Price Action

The relentless regurgitation of the only two rumors that have moved markets this week, namely the Japanese sales tax delay and the "surprise" cabinet snap elections, was once again all over the newswires last night in yet another iteration, and as a result the headline scanning algos took the Nikkei another 1.1% higher to nearly 17,400 which means at this rate the Nikkei will surpass the Dow Jones by the end of the week helped by further reports that Japan will reveal more stimulus measures on November 19, although with US equity futures rising another 7 points overnight and now just shy of 2050 which happens to be Goldman's revised year-end target, the US will hardly complain. And speaking of stimulus, the reason European equities are drifting higher following the latest ECB professional forecast release which saw the panel slash their GDP and inflation forecasts for the entire period from 2014 to 2016. In other words bad news most certainly continues to be good news for stocks, which in the US are about to hit another record high (with the bulk of the upside action once again concentrated between 11:00 and 11:30am).

The next time stuff hits the fan, will the world be as trusting in Central Banker proclamations? Will we continue to believe these folks are omnipotent? Or will their phony promises accomplish nothing?

As one would expect with half the market away, US equity volumes were terrible (but fiunnily enough not much worse than yesterday) with most major indices trading in a very tight range around unchanged. Overnight strength in stocks on the back of USDJPY's momo ignition after Reuters headlines on Japan tax delays. Trannies, however, surged out of the gate, stalled into the European close, tumbled on oil weakness, then rallied back in the last hour - amid now news. Treasury futures were very quiet and went nowhere. The real story of the day was in the FX markets, which saw notable USD weakness led by EUR and AUD strength, and a late day rally in JPY (USDJPY tagged 116.00 stops then faded... that's 8 handles in 9 days). The USD weakness - which started around the European close - sparked a rally in copper, gold, and silver (and gold miners surged). Oil prices tested cycle lows before also bouncing back in a v-shaped recovery to close higher. Despite early intraday record highs in Dow and S&P futures, they ended practically unchanged as VIX was notably divergent. Late-day panic-buying lifted the Dow (+0.007%), S&P, and Russell 2000 green.

With the bond market closed today due to Veteran's Day and the correlation and momentum ignition algos about to go berserk without any parental supervision, it was only a matter of time before some "stray" headline sent first the carry pair of choice, i.e., the USDJPY, and subsequently its derivative, the Emini, into the stratosphere. And sure enough, just before 3am Eastern, it was once again Reuters' turn to leak, only this time not about the ECB but Japan, as usual citing an unnamed "government official close to Abe's office", that Prime Minister Shinzo Abe was likely to delay a planned sales tax increase.

• JAPAN MORE LIKELY TO DELAY SALES TAX INCREASE, REUTERS REPORTS

Which of course is a repeat of what Reuters said 2 days ago but since it came on the weekend, the momentum ignition algos didn't notice. The result was an instant surge in the USDJPY, which shortly thereafter touched on 116.00 the highest level in 7 years, and is up now 200 pips since yesterday as the obliteration of Japan's economy proceeds, in turn pushing European stocks, and shortly, the S&P, higher

Following Friday's sticksave, where the usual 3:30 pm ramp brigade pushed futures just barely green into the close despite a miss in the payrolls report which the spin brigade did everything in its power to make it seem that the hiring a few hundred thousand young female waitresses was bullish for the economy, overnight we have seen a listless session, dominated by more USD-profit taking as increasingly more wonder if the relentless surge higher in the Greenback is massively overdone, especially considering that stocks are screaming "worldwide recession" excluding the US, if only for now, because as Goldman explained soaring USD means plunging Oil, means tumbling E&P capex, means lower GDP, means less growth, means lower corporate profits, and so on. That said, we expect the now trivial Virtu JPY momentum-ignition algos to activate shortly, pushing the USDJPY and its derivative, the S&P500, higher in the coming minutes, and certainly before the US market opens in under 3 hours.

• US Change in Nonfarm Payrolls (Oct) M/M Exp. 235K (Low 140K, High 314K), Prev. 248K, Jul 180K.
• US Unemployment Rate (Oct) M/M Exp. 5.9% (Low 5.8%, High 6.1%), Prev. 5.9% European
• This will be the first employment report since the Fed announced the conclusion of QE3
• Stronger data of late has increased expectations of a solid October report
• Seasonal factors could also be supportive
• Focus could again may turn to the wage component of the jobs report as the Fed looks to exit easy policy

European shares fall, reversing earlier gains, with the banks and tech sectors underperforming and basic resources, oil & gas outperforming. Companies including ArcelorMittal, Allianz, Swiss Re, Richemont released results. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields rise; German yields increase. Furthermore, the pullback in the USD-index from overnight highs has also provided the commodity complex with some upside and thus has seen basic materials and energy name outperform to the benefit of the FTSE 100. Elsewhere, Allianz’s (+4.9%) impressive pre-market report has helped halt the move to the downside for the DAX which trades with modest gains of 0.3%. Fixed income markets continue to hold fire (albeit in marginal negative territory) with volumes exceedingly thin ahead of key risk events. And with that, all eyes move to today's Nonfarm payroll expected to print at 235K, after last month's 248K. Something to keep in mind: the average seasonal adjustment to the October data is almost exactly 1 million, so yet again the fate of the US and global economy, will be determined by an Arima X 13 "fudge factor."

With last night's latest Japanese flash crash firmly forgotten until the next time the trapdoor trade springs open and swallows a whole lot of momentum chasing Virtu vacuum tubes, it is time to look from east to west, Frankfurt to be precise, where in 45 minutes the ECB may or may not say something of importance. As Deutsche Bank comments, "Today is the most important day since.... well the last important day as the ECB hosts its widely anticipated monthly meeting." Whilst not many expect concrete action, the success will be judged on how much Draghi hints at much more future action whilst actually probably doing nothing.

While hardly a surprise, the spin for the latest round of overnight BOJ USDJPY-buying exuberance, which sent the pair higher by another 100 pips to a fresh 7 year high of 114.500 and just over 500 pips from the Albert Edwards "line in the sand" 120 and pushed US equity futures higher with it, has been the Republican sweep in the midterm elections which not only solidified GOP control of the House but also gave Republicans outright control of the Senate.

what is strange is that while traditionally such a major downward growth revision would have been sufficient to send futures soaring - why: because in a world where only central banks are left, it means more central bank global bailouts of course - this time the adverse update actually had the impact of sending futures to their lows of the session, granted just a few tiny points since the market is clearly disconnected with even the most pro forma, non-GAAP version of reality, but the reaction direction was clearly unexpected. Perhaps this is explained by the ongoing devastation in both WTI and Brent, which were trading at $76.70 and $82.50 at last check, both down almost 3% as the plan to use Saudi Arabia to crush Russia has instead backfired and the Saudi princes are now openly looking at destroying the US shale infrastructure, as we forecast in the worst, for Obama, scenario.

While it is unclear whether it is due to the rare event that no central bank stepped in overnight with a massive liquidity injection or because the USDJPY tracking algo hasn't been activated (moments ago Abe's deathwish for the Japanese economy made some more progress with the USDJPY hitting new mult-year highs just shy of 113.6, on its way to 120 and a completely devastated Japanese economy), but European equities have traded in the red from the get-go, with investor sentiment cautious as a result of a disappointing the Chinese manufacturing report. More specifically, Chinese Manufacturing PMI printed a 5-month low (50.8 vs. Exp. 51.2 (Prev. 51.1)), with new orders down to 51.6 from 52.2, new export orders at 49.9 from 50.2 in September. Furthermore, this morning’s batch of Eurozone PMIs have failed to impress with both the Eurozone and German readings falling short of expectations (51.4 vs Exp. 51.8, Last 51.8), with France still residing in contractionary territory (48.5, vs Exp and Last 47.3).

Two days ago, when QE ended and knowing that the market is vastly overstimating the likelihood of a full-blown ECB public debt QE, we tweeted the following: "It's all up to the BOJ now." Little did we know how right we would be just 48 hours later. Because as previously reported, the reason why this morning futures are about to surpass record highs is because while the rest of the world was sleeping, the BOJ shocked the world with a decision to boost QE, announcing it would monetize JPY80 trillion in JGBs, up from the JPY60-70 trillion currently and expand the universe of eligible for monetization securities. A decision which will forever be known in FX folklore as the great Halloween Yen-long massacre.

To summarize (even though with liquidity as non-existant as it is, this may be completely stale by the time we go to print in a minute or so), European shares erase gains, fall close to intraday lows following the Fed’s decision to end QE. Banks, basic resources sectors underperform, while health care, tech outperform. Companies including Shell, Barclays, Aviva, Volkswagen, Alcatel-Lucent, ASMI, Bayer released earnings. German unemployment unexpectedly declines. The Italian and U.K. markets are the worst-performing larger bourses, the Swiss the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; German yields decline. Commodities decline, with nickel, silver underperforming and wheat outperforming. U.S. jobless claims, GDP, personal consumption, core PCE due later.

As Deutsche Bank observes, the Fed has been wanting to hike rates on a rolling 6-12 month horizon from each recent meeting but never imminently which always makes the actual decision subject to events some time ahead. They have seen a shock in the last few weeks and a downgrade to global growth prospects so will for now likely err on the side of being more dovish than in the last couple of meetings. They probably won't want to notably reverse the recent market repricing of the Fed Funds contract for now even if they disagree with it. However any future improvements in the global picture will likely lead them to step-up the rate rising rhetoric again and for us this will again lead to issues for financial markets addicted to liquidity. And so the loop will go on for some time yet and will likely trap the Fed into being more dovish than they would ideally want to be in 2015.

If yesterday's markets closed broadly unchanged following all the excitement from the latest "buy the rumor, sell the news" European stress test coupled with a quadruple whammy of macroeconomic misses across the globe, then today's overnight trading session has been far more muted with no major reports, and if the highlight was Kuroda's broken, and erroneous, record then the catalyst that pushed the Nikkei lower by 0.4% was a Bloomberg article this morning mentioning that lower oil prices could mean the BoJ is forced to "tone down or abandon its outlook for inflation." This comes before the Bank of Japan meeting on Friday where the focus will likely be on whether Kuroda says he is fully committed to keeping current monetary policy open ended and whether or not he outlines a target for the BoJ’s asset balance by the end of 2015; some such as Morgan Stanely even believe the BOJ may announce an expansion of its QE program even if most don't, considering the soaring import cost inflation that is ravaging the nation and is pushing Abe's rating dangerously low. Ironically it was the USDJPY levitation after the Japanese session, which launched just as Europe opened, moving the USDJPY from 107.80 to 108.10, that has managed to push equity futures up 0.5% on the usual: nothing.