goldman sachs

While any moves in the US stock market ahead of Thursday are largely irrelevant, as only Yellen's statement in 4 days will unleash epic algo buying or short covering (yes, according to JPM the Fed statement is bullish no matter what), it is what happened in China that is concerning, because while we had expected Chinese stocks to go nowhere in particular now that index future trading volumes have plunged by 99% or perhaps rise on hopes of even more easing after the latest terrible economic data, the Shanghai Composite dropped 2.7%, but it was the retail darling Shenzhen Composite which tumbled 6.7% - its worst selloff since August 25, while China's Nasdaq, the ChiNext crashed -7.5%.

So far, it’s a different type of crisis – market tumult in the face of global QE, in the face of ultra-low interest rates and the perception of a concerted global central bank liquidity backstop. It’s the kind of crisis that’s so far been able to achieve a decent head of steam without causing much angst. And it’s difficult to interpret this bullishly. If Brazil goes into a tailspin, it will likely pull down Latin American neighbors, along with vulnerable Indonesia, Malaysia, Turkey and others. And then a full-fledged “risk off” de-risking/de-leveraging would have far-reaching ramifications, perhaps even dislocation and a collapse of the currency peg in China. China does have a number of major trading partners in trouble. Hard for me to believe the sophisticated players aren’t planning on slashing risk.

EURUSD has been rising for the last week adding over 230 pips of the September 3rd Draghi lows. The last few minutes has seen that EUR strength extend 40-50 pips which must be disheartening for Goldman Sachs who just released a note explaining why EURUSD's bounce is over...

Perhaps after intervening every single day in the past week (remember that FT piece saying the PBOC would no longer directly buy stocks... good times) in either the stock or the FX (both on and offshore) market, China needed a day off; perhaps even the algos got tired of constantly spoofing the E-mini and inciting momentum ignition, but for whatever reason the overnight session has been oddly uneventful, with no ES halts so far, few USDJPY surges (then again those come just before the US open), and even less violent CNY or CNH moves, leading to virtually unchanged markets in Japan (small red) and China (small green). And while the initial tone in Europe has been modestly "risk off", it is nothing in comparison to the massive gyrations that have become a stape in the past few weeks.

With Treasury Secretary Jack Lew sending a letter to Congress this evening demanding they raise the debt limit as soon as possible, warning that cash balances have dropped below the "minimum target," it is perhaps less than surprising that Goldman Sachs is warning that a government shutdown at the end of the month has become much more likely over the last several weeks. While out-months in VIX (beyond the prospective shutdown) remain elevated, Goldman finds a silver-lining claiming that the effect of a potential shutdown on financial markets and the real economy would probably be modest if it did occur. We shall see...

This level of global inter-connected financial risk is hazardous in Mexico, where it’s peppered by high bank concentration risk. No one wants another major financial crisis. Yet, that’s where we are headed absent major reconstructions of the banking framework and the central bank policies that exude extreme power over global economies and markets, in the US, Mexico, and throughout the world. Mexico’s problems could again ripple through Latin America where eroding confidence, volatility, and US dollar strength are already hurting economies and markets. The difference is that now, in contrast to the 1980s and 1990s debt crises, loan and bond amounts have not just been extended by private banks, but subsidized by the Fed and the ECB.  The risk platform is elevated. The fall, for both Mexico and its trading partners like the US, likely much harder.

This is getting way too stupid. The Keynesian Chorus has launched a full blast trilling campaign, emitting an increasingly shrill cackle of warnings against a Fed rate hike. Yes, 80 months of pumping free money into the canyons of Wall Street is not enough. Why? Well, this is hard to type with a straight face, but according to the cackling gaggle of Keynesian Chicken Littles, the Fed has already tightened too much!

The growing roar of 'the establishment' crying for help from The Fed should make investors nervous. While your friendly local asset-getherer and TV-talking-head will proclaim how a rate-hike is so positive for the economy and stocks, we wonder why it is that The IMF, The World Bank, Larry Summers (twice), Goldman Sachs, China (twice), and now no lessor nobel-winner than Paul Krugman has demanded that The Fed not hike rates for fear of  - generally speaking - "panic and turmoil," however, as Krugman notes, “I think it would be a terrible mistake to move. But I’m not confident that they won’t make a mistake."

• Global stocks rally as investors scent fresh stimulus (Reuters)
• Japan's Nikkei 225 Rises 7.7% for Biggest Gain Since October 2008 (BBG)
• China's Stocks Advance for Second Day Amid Stimulus Speculation (BBG)
• Abe Pledges Corporate Tax Cut as Investments Slump (BBG)
• U.S. to shift 50 staff to boost office handling Clinton emails (Reuters)
• Chinese Premier Li Keqiang Says China Doesn't Want a Currency War (BBG)
• One Thing China Got Right (BBG)

While we already knew that China was selling - and following the record selling of FX reserves in August, so does everyone else - an even more interesting question emerged: who is buying? Thanks to the WSJ we now know the answer: "A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street."

If the market is right, Goldman warns that current cross-asset-class volatility appears to be pricing in a lot of economic damage. As they note, VIX doesn’t just trade the economy; it also has a strong and often humbling element of risk sentiment baked in.

On one hand, every economist, virtual portfolio manager, Yahoo Finance Twitter expert, and TV talking head is certain that a September rate hike is inevitable. On the other hand, the bank that runs the NY Fed (and whose chief economist Jan Hatzius has dinner with NY Fed head Bill Dudley at the Pound and Pence every other month), Goldman Sachs is re-doubling down on its call that the Fed will not hike in September. Here are Goldman's seven reasons why not.

As an investor, you have enough to be concerned about just taking into account factors like inflation, deflation, Fed policy and the overall state of the economy. Now you have another major threat looming – financial warfare, enabled by cyberattacks and force multipliers. What can you do to preserve wealth when these cyberfinancial wars break out? The key is to have some portion of your total assets invested in nondigital assets that cannot be hacked, wiped out or disrupted by financial warfare. The time to take defensive action by acquiring some non-digital assets is now.

While we have exposed the ugly under-belly of today's jobs data, mainstream media is spinning it as a 'Goldilocks' report with enough hits-and-misses for every hawk or dove. The market's initial reaction signals rising expectations of a September rate hike but, as Goldman's Jan Hatzius explains, they continue to expect the FOMC to keep policy rates unchanged at the September 16-17 meeting.