Overnight markets have been a continuation of the relative peace observed yesterday before the onslaught of key data later in the week, with the biggest mover standing out as the USDJPY, which briefly touched 102 before sliding lower then recouping losses. This sent the Nikkei 225 up 0.57% despite absolutely atrocious Japanese household spending data, coupled with a major deterioration in employment: at this rate if Abenomics doesn't fix the economy it just may destroy it. Aside from that the last 24 hours could be summed as having a lot of noise but not a lot of excitement. This was best illustrated by the S&P500’s (+0.03%) performance which was the second smallest gain YTD. And while the SHCOMP is starting to fade its recent euphoria and China was up only 0.24%, Europe continues to cower in the shade of Russian sanctions as both German Bund yields rose to record highs, and Portugal's BES tumbled by 10% once again to 1 week lows. Today Europe is expected to formally reveal its latest Russian sanctions, which should in turn push Europe's already teetering economy back over the edge.
The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue: "Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears."
There has been little in term of tier 1 data releases to drive the price action so far in the overnight session which means participants focused on the upcoming US related risk events including the Fed, Q2 GDP and July Payrolls. This, combined with WSJ article by Fed’s Fisher who opined that the FOMC should consider tapering the reinvestment of maturing securities and begin shrinking the Fed’s balance sheet (note that Fisher’s opinion piece is written based on a speech he gave on July 16th) meant that USTs came under pressure overnight in Asia and in Europe this morning. There has been little notable equity futures action (for now: the USDJPY algo team gave it a good ramp attempt just before Europe open, and will repeat just around the US open despite Standard Chartered major cut to its USDJPY forecast from 110 to 106 overnight), although we expect that to change since today is the day when Tuesday frontrunning takes place with full force. We expect equities to completely ignore the ongoing deterioration in Ukraine and the imminent release of EU's own sanctions against Russia, as well as what is now shaping up as an Argentina default on July 30.
After all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear in yesterday’s interview that the blame cannot be placed at his feet where it belongs:
"I have come to the conclusion that bubbles, as I noted, are a function of human nature."
- Argentine holdout NML says government "choosing" to default (Reuters)
- Crunch time for Gaza truce talks as death toll passes 800 (Reuters)
- Don’t Tell Anybody About This Story on HFT Power Jump Trading (BBG)
- U.S. Accuses Russia of Shelling Eastern Ukraine (BBG)
- France’s Wheat Exports in Question as Rain Spoils Quality (BBG)
- Tapering in action: Lower printer sales hurt Xerox's revenue (Reuters)
- No liquidity? No Problem, there's an ETF for that: Bond ETFs Swelling in Europe as Trading Debt Gets Tougher (BBG)
- Herbalife hires ex-Biden chief to fend off regulators (NYPost)
- GM recalls far from calamity for some dealers who find new customers, business (Reuters)
- Bad weather likely cause of fatal Air Algerie crash: French officials (Reuters)
Ever since going public, it appears that Markit's giddyness about life has spilled over into its manufacturing surveys: after a surge in recent Markit mfg exuberance in recent months in the US, it was first China's turn overnight to hit an 18 month high, slamming expectations and fixing the bitter taste in the mouth left by another month of atrocious Japan trade data (where even Goldman has thrown in the towel on Abenomics now) following which the euphoria spilled over to Europe just as the triple-dip recession warnings had started to grow ever louder and most economists have been making a strong case for ECB QE. Instead, German July mfg PMI printed at 52.9, above the 52.0 in June and above the 51.9 expected while the Composite blasted higher to 55.9, from 54.0, and above the 53.8 expected thanks to the strongest Service PMI in 37 months! End result: a blended Eurozone manufacturing PMI rising from 51.8 to 51.9, despite expectations of a modest decline while the Composite rose from 52.8 to 54.0, on expectations of an unchanged print. Curiously the soft survey data took place as Retail Sales declined both in Italy (-0.7%, Exp. +0.2%), and the UK (-0.1%, Exp. 0.3%), which incidentally was blamed on "hot weather." Perhaps Markit, now that it has IPOed successfully, can step off the gas or at least lobby to have surveys become part of GDP.
Meghan O’Sullivan, Harvard's Director of Geopolitics (and former deputy national security adviser for Iran and Afghanistan) warns, "The US should have already panicked." As she notes, major American economic and political interests are at stake. The erasure of the Syria-Iraq border by a group that is considered too radical for al-Qaeda, the takeover of Iraq’s second largest city by IS, the kidnapping of international diplomats, and the declaration of an Islamic caliphate in large parts of Iraq and Syria – each one of these should be a major signal about the gravity of the situation. The Sectarian Divide remains key...
A sharp increase in Middle East geopolitical tensions, first with the resurgence of a radical al-Qaeda affiliate – now called the Islamic State – making substantial territorial gains in major oil producer Iraq, and more recently with an escalating military conflict between Israel and Hamas, has barely caused a blip in global markets and even in oil prices despite the fact that oil supply today is tight. At the same time, the conflict between Ukraine and Russia – the largest oil producer globally – has reached a more dangerous level, also with little oil price response. Indeed, it is difficult to identify another point in recent history when the Middel East – for all its troubles – was in such a precarious state; yet, as Goldman, rather rhetorically asks, this raises the question of whether the markets are being too dismissive about the recent turn of events.
Today we’re going to explain what the “final outcome” for this process will be. The short version is what happens to a cancer patient who allows the disease to spread unchecked (death).
Police are still investigating the tragic death of 39-year-old Goldman Sachs Managing Director Nicholas Valtz this weekend. As Bloomberg reports, Valtz, a "novice kiteboarder," was found dead yesterday by family members who went searching for him after he didn’t return from a kiteboarding outing. While there is no accusation of suicide in this case, it sadly brings the number of young financial services executives deaths to 16 this year.
Benzinga noted on June 27, 2014 “The demand created by Abenomics, along with the demand rush prior to a hike in consumption tax, is viewed as fleeting by corporations”
While we have again and again explained why Abenomics is ultimately doomed as you simply cannot print your way to prosperity (a message The Fed appears to be discovering rapidly), when Goldman Sachs unleashes an Abenomics-bashing piece, one has to wonder just what options Abe has left as economic data starts to collapse (and approval ratings drop just as fast). Simply put, as we concluded before, "Monetary debasement does NOT result in an economic recovery, because no nation can force another to pay for its recovery... Eventually the monetary debasement raises all costs and this initial benefit to exporters vanishes. Then the country is left with a depleted capital base and a higher price level. What a great policy!"
Despite being dismissed as "noise", inflation is here and it's rising. As the following chart shows, if you eat, drive, use electricity, or live in a house, you are paying dramatically more this year than you did last year. On the bright side, if you wear clothes or use electronics, prices have dropped (but remember deflation is bad...). How much longer can the Fed pull the wool over the eyes of the people?
For a centrally-planned market that has long since lost the ability to discount the future, and certainly respond appropriately to geopolitical events, yesterday was a rough wake up call with a two punch stunner of not only the MH 17 crash pushing the Ukraine escalation into overdrive, but Israel's just as shocking land invasion of Gaza officially marking the start of a ground war, finally dragging global stocks out of their hypnotized slumber and pushing risk broadly lower across the globe, even if the now traditional USDJPY and AUDJPY ramp algos have woken up in the past few minutes and will be eager to pretend as if nothing ever happened.
No one knows how this will play out. We all know on some level that it will not end well, but exactly how and when it will all backfire remains to be seen. We’ve already had two epic Crises in the last 15 years. By the look of things, we’re heading for a third one in the not to distant future.