Nikkei

In a market in which horrible data leads to upward stock spikes, what can one expect but a directionless market for now: after all today's biggest pending disappointment, the durable goods orders due out in an hour, has not hit the tape yet sending stocks soaring. Newsflow out of Europe is more of the same, summarized by the following BBG headline: 'MERKEL SAYS EURO BONDS ARE THE ‘WRONG WAY." We for one can't wait for the algos to read into this as more bullish than Eurobonds only over her dead body. Perhaps that explains why despite the constant barrage of abysmal economic data, capped by today's epic collapse in MBS mortgage applications plunging 7.1% or the most since March despite record low mortgage yields, futures are once again green. In summary: the usual Bizarro market which has by now driven out virtually everyone.

Last week, Europe was the source of transitory euphoria on some inexplicable assumption that just because the continent has run out of assets, and the ECB has no choice but to expand "eligible" collateral to include, well, everything, things are fixed and it is safe to buy. Today, it is the opposite. Go figure. Call it pre-eurosummit burnout, call it profit taking on hope and prayer, call it Brian Sack packing up his trading desk (just 5 more days to go), and handing over proper capital markets functioning to a B-grade economist, or best just call it deja vu all over again.

If we pursue the line of inquiry established by Chris Martenson’s recent call to Buckle Up -- Market Breakdown in Progress, we come to these basic questions: When will the market reflect the fundamental weakness of the global economy? And when will the market finally hit bottom? Clearly, the correlation between market action and the underlying economy is weak.  While many would declare the stock market to be a “lagging indicator” of recession, even that may be overstating the connection. If we have learned anything in the past three years, it’s that weakening the dollar to foster the illusion of rising corporate profits, central bank monetary easing (QE), and central state borrow-and-spend stimulus can goose the market higher even as the underlying economy remains weak or recessionary. Will the Fed continue to support the U.S. market with QE programs every time it sags? Will QE always work as well as it did in 2010 and 2011? If the history of the deflationary-era Nikkei is any guide (and the BoJ's unprecedented monetary easing while the central government has borrowed and spent unprecedented sums on fiscal stimulus), the bottom could be a year away.

All you need to read.

All you need to read.

Everything today is all about the Fed, which at 12:30 pm will release its standard statement. The publication of Fed officials' forecasts and Chairman Bernanke's press conference will follow at 14:00 and 14:15, respectively. Some, like Goldman are convinced the Fed will announce new easing measures, which could take the form of a new LSAP, more Twist as well as a lengthening of short-term rate guidance beyond 2014, potentially going as far as announcing a Flow-based form of QE, while others such as BofA are fairly certain nothing will happen. Then at 2:00 pm the Fed will release its new economic projections, in which it is roundly expected that the Fed will revise its GDP forecasts for 2012 and 2013 lower, and unemployment - higher. Finally at 2:15 pm Bernanke will address Steve Liesman and a few other members of the fawning captured media. By then the market will be either much higher or much lower, although with about 5% of the recent market move driven entirely by pricing in of more QE, the risk is to the downside. In other words the hopium phase is over. It is now make or break for the Fed.

• Prepare for Lehmans (sic) re-run, Bank official warns (Telegraph)
• Fed Seen Extending Operation Twist While Avoiding Bond Buying (Bloomberg)
• US Watchdog Hits at ‘Risky’ London (FT)
• G20 Bid to Cut Cost of Euro Borrowing (FT)
• Romney Says Rubio Being Examined as Possible Running Mate (Bloomberg)
• Hollande Says Worth Exploring ESM Bond Buys (Reuters)
• US Upbeat After Eurozone Debt Crisis Talks (FT)
• BOJ Members Say Japan Could Be ‘Adversely Affected’ by Europe (Bloomberg)
• China Steps Said to Grow Bond Market, Add Issuer Scrutiny (Bloomberg)
• How Asia Will Fare if Europe Cracks (WSJ)

The key headline in the overnight session was that China was willing to add a token pittance to the IMF "warchest" even as it itself is struggling to find ways to stimulate its economy. Ignore that China had demands of a complete quota overhaul that would see China nearly on par with the US in voting rights, something the US, which incidentally have exactly $0.00 to the bailout effort, would agree to. The amount that warchest has increased to is now $456 billion. It was $430 billion in April just to keep things in perspective. Hardly the Deus Ex the EURUSD is trying hard to make it appear. In the meantime, a gaping hole, as large as $350 billion has opened in Spain. And that excludes the hundreds of billions that will shortly be needed by Italy. Also out of Greece we get rumors that a government may or may not be formed. As to how long said pro-bailout government will last when over half the country voted against he memorandum, that is a different question entirely. Overall, expect a quiet session with everyone praying loudly that Bernanke will launch a new LSAP program tomorrow. If the Chairman does something far less spectacular like merely expanding Twist or raising the maturity of bonds for sale from 1-3 year to 1-4 year, the market will not be happy. Lastly, the G-20 came, ordered lots of shrimp Ceviche at the best restaurants Las Ventanas and One and Only Palmilla has to offer (charge the taxpayers of course), and conquered nothing. But issued a statement that they hope things will fix themselves all over again. In short: nothing but solid reasons for the futures to be up, up, and away.

All you can read.

Just read.

All you can read.

If yesterday's global intervention rumor was a feeler of market response to the next latest and greatest intervention then we may have big problems: the EURUSD is now unchanged, Spanish bond yields are now unchanged, stocks are doing their quad witching thing which means all stops will be taken out before the day is done, but most importantly the euphoria such an announcement would have created before is now completely gone (as per The Diminishing Returns Of Central Planning). What is actually worse, and how the G-20 rumor may have backfired, is that as we pointed out, suddenly there has been a significant shift in expectations: if Syriza does not have an outright win on Sunday then there will be no immediate central bank response, which was predicted to be "if needed". Remember: for this market, when all that matters is the next 10 minutes of trading, this is the only relevant metric. Which means that suddenly from a Risk On event, Syriza's loss has become Risk Off! Of course, the reality is that Sunday will almost certainly be a replay of the last election, where the parliament continues to be empty, and Greece continues to be "Belgium" - recall from May 3, "Previewing The First Of Many Greek Elections." In either case, as others have suggested holding on to positions over the weekend may not be the most prudent thing.

All you need to know.

All you need to know.

After hitting overnight highs of 1.2670, the EURUSD has wiped out nearly all of its gains following the Spanish "bailout", and was last trading just +40 pips higher compared to the Friday close. Same thing with Spanish bonds: these reacted favorably initially, but slowly the bondholder realization that they just got primed has settled in, and with sovereign CDS still a questionable hedge courtesy of ISDA, the only real hedge is selling, and have now drifted wider on the day, as have Italian bonds following a Bloomberg piece which notes the patently obvious: Italy Moves Into Debt-Crisis Crosshairs After Spain. Expect US stocks, always last to get the memo, to realize that Europe has not only faded the entire move, but is now appreciating it for what it is: a confirmation of failure.