8.5%

The storm that caused chaos across financial markets since May should not dissipate any time soon. As such, we retain a short bias towards China and an outright short in EM currencies. If world trade remains weak and local inflation keeps on gaining momentum, the currencies of several EM countries (ex-China) may remain under pressure. Such weakness may be exacerbated by tightening liquidity.

• Biggest Banks Face Fed Restoring Barriers in Commodities (BBG)
• SAC to Employees: Cohen Didn't Read Dell Email at Heart of SEC's Case (WSJ)
• Second (and Third) liens are back, and so is 2005: As Banks Retreat, Hedge Funds Smell Profit (WSJ)
• Singapore funds benefit from Asian wealth (FT)
• 2 years later the lies haven't changed one bit - Tepco hit over slow admission of radioactive leak (FT)
• How big tech stays offline on tax (Reuters)
• Hilton Leads Rush to Africa in Fastest Boom (BBG)
• U.S. and UK fine high-speed trader for manipulation (Reuters)
• Key witness takes stand in SEC case against Goldman's Tourre (Reuters)
• Boomer Sex With Dementia Foreshadowed in Nursing Home (BBG)
• Bentley SUV gives £800m boost to UK car industry (FT)

• Detroit ‘Gut Kick’ Poses New Test for Long Suffering City (BBG)
• Florida lawmakers urge overhaul of 'Stand Your Ground' law (Reuters)
• Investors pour huge sums into US equity funds (FT)
• Snowden Standoff Threatens Obama-Putin Moscow Summit (BBG)
• China, U.S. companies' great hope, now a drag (Reuters)
• Morgan Stanley stock traders rebuild burned bridges (Reuters)
• Huawei spied for China, claims ex-CIA head Michael Hayden (FT)
• Gorilla Flipping Homes as Rebound Revives Rapid Trades (BBG)
• BRICS joint action at G20 summit may be wishful thinking (Reuters)

The S&P 500 is up 8.5% from the 6/24 lows - the best 17-day run since Oct 2011 when the world's central banks launched their unprecedented 'save-the-markets' co-ordinated easing/printfest (as an aside, the S&P fell 140pts (or 12%) in the next 2 weeks). Trannies were on top today (+1.6%) while Nasdaq took the rear (-0.25%); homebuilders are down 2% on the week and 3% post-FOMC while Utilities and Financials are running 2% higher on the week. Aways from exuberant equities, bonds cracked 8bps higher in yield off their pre-Bernanke low yield levels (with the long-end notably underperforming on the week); the USD jumped back up to unchanged on the week (as JPY dumped - aiding risk-assets); and silver and gold diverged with the former holding the week's lows as gold limped higher. The real story of the day is oil prices which screamed above $108 - highest in 14 months - crushing the Brent-WTI spread. Hedgers were active (though clearly not sellers) as VIX notably underperformed stocks (as did credit indices).

Risk assets are not quite (yet) back to the ‘melt-up' of May but equity markets are trading in a confident mood after Bernanke caused sentiment to flip from glass ‘half empty' to ‘half full'. China Q2 GDP data did not derail price action as equity futures anticipate a positive start of the week. The semi-annual testimony of the Fed Chairman is typically a seminal event on the market calendar but do we dare say that the one coming up this week is a non-event following last week's message on policy accommodation? The VIX index dropped 7 points over the last three weeks of which 2 points alone came last Thursday and Friday as stocks roared to new highs and shrugged off the candid observation on the Chinese economy by finance minister Lou Jiwei. If a 6.5% growth rate is tolerable in the future, there is little doubt that commodities and the AUD have further to fall. Chinese GDP slowed from 7.7% to 7.5% according to data released overnight and prospects for the second half don't look much brighter after evidence of slowing credit growth. Data on Friday showed declines of narrow money from 11.3% yoy to 9.1% in May, with broad money growth slowing to 14% yoy. Non-bank credit and new foreign currency bank lending also weakened.

The move is very reminiscent of the 2007 top where we had a top, a brief collapse and then a final burst higher to a new high. Within a few months however, the markets had begun to descend into what would ultimately be the worst Crisis in 100 years.

This week's final auction is over, in the form of a $13 billion 30 Year reopening, which like the previous 3 and 10 Years, was "good enough" but certainly nothing to write home about. The final yield of 3.660% stopped through the When Issued by 1 basis point so the market was mispricing the demand in the minutes leading up to the sale, however, the Bid to Cover of just 2.26 showed that not all was well under the sun - this was the lower BTC since August 2011, or the "debt ceiling" auction, and lower than both last month's 2.47 and the LTM average 2.57. The internals were in line with Indirects allotted 40.2%, Direct take down doubling from 8.5% to 16.3% and Dealers allocation dropping from 51.3% to 43.4%. Finally, following the past two auctions, the collateral squeeze in the bond market appears to have eased a bit on the short end with the 3 Year trading -0.02% down from -0.55% yesterday, although the 10 Year squeeze continuing still and trading special-er at -0.40% compared to -0.30% yesterday. How long until the Fed monetize all the Dealer allocated $5.6 billion in future POMOs? Keep an eye out on Cusip 912810RB6 in futures 30 year POMOs to see how much of this bond is promptly flipped back to the Fed.

The U.S. economy weakened appreciably in the first quarter of 2013. But what if this weakness persists into the second quarter just completed, and worsens still in the second half of this year? Q1 GDP, as reported on June 26th, was revised lower to just 1.8%. And various indications suggest that Q2 could come in slightly lower still, at 1.6%. Might the U.S. economy be guiding to a long-term GDP of 1.5%? That’s the rate identified by such observers as Jeremy Grantham – the rate at which we combine aging demographics, lower fertility rates, high resource costs, and the burdensome legacy of debt. After a four-year reflationary rally in just about everything, and now with an emerging interest rate shock, the second half of 2013 appears to have more downside risk than upside. Have global stock markets started to discount this possibility?

• Fashionable 'Risk Parity' Funds Hit Hard (WSJ)
• No 1997 Asian Crisis Return as China Trembles (BBG)
• Greece Faces Collapse of Second Key Privatization (FT)
• China Bad-Loan Alarm Sounded by Record Bank Spread Jump (BBG)
• Iranian official signals no scaling back in nuclear activity (Reuters)
• Asmussen Says Any QE Discussions at ECB Not Policy Relevant (BBG)
• Flat Japanese consumer prices aid Kuroda (FT)
• Vietnam Devalues Dong for First Time Since ’11 to Boost Reserves (BBG)
• World Bank Sees ‘Vulnerable’ Food System on Climate Change (BBG)
• Fed big-hitters seek to quash QE fears (FT)
• EU Leaders Set to Slow Support for Ailing Banks (BBG)

One of the main reasons the entire debt-fueled house of cards propping the western financial system, hasn't collapsed in a smouldering heap so far - a development that has stumped all those who think of the Reinhart-Rogoff sovereign debt matrix as one dimensinal with only debt/GDP as the key variable and completely ignoring the interest rate (manipulated or not) - is that the cash interest payment on the global mountain of debt has been rather tame, courtesy of all developed world central banks going all in with serial, or increasingly more, parallel monetization of debt. However, while the US Treasury has the benefit of the Federal Reserve (and its Primary Dealer tentacles) as a backstopped buyer of all the debt that's fit to print, individual Americans are not as lucky. And as America's massively overindebted student body may be about to find out, there is no surer way to burst a debt bubble than to send its rates soaring. Because unless Congress pulls off a miracle in the next 24 hours and passes legislation that delays an inevitable doubling of rates on the most popular Federal (subsidized) Stafford loans, the interest is set to double from 3.4% to 6.8%.

In the final section of this five-part series (Part 1, Part 2, Part 3, and Part 4) on the dismal reality behind the non-recovery, David Stockman explains what lies ahead. He details in his new book 'The Great Deformation', that the mainstream notion that there is a choice between fiscal austerity and fiscal stimulus is wishful thinking. It does not recognize that owing to the triumph of crony capitalism and printing-press money America has become a failed state fiscally. What lies ahead is a continuous, mad-cap cycling back and forth - virtually on an odd-even day basis - between deficit cutting and fiscal stimulus to the GDP. As Stockman notes, the proximate cause of this recession waiting to happen is the federal government’s unfolding encounter with Peak Debt. The latter is not a magical statistical point such as a federal debt ratio of 100 percent of GDP, but a condition of permanent crisis - "no viable economy can survive on chronic fiscal deficits nor can it fail to save at a sufficient rate to fund a healthy level of investment in productive capital assets. The blithe assumption to the contrary which animates current policy rests on self-serving clichés such as “deficits don’t matter” and the Chinese savings glut." So the American economy faces a long twilight of no growth, rising taxes, and brutally intensifying fiscal conflict. These are the wages of five decades of Keynesian sin - the price of abandoning financial discipline.

The 20th century could be categorized as THE century when communications took off and we started living in each other’s pockets. Lives had been ruined by war, trouble and strife. Wealth had been redistributed beyond belief. There were no longer just a few that were making the profits, but there were growing classes of people that wanted recognition.

A sense among investors that the global economy is unraveling has injected tremendous volatility into the markets. As Bloomberg's Rich Yamarone notes, if the global equity market decline is not a “Sell in May” event, but the beginning of a great unwinding, then the economy, skating on thin ice, may be even more susceptible to recession. However, most of the US equity disconnect from the reality of weak data (and other markets) can be laid at the feet of the Fed's ever-generous monetary policy. However, given all of this 'weakness' - or missing of Fed benchmarks that we discuss below - that the Fed is well aware of, we ask again, why would so many members have been out discussing 'Taper' if it were not due to their concerns of broken markets and bubble conditions.

With most market participants (what's left of them) traditionally narrowly focused on one specific asset class, be it stocks, bonds, rates, or commodities, they sees a few trees but miss the whole forest - a perspective which has to include all cross asset perspectives, which in our day and age is quite complicated, to say the least, due to the prevailing and oftentimes irreconcilable cognitive biases among such traders (all of which tend to interpret Bernanke's market signaling in their different way). So courtesy of Citi's Stephen Antczak, here is a comprehensive summary how every single asset class is viewing the market right now.

Following the 3 and 10 year auctions in the last two days, today's 30 Year $13 billion reopening completed the trifecta of ugliness, pricing at a surprisingly wide 3.355%, or three whole basis points above the When Issued, which traded at 3.324% at 1pm - the biggest tail in a long time. It was also the highest yield for a 30 Year since March 2012. The internals were not pretty either - the Bid To Cover coming at 2.47, well below the TTM average of 2.59 but hardly the massive BTC collapse that we saw in yesterday's 10 Year. And just like yesterday, the Directs ran for the hills taking down just 8.5%, compared to 15.2% in the past year average, Indirects taking 40.2% and 51.3% or so left for the Dealers who will be happy to stock up on some more collateral.