Better stock up on the Depends now.
Two months ago we explained very diligently, why courtesy of the strategic Russian Naval base in Tartus, Syria, the Russian regime will never, repeat never, let the Syrian government be replaced by various insurgent forces (very much like in other parts of MENA, which now are suffering from an absolute political vacuum and even greater corruption in the aftermath of the Arabian Spring). Subsequently there were various reports of Russian troops arriving in Tartus, both confirmed and denied by Russia, which were promptly forgotten: after all distractions from other, far greater problems can not become too repetitive or else the general audience will habituate. But all that was a month ago, and attention spans these days are short, so it is time to once again escalate, and sure enough yesterday the AP reported that Obama has approved an aid package to the Syrian rebels. Naturally, since this whole theater is all about severing strategic Russian national interests in the Mediterranean, and thus, into the Suez, Arabian Gulf, and ultimately Persian Gulf, German Spiegel reports of the immediate tat to America's tit (not to be confused with the Colombian legal prostitution tit, where it now appears whoregate is about to become a national pastime courtesy of upcoming congressional hearings involving the 12 men from Obama's staff who were Secretly Serviced on taxpayer dimes), as apparently yet another Russian-chartered, German ship has been intercepted carrying military equipment and munitions into Syria.
A peaceful and stable Pakistan is integral to western efforts to pacify Afghanistan, but Islamabad’s obsessions with its giant eastern neighbor may render such issues moot.
Since partition in 1947, Pakistan and India have fought four armed conflicts, in 1947, 1965, 1971 (which led to the establishment of Bangladesh, formerly East Pakistan) and the 1999 Kargil clash. With the exception of the 1971 conflict, which involved rising tensions in East Pakistan, the others have all involved issues arising from control of Kashmir. But now a rising new element of discord threatens to precipitate a new armed clash between southern Asia’s two nuclear powers – water.
Volatility is back. The S&P moved more than 1% on 4 of the 5 days, had the biggest down day of the year, and even the least volatile day was a 0.7% move.
"All might be well in China, but Europe again is a cause for serious concern. Spain is the victim of the most intense violence – CDS trades to new all-time wides, and local banks sent nearly 5% lower. The hope might have been that once European markets closed, US equities would recoup losses. But there’s no place for hope on Friday the 13th, and stocks close at the low. The post-close price action in futures was even worse as ES1 drops further still. Back below the 50d again. Perhaps spillover from weakness in European financials, but problematic as tech, the other obvious leader of the year’s rally, is also flagging. SPX drops 17 to close 1370 (-1.25%). The DOW drops 137 to close 12850 (1.05%). The NASDAQ drops 44 to close 3011 (-1.45%)."
In the end having a system without rules is not the same as having a system without consequences. It may be hard to figure out the consequences in such a poorly articulated system, but in time the system will tell you.
That is what EMU is finding out and what the rest of the world is discovering as the flaws in the global financial system become more apparent. But we are much better at finding flaws that at finding solutions.
The heaviest weekly loss (down 2%) in the S&P 500 since mid-December and largest two-week drop since the rally began in November was dominated by losses in financials (and energy). The major financials most notably have been crushed from the start of April (MS -13%, Citi/BofA -11%, GS -8.5% since the European close on 4/2). Credit broadly underperformed on the day (after ripping to pre-NFP levels yesterday) but HYG (the high-yield bond ETF) outperformed surprisingly but this appears to be related to an equity-credit (SPY-HYG) convergence trade as HYG looks very rich now once again to its NAV. The dismal close in ES (S&P futures) on significantly heavier volume and block size. VIX pushed back above 19.5% and we worry that the violent swings that we saw in credit and equity markets this week are very reminiscent of the beginning of the chaos mid-Summer last year - and perhaps rightfully so given the European situation that is escalating. FX markets were much more active today with EURUSD breaking back under 1.31 and AUD leaking lower after gapping down on China GDP news last night. Interestingly the USD ended basically unchanged from last week's close while Gold managed to hold onto its gains for the week (+1.5% at $1655) despite drops in Silver and Copper also today (Silver and Gold retracing the spike highs from yesterday). Copper kept sliding -4.7% on the week. Treasuries slipped lower in yield from late last night exaggerated by China's news with the entire complex notably lower (5-9bps on the week) in yield and flatter as the long-end outperformed. Stocks pulled back towards CONTEXT with broad risk assets at the close today though it remains rich to Treasuries and credit on a medium-term basis.
Gold bullion remains supported, mostly due to a pickup in physical Indian and Chinese gold demand this week. There are expectations of sustained Indian consumption next week in the lead up to the Akshaya Tritiya festival later this month. Western physical buying remains unusually anaemic - for now. In recent years, April and May have been positive months for gold in terms of returns (see table above). April has returned 1.4% per annum in the course of the current bull market since 2000. May has returned 1.75% per annum in the course of the current bull market since 2000. Interestingly, the last month of Q1 and Q2, March and June, have been negative in terms of returns. March in particular has seen the poorest returns for any month in the last 11 years with average falls of 0.6%. Therefore the very poor performance of gold in March 2012 (-6.4%) may represent another buying opportunity as it did last year (see chart below) and in previous years.
Risk-aversion is noted in the European markets with all major European bourses trading lower heading into the US open. Participants remain particularly sensitive to Spain following a release from the ECB showing that Spanish bank’s net borrowing from the ECB hit a new record high at EUR 227.6bln in March against EUR 152.4bln in February. Further pressure on the equity markets was observed following the overnight release of a below-expected Chinese GDP reading, coming in at 8.1% against a consensus estimate of 8.4%. As such, markets have witnessed a flight to safety, with Bund futures up over 40 ticks on the day. In the energy complex, WTI and Brent futures are also trading lower, as the disappointing Chinese GDP data dampens future oil demand, however a failed rocket launch from North Korea may have capped the losses.
- ECB Seen Favoring Bond Buying Over Bank Loans (Bloomberg)
- Italians Rally Against Monti’s Pension-Overhaul Limbo (Bloomberg)
- Spain Cracks Down on Fraud as Rajoy Says Aid Impossible (Bloomberg)
- Europe’s Capital Flight Betrays Currency’s Fragility (Bloomberg)
- China’s Less-Than-Forecast 8.1% Growth May Signal Easing (Bloomberg)
- China Banks Moving to Lower Mortgage Interest Rates (China Daily)
- Fed Officials Differ on Need to Keep Rates Low to 2014 (Bloomberg)
- North Korea Confirms Rocket Failure (Reuters)
- Yuan Lending Set to Cross New Border in Pilot Plan (China Daily)
The number the market has been waiting for with bated breath arrives:
CHINA 1Q GDP GROWS 8.1% ON YEAR, EXPECTED 8.4%, and whispered at 9.0%
CHINA STATISTICS BUREAU SAYS PROBLEMS REMAIN IN THE ECONOMY
NBS: CHINA STILL FACES UPWARD PRESSURE ON INFLATION
NBS: CHINA FACES DIFFICULTY STABILIZING EXPORTS
And so the rumormill, which was expecting some ridiculous GDP print of 9.0% based on a third-rate research report released overnight, despite China posting some epic budget surpluses in the past few months, is stuck dumping risk in this late hour. Everything selling off as China's GDP posts the biggest sequential drop since March 2009 and the lowest sequential GDP rise since September 2009.
The 2 Millions Missing Jobs. Without them, nothing will work.
More jaw-boning helped squeeze shorts as equity indices, credit, and precious metals all closed their highest since the NFP dive as QE3 hope is back on the table. The best day in four months for Materials (now the only sector green from before the NFP print) and Industrials, and the best two-day gain in financials and energy in four months but the S&P 500 remains around 1% off pre-NFP levels (but managed to fill the gap to the lows of last Thursday in S&P futures). Credit (both investment grade and high-yield spreads) managed - just as in Europe - to rip up to pre-NFP levels also (outperforming stocks). Notable divergence between AAPL and SPY started at 1045ET today - as GOOG volume picked up and accelerated which was also when ES (S&P e-mini futures) broke Tuesday's opening level and ran stops. Volume was average with higher average trade size coming in as we reached post-NFP highs (suggesting again professionals selling into strength as weak shorts are squeezed out in a hurry). The dovish comments sent Gold and Silver surging (and China rumors pushed Copper up - and WTI to around $104). VIX crumbled into the close - with its largest drop in over 5 months in percentage terms - though still higher than last Thursday's close. FX markets were noisy once again through Europe but USD ebbed higher in the afternoon - still very modestly lower on the week and day (with JPY leaking weaker today helping carry support risk a little). Treasuries also leaked higher in yield but remain at the immediate spike low yields post-NFP (pretty much in line with stocks generally) but between FX and TSYs, broad risk assets were not as excited as credit and equity markets specifically as we suspect this was weak recent shorts being shaken out suddenly. In context, the S&P 500 is down over 3% in gold terms from before the payrolls print.
Earlier today, the Chinese Internet (yes, it is its own category) experienced a glitch in the matrix. Whether this is due to further potential confusion over the fate of Bo Xilai (and/or any rumors of a concurrent/past/future military coup), or just overall confusion as to what is actually happening in the country, or simply mere censorship gone uber-wild is unclear. As the WSJ explains it, "At around 11 a.m. local time Thursday, China’s Internet suddenly began behaving very strangely. People inside China reported being unable to access some Chinese web sites like Sina’s Corp’s portals as well as popular foreign web sites not normally blocked by China’s firewall. Simultaneously, Internet users outside China, including in Hong Kong, reported difficulties accessing key Chinese sites, like search engine Baidu and the website of the People’s Bank of China." And while we have no idea of what is going on behind the scenes, we are fairly confident what isn't. Such as the country growing at a 9% as has been wildly speculated all day in what some suggest is a leak of Chinese official data. For a glimpse of what is going on, we went to get some local color such as this message board posting at CND.org. Is this the full story? Of course not. But neither are the endless lies peddled by the PBOC and the CCP. Our advice: keep the below in mind while reading any economic data coming out of the country Ministry of Truth and Bureau of Propaganda in the coming weeks and months. Because if today's Internet glitch is any indication, things behind the scenes are truly starting to heat up.
A Monetary Cliff or a Fiscal Cliff: these are the two poisons that Barton Biggs sees rushing straight toward America, with little hope of an uneventful collision. While we have not been shy of our opinions on Barton Biggs' flip-flopping positions, his note on the US "as a nation of totally self-centered special interest groups that terrorize our politicians" struck a chord and deserves praise in its clarity. Noting that Europe seems stuck again, he points to the US market being data and Europe-dependent for the next month and believes the correction is little less than half way over (in terms of size not time). In Biggs opinion "although the Monetary Cliff is more long-term dangerous, the proximity of the Fiscal Cliff, if not dealt with, will trigger the dreaded double-dip recession we are all terrified of and bring on another financial crisis."