Fisher

Tomorrow we prepare for a “new” Fed.  It looks a lot like the old Fed, but one can hope. In the meantime we wonder if QE is worth it?  Does it do what it is “supposed” to do?  No.  We don’t think it has done much for jobs or inflation or housing.  We look at the pre QE data and the post QE data and we are underwhelmed. But what real evidence is there that QE is helping the economy?  Would we be the same without it?  Better even?  I am told no, but I am told a lot of things that turn out not to be true.  If it was clear that QE was really helping the economy, I wouldn’t be wondering why we do it. But is there any harm to QE?  That is the other side of the coin.  Ask any person from an Emerging Market whether QE is harmful and you will likely get a very different answer than the one Ben has given.

This week, much of the market focus will remain on the policymakers' responses to the challenges emerging out of the, well, emerging markets. In particular, the response of the Turkish Central bank will be key. This week we also have eight MPC meetings, with the US FOMC on Wednesday standing out. Consensus expects the continuation of the tapering of asset purchases – by another USD10bn, split equally between Treasuries and MBS. Other than that, the announcement should be fairly uneventful. In India GS forecasts an out-of-consensus hike of the repo rate to 8.00% after the central bank published a report on suggested changes to the monetary policy framework. In New Zealand, South Africa, Israel, Mexico, Malaysia and Colombia, consensus expects no change in the monetary policy stance. Among economic data releases, the focus will be on consumer surveys, as well as business surveys (US, Germany and Italy). There are also inflation numbers from the US, Euro Area, Japan and Brazil. Advanced Q4 GDP data prints will come out for the US and the UK. US consumption and production numbers are due at the end of the week.

• Emerging market sell-off raises specter of contagion (Reuters)
• China Bank Regulator Said to Issue Alert on Coal Mine Loans (BBG)
• Argentina to Ease FX Controls After Peso Devaluation (BBG)
• Pimco's Gross problem: who can succeed the 'Bond King'? (Reuters)
• Ukraine protesters seize building, put up more barricades (Reuters)
• Mideast Turmoil Dominates Gathering of Business Elite (WSJ)
• Central Banks Withdraw Dollar Funding (WSJ) - oh really?
• Samsung warns of weak earnings growth this quarter (FT)
• Three explosions rock Cairo, killing 5 (USA Today)

It's Risk Off time.

Things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, when EM revulsion once again hit participants, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%.  And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?

• Gross Told El-Erian ‘Hell No’ Seeking to Stop Departure (BBG)
• How Caterpillar got bulldozed in China (Reuters)
• Davos Bankers Struggle to Convince Elite That Markets Are Safer (BBG)
• Lucrative Role as Middleman Puts Amazon in Tough Spot (WSJ)
• Arctic Air Blankets Northern U.S. as Texas to Get Snow (BBG)
• Lenovo buys IBM's server business in China's biggest IT acquisition (Reuters)
• SEC judge bars "Big Four" China units for six months over audits (Reuters)
• U.S. Accuses Security Background Check Firm of Fraud (WSJ)
• RIP BOE forward guidance: Bank of England rate rise is 'still some way off' - Fisher (Reuters)

Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.

With the market more bullishly positioned, more euphoric, and more levered than almost any time in history, it is perhaps worth "pondering" what some of the risks to this optimism could be...

Day two of the bounce from the biggest market drop in months is here, driven once again by weak carry currencies, with the USDJPY creeping up as high as 104.50 overnight before retracing some of the gains, and of course, the virtually non-existant volume. Whatever the reason don't look now but market all time highs are just around the corner, and the Nasdaq is back to 14 year highs. Stocks traded higher since the get-go in Europe, with financials leading the move higher following reports that European banks will not be required in upcoming stress tests to adjust their sovereign debt holdings to maturity to reflect current values. As a result, peripheral bond yield spreads tightened, also benefiting from good demand for 5y EFSF syndication, where price guidance tightened to MS+7bps from initial MS+9bps. Also of note, Burberry shares in London gained over 6% and advanced to its highest level since July, after the company posted better than expected sales data. Nevertheless, the FTSE-100 index underperformed its peers, with several large cap stocks trading ex-dividend today. Going forward, market participants will get to digest the release of the latest Empire Manufacturing report, PPI and DoE data, as well as earnings by Bank of America.

"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments - the longest-serving Fed chair - "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."

The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.

Following yesterday's major market drubbing, in which the sliding market was propped up by the skin of Nomura's (and BOJ, and Fed's) teeth at 103.00 on the USDJPY, it was inevitable that with Japan returning from holiday there would be a dead cat bounce in the Yen carry pair, and sure enough there was, as the USDJPY rose all the way back up to 103.70, and nearly closed the Friday gap, before starting to let off some air. However, now that US traders are coming back online, Japan's attempts to keep markets in the green may falter, especially since it only has a couple of ES ticks to show for its efforts, as for the Nikkei which dropped 3% overnight, it has now lost all US "Taper" gains.

With no major macro news on today's docket, it is a day of continuing reflection of Friday's abysmal jobs report, which for now has hammered the USDJPY carry first and foremost, a pair which is now down 170 pips from the 105 level seen on Friday, which in turn is putting pressure on global equities. As DB summarizes, everyone "knows" that Friday's US December employment report had a sizeable weather impact but no-one can quite grasp how much or why it didn't show up in other reports. Given that parts of the US were colder than Mars last week one would have to think a few people might have struggled to get to work this month too. So we could be in for another difficult to decipher report at the start of February. Will the Fed look through the distortions? It’s fair to say that equities just about saw the report as good news (S&P 500 +0.23%) probably due to it increasing the possibility in a pause in tapering at the end of the month. However if the equity market was content the bond market was ecstatic with 10 year USTs rallying 11bps. The price action suggests the market was looking for a pretty strong print.

President Obama has just nominated Lael Brainard as a Fed Governor, Jerome Powell to his second term and most notably, Stanley Fischer (ex Head of the Bank of Israel) as Vice-Chairman of the Fed. "These three distinguished individuals have the proven experience, judgment and deep knowledge of the financial system to serve at the Federal Reserve during this important time for our economy,” Obama said in statement. Bear in mind that Fischer is skeptical of forward-guidance (as we note below) which is soon to become the Fed's main weapon to jawbone markets.

Stanley Fischer's term as governor runs through 2020 (vice chair through 2018), Brainard's term through 2026 and Powell's through 2028!

Tenure anyone? We are sure they will still do a great job...

• Yellen’s Record-Low Senate Support Reflects Fed’s Politicization (BBG)
• Euro-Zone Inflation Rate Falls in December, even further below ECB's target (WSJ)
• Zambia politician charged for calling president a potato (AFP)
• Blame gold: India Savings Deposit Scam Collapse Leaves Thousands Penniless (BBG)
• Hedge Funds Raise Gold Wagers as Yamada Sees $1,000 (BBG)
• George Osborne limits cuts options with pensions promise (FT)
• Vietnam Raises Foreign Bank Ownership Caps to Aid System (BBG)
• But they said buy a year ago... Goldman to JPMorgan Say Sell Emerging Markets After Slide (BBG)
• SAC Trial Seen by Probe Convict as Latest Abusive Tactic (BBG)

How many people in the financial services industry understand how the financial system works?

We've all experienced it, we are dealing with someone who has all sorts of masters degrees, PhD's, and doesn't know the Federal Reserve is a private corporation, and even doesn't know the product their company is selling.

In the spirit of professionalism, we must keep these quotes anonymous, but certainly if you have survived long enough in Finance or read the Financial news regularly, you will not need any references because you've probably heard it before.

• Firms to Face new Rules Over Pay, Taxes (WSJ)
• US to test commercial drones at six sites (CNN)
• China’s Local Debt Swells to 17.9 Trillion Yuan in Audit (BBG) - which is about 2 trillion less than where it actually is (Reuters)
• Fears after key China debt level soars 70% (FT) and in reality the debt level is saoring far more
• Pot Shops in Denver Open Door to $578 Million in Sales (BBG)
• China Says It Will Shun Abe After Shrine Visit (WSJ)
• De Blasio Taking Office Citing Wealth Gap as Crime Falls (BBG)
• China Approves $353 Million of Share Sales as IPOs Resume (BBG)
• Obama Seeks Way to Right His Ship (WSJ)
• Netflix Tests Subscription Fees Based on Number of Account Users (BBG)
• Three big macro questions for 2014  (FT)