Equity Markets

Back on March 21, Goldman's Peter Oppenheimer released the "Long Good Buy, The Case For Equities", which was Goldman's subversive attempt to rally equity into buying all the stocks that Goldman had to offload, as well as buy all TSYs that GS clients had to sell. Needless to say, Goldman top ticked the market and stocks have tumbled ever since, even as the 10 Year soared from 2.5% to the current ~1.75%. So what? Well, this morning the same analyst, precisely two months on the anniversary of his "once in in a lifetime" stock buying opportunity, has released a new report with the paradoxical header: "Near-term risks are to the downside." But, but... Anyway, that's all the market needed to grasp that Goldman's prop desk is now buying every piece of risk not nailed down hand over fist as the June FOMC meeting is now the D-Day. Futures have soared ever since.

There was some hope that today's European summit would provide some more clarity for something else than just the local caterer's 2012 tax payment. It wont. Per Reuters: "Germany does not believe that jointly issued euro zone bonds offer a solution to the bloc's debt crisis and will not change its stance despite calls from France and other countries to consider such a step, a senior German official said on Tuesday. "That's a firm conviction which will not change in June," the official said at a German government briefing before an informal summit of EU leaders on Wednesday. A second summit will be held at the end of June. The official, requesting anonymity, also said he saw no need for leaders to discuss a loosening of deficit goals for struggling euro zone countries like Greece or Spain, nor to explore new ways for recapitalise vulnerable banks at Wednesday's meeting." In other words absolutely the same as in August 2011 when Europe came, saw, and did nothing. Yes, yes, deja vu. Bottom line: just as Citi predicted, until the bottom falls out of the market, nothing will change. They were right. As for the summit, just recycle the Einhorn chart from below. Elsewhere, the OECD slashed world growth forecasts and now officially sees Europe contracting, something everyone else has known for months. "In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011, before accelerating to 4.2 percent in 2013, in line with its last estimates from late November... The OECD forecast that the 17-member euro zone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013, though regional powerhouse Germany would chalk up growth of 1.2 percent in 2012 and 2.0 percent in 2013." Concluding the overnight news was a meaningless auction of €2.5 billion in 3 and 6 month bills (recall, Bill issuance in LTRO Europe is completely meaningless) in which borrowing rates rose, and a very meaningful downgrade of Japan to A+ from AA, outlook negative, by Fitch which lowered Japan's long-term foreign currency rating to A plus from AA, the local currency rating to A plus from AA minus, and to the country ceiling rating to AA+ from AAA. Yes, Kyle Bass is right. Just a matter of time. Just like with subprime.

With a lack of European data, markets have remained focused on the macroeconomic issues throughout the morning. European equities have seen mixed trade this morning, starting off sharply lower following Moody’s downgrade of 16 Spanish banks late last night. Equities have been observed on a relatively upwards trend as market talk of asset reallocation into stocks from fixed-income has somewhat buoyed sentiment, however this remains unconfirmed. The news that Spanish banks are pressing regulators to reinstate a short-selling ban on domestic banking stocks has also helped keep negative sentiment towards Spanish financials at bay, with Bankia dramatically reversing recent trends and seen higher by around 25% at the midpoint of the session...The chief of the Australia and New Zealand Banking Group has said volatile conditions in global markets have caused the wholesale funding market for Australian banks to freeze, a further sign that the European turmoil is taking its toll on global markets.

And so the unthinkable has happened: the FaceBook IPO has priced (at $38 as noted yesterday) into the ugliest possible tape imaginable, combining continuing bad news for JPM, ongoing deterioration for European risk markets (nothing new here), the need for the EU Commission to deny it is working on emergency Greek exit plans (we all know what that means) a request by Spanish banks to reinstate the short selling rule (as we predicted back in February), and a #Ref!-ing circular demand by Spain that banks deposit €30 billion into a deposit-protection fund. In other words more of the same. And yet FB has to trade up... or else. Which is why at least for the time being futures are soaring, on that, as well as on the rumor that Europe may close again today at 11:30 am Eastern. However, if 13 out of 14 previous trading days are any indication, expect the the rumor to then resurface that Europe will be opening again on Monday which will wipe out all of the day's gains since who on earth will want to be long risk over a weekend  in which many things in Europe can go bump in the night.

Now its getting interesting. 30Y yields fell the most in 5 months today back to 5 month lows, 10Y yields crashed to all-time closing lows, and Gold surged by its most in 4 months (and 2nd most in 7 months) as stocks started to accelerate lower. Gold is unch on the week now as 30Y is -21bps and 10Y -14bps to 1 1.69% handle - incredible. Between the Philly Fed's confirmation of deceleration in US macro data and Europe's increasingly crescendo-like implosion, is it any wonder that the decoupling thesis has given way to reality. S&P 500 e-mini futures repeated the early rally late fade pattern of the last 8 days but this time it was more aggressive as ES pushed towards 1300. CAT was a dog today accounting for 25% of the Dow's losses and AAPL tumbled further - heading towards a 20% retracement off its highs. Financials tumbled further with Citi inching very close to red YTD (and JPM falling rapidly). Credit markets, which led the selloff, continue to slide but this time with equities in sync. Equities went out at their very lows of the day at 1300.50 (at 3.5 month lows) as VIX soared over 24% to close at its highest in 5 months.

Because the proper trade is to respond only after JCP blew up proving that the US consumer is finished, here is Goldman finally joining the bandwagon of shorting the terminally tapped out all buying, all eating, all charging Joe Sixpack.

The World Gold Council has released the Q1 2012 Gold Demands Trend report. Gold demand grew 16% over the past 12 months to 1,098 tonnes. This had a US dollar value of just $59.7 billion spent on gold, globally, in Q1 2012. While global demand was down 5% from the record high of Q4 2011, it was significantly higher than demand in Q1 2011 suggesting that global demand may be consolidating at these higher levels.  Probably the most important aspect of demand and one of the most important fundamentals in the gold market is that of still very robust and increasing Chinese demand. In this the Chinese Year of the Dragon – China is becoming a fundamental driver of the gold market. Global demand was boosted by China posting a quarterly record of 98.6 tonnes of investment demand up 13% from Q1 2011. This increase was a result of investors’ continued move to preserve wealth amid ongoing concerns over inflation, volatility in equity markets and price falls in some property markets. Jewellery demand in China, much of which is also store of wealth demand, increased to 156.6 tonnes – 30% of the global appetite.  This increase places China as the largest jewellery market for the third consecutive quarter.

Overnight: just more of the same, as markets collapsed, first in Asia, then in Europe, on ever more concerns what a Greek exit would do to Europe. The most important story of the night was a report in Dutch Dagblad claiming that ECB has turned off the tap for Greek bank liquidity: "At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says." Whether this move is to force Greece to blink (even more) by making the previously reported bank run even more acute, or just general European stupidity, is unclear but it is certain to make the funding stresses across all of Europe far more acute. The news sent all peripheral bond yields soaring, and the EURUSD tumbling to under 1.27 briefly. 

We suspect, when we look back on Europe some months from now, that we will see; a love affair gone badly due to conditions beyond anyone’s control and a separation that, while bound in great sadness, is what the Fates have determined for the actors in this grand drama. Extending the unreality, foillowing news that Greece will - as expected - hold new elections, today the new French President and the German Chancellor will meet for the first time. They will issue a statement promising cooperation, a brighter Europe, some vision of a grand alliance and an eternal pledge for the spirit of unity between the French and the German people. Believe none of it. The Germans are already targeting Vichy as the new place of government in France and there is an active search underway to find the decedents of Marshal Petain. There was an armistice between Germany and France in 1940 and there may be a new one announced today but the new one, like the old one, will be a short lived affair as the goals of France and the goals of Germany could not be further apart.

European bourses are trading in modest positive territory ahead of the US open with early trade seeing moves higher across equities as Germany printed an expectation-beating 0.5% growth in their flash Q1 GDP. Elsewhere, Eurozone growth surprised to the upside somewhat, coming in flat against the expected contraction of 0.2%. However, as time passed, Greece garnered the focus of markets once more as they face a EUR 435mln foreign-law bond redemption today. Government source comments have somewhat reassured markets that the payment will be made, but participants await official confirmation. Further assisting the moves off the highs was a lower-than expected ZEW survey from Germany, with economists noting that the French and German elections have knocked confidence in the country over the past month.

As already noted, one piece of good news out of Europe - German GDP (ignore the huge ZEW miss) - was enough to make everyone forget the Italian bank downgrade, and that Greece is one election away from unwinding the EMU. Yet perhaps it is good to have a modest bounce from a market, which however not even Goldman says is oversold: after all the central planners need a day or two to regroup, and consider what currency to crush next to buy the global nominal stock market a few months of breathing room.

Many pixels have been 'spilled' trying to comprehend what exactly JPMorgan were up to, where they are now, and what the response will likely end up becoming. Our note from last week appears, given the mainstream media's 'similar' notes after it, to have struck a nerve with many as both sensible and fitting with the facts (and is well worth a read) but we have been asked again and again for a simplification. So here is our attempt, in 22 simple tweets (or sentences less than 140 characters in length) to describe what the smartest people in the room did and in possibly the most incredible irony ever, how the Fed (and the Central Banks of the world) were likely responsible for it all going pear-shaped for Bruno and Ina. The key factor is that if systemic risk had remained in even a 'normal' range of possible regions based on history, then the JPM CIO office would have had no need to over-hedge their tail-risk hedge position, no greed-driven need to press the momentum, and no need for such an epic collapse as we are seeing now. The point is - this was a trader/manager with a good idea (hedge tail risk) that was executed poorly (and with arrogance) but exaggerated by the unintended consequences of the Central-Banks-of-the-world's actions (and 'models behaving badly' as Derman would say).

The failure to form a coalition government in Greece this weekend has prompted risk averse trade across the asset classes this morning with publications across Europe continuing to speculate about the potential exit of Greece from the Euro-area. As a result of this the Spanish 10yr yield touched 6.2% and the respective spreads over benchmark bunds in Spain and Italy have traded as wide as 30bps so far today. The knock on effect has been a sell-off in the financials which has seen the IBEX and FTSE MIB under perform in the equity markets with a relative safe-haven bid into the USD weighing on crude futures and precious metals. Spanish t-bill auctions and a variety of lines tapped out of Italy did stem the tide after selling around the top end of their indicative ranges but focus will remain solely on Greece given a lack of tier 1 data out of the US. Moving forward the next meeting of party heads in Greece is scheduled to commence at 1730BST, however, the head of the Syriza party has already indicated he will not be attending with the leader of the democratic left suggesting he is doubtful that a coalition can be formed.

Just in case you were wondering if there was any fall-out from the JPM/Iksil debacle. The investment grade credit indices are getting Corzined here from IG9 10Y to the latest and greatest IG18 5Y. Equity markets will not stand idly by as the investment grade credit market violently jerks wider.

There are a lot of moving parts in the Dismal tale of Dimon's demise... Iksil' large size in the market left a mark that hedge funds tried to fix - that was his index trading was making the index extremely rich (expensive) relative to intrinsics (fair-value). That is where the media picked up the story and as we detail below leads us to today. Attempts to hedge his over-hedged positions and/or unwind them impacted the market too much and we suspect created the need for today's admission of guilt. And so, we find ourselves with - net CDS/CDO notionals remain huge (and implicitly on JPM's shoulders), his very recent lack of selling has left the credit index maybe 20bps rich to where it might trade given its rough correlation with the S&P 500 and this would imply at least $3bn of losses already in addition at fair-value. Of course, the situation is far worse because 1) any efforts to unwind such a huge position will lead to the market yawning wide and swallowing him in illiquid bid-ask spreads; and 2) the rest of the world knows their position - so why would the hedge funds not push their position. Note, it is not the instrument that caused this - it is the trader as "you don't hedge risk when you bet on momentum continuing you idiot!"