High Yield

There was something for everyone in last night's much anticipated Chinese PMI data, with the official number sliding to the lowest in over 3 years, suggesting the PBOC will need to do more stimulus and is thus bullish, while the unoffocial Caixin print rising to the highest since June, suggesting whatever the PBOC is doing is working, and is also bullish. Not unexpectedly, global stocks decided to take the bullish way out, and have risen across the globe led by Asia, where stocks rose as much as 1.8%, Europe also green and US equity futures up 10 points as of this writing.

"... As the tide of leverage goes out, the full extent of irresponsible lending becomes apparent. The previously virtuous cycle between risk spreads and fundamentals goes into reverse, with lower prices, defaults, and downgrades forcing leveraged investors to sell, leading to even lower prices."

Without a rerun of last Friday's Chinese stock market rout, European traders could focus on what "really matters", namely how much of the ECB's upcoming 20 bps rate cut and €20 billion QE expansion (with Commerzbank saying Draghi may even hint at Europe's QE3) is priced in, and whether the ECB's actions are just modestly priced in, or more than fully, and just how big the "sell the news" event will be.The result: the Euro falls to a new 7 month low, the dollar spot index hits a new all time high, and European stocks and US futures stage another remarkable overnight comeback on the usual low volume levitation and central bank intervention.

"The previous three times this metric fell that far into negative territory on the S&P 500 were Q1 1990, Q1 2001, and Q4 2007, coinciding with the start of each of the last three high yield default cycles"

• The best performing asset class of this Millennium is gold, by a country mile.........

With at least 83 percent of these companies' operating cash being spent on debt repayments - the highest on record - the renewed collapse in crude oil prices of the last month has renewed focus on the tidal wave of defaults that the credit market is increasingly pricing in (and stocks not).

In the short run this will probably lead to dramatic and unexpected change in financial flows. Over the longer run, a much-overlooked problem emerges. Simply put, it is highly unlikely that market rates will respond as the Fed moves its target rate upwards; in this case, the FOMC will have lost all control.

After several months of artificial, centrally-planned calm in Chinese markets, where "malicious sellers" found out the hard way the Politburo means business, overnight the relative quiet in Chinese stocks since August broke with a bang when the Shanghai Composite tumbled as much 6.1% before closing down 5.5%, the biggest drop in three months and the largest weekly loss since the depth of the Chinese rout in mid-August while a gauge of Chinese volatility surged from the lowest level since March.

"The dealer market has collapsed, and all that's left are investors trading the same few bonds back and forth, leaving pricing services guessing with bigger and bigger margins of error on the real value of illiquid debt. That's the real problem. And it's not one the SEC can fix by targeting 'transcendent liquidity' in ETFs."

CEOs, Wall Street are furiously making hay while the storm moves in.

While yesterday's 2 Year auction was well stronger than expected, moments ago the Treasury sold $35 billion in 5 Years in an auction that came quite mixed: the High Yield printed at 1.67%, or the highest since June, it tailed 0.5 bps to the 1.665% When Issued. Perhaps showing the flattening of the curve on the short end, while yesterday's 2Y closed at the highest yield since May 2010, today's 5Y was only the highest since June, when a comparable auction yielded 1.71%.

It had been a relatively quiet session overnight when as reported previously, the geopolitical situation in the middle east changed dramatically in a moment, when NATO-member country Turkey downed a Russian fighter jet allegedly over Turkish territory even though the plane crashed in Syria, and whose pilots may have been captured by local rebel forces. The news promptly slammed Turkish assets and FX, sending the Lira tumbling, pushing lower European stocks and US equity futures while sending 2 Year German Bunds to record negative yields.

2015 ends with the market cap of Amazon & Google exceeding that of every single Chinese company in the MSCI China index… the US stock market a mere 107 trading days away from becoming the 2nd longest bull market of all-time, with equity leadership driven by “growth” (longest duration of outperformance ever) & “quality” (at all-time relative high)… and $6trn of negatively-yielding government bonds, $17trn of bonds yielding <1%, and the Fed expected to raise the Fed funds rates for the 1st time since 2006.

As a result of the global commodity weakness, global stocks have fallen for the first time in six days as the sell-off in commodities continued, dragging both US equity futures and European stocks lower. However, putting this in context, last week the MSCI All Country World Index posted its biggest weekly gain in six weeks: alas, without a coincident rebound in commodity prices, it will be merely the latest dead cat bounce.

Importantly, while the "bias" of the market is to the upside, primarily due to the psychological momentum that "stocks are the only game in town," the mounting risks are clearly evident. From economic to earnings-related weakness, the "bullish underpinnings" are slowly being chipped away.