Markets Digest Wristwatch, NIRP Monetization, Catalan Independence News; Push Yields, USDJPY Even HigherSubmitted by Tyler Durden on 09/10/2014 07:08 -0400
Overnight the most notable move has been the ongoing weakness in rates, with USTs reversing earlier Tokyo gains after BoJ Deputy Governor Iwata, in addition to commenting on a lot of things that didn't make much sense, said he didn’t see any difficulties in money market operations even if BoJ bought bought government debt with negative yields, as InTouch Capital Markets notes. As a reminder, yesterday we noted that in a historic first the "Bank Of Japan Monetizes Debt At Negative Rates." As Bloomberg notes, this may be interpreted that BoJ may target negative yields to penalize savers, which "all boosts the appeal of yen-funded carry trades." In other words, first Europe goes NIRP, now it's Japan's turn! So while this certainly lit the fire under the USDJPY some more, which overnight broke about 106.50 and hit as high as 106.75 on Iwata's comments, it does not explain why the 10Y is currently trading 2.52% - after all the fungible BOJ money will eventually make its way into US bonds and merely add to what JPM has calculated is a total $5 trillion in excess liquidity sloshing in the global market.
Think CDS were the scourge of humanity, think again. As Pension360 reports, several Wall Street firms are selling securities backed by longevity risk - the risk that retirees receiving benefits will live longer than expected (and thus incur a higher cost on their retirement plan). As Ted Ballantine notes, 'no one ever said Wall Street wasn't creative'; but one wonders just how the banks are mitigating this risk...
It has been an odd session: after yesterday's unexpected late day swoon despite the ECB launch of "Private QE", late night trading saw a major reversal in USDJPY trading which soared relentlessly until it rose to fresh 6 year highs, briefly printing at 105.70, a level not seen since October 2008, before giving back all gains in overnight trading. It is unclear if it was this drop, or some capital reallocation from the US into Europe, but for whatever reason while Europe has seen a stable - if fading in recent hours - risk bid, and European bonds once again rising and Irish and Italian yields both dropping to record low yield, US equity futures have slumped and are now trading at the lows of the session ahead of a US nonfarm payroll print which is expected to rise and print for the 7th consecutive time above 200K, at 230K to be precise, up from 209K in July (down from 288K in June). It is unclear if the market is in a good news is bad news mood today, but for now the algos are not taking any chances and have exited risky positions, with the ES at the low end of the range the market has been trading in for the past week centered aroun S&P 2000.
Even as the NATO summit began hours ago in Wales, conveniently enough (for Obama) at the venue of the 2010 Ryder Cup, so far today geopolitics has taken a backseat to the biggest event of the day - the ECB's much hyped and anticipated announcement. So anticipated in fact that even as it has been priced in for the past month, especially by BlackRock which is already calculating the Christmas bonus on its "consultancy" in implementing the ECB's ABS purchasing program and manifesting itself in record low yields across Europe's bond market, Reuters decided to milk it some more moments ago with the following blast: "Plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros are on the table at Thursday's European Central Bank policy meeting..." The notable being the size of the program, which at €500 billion, is precisely what Deutsche Bank said a week ago the size of the ABS program would be. Almost as if the bank with the world's biggest derivative exposure is helping coordinate the "Private QE"...
Zero inflation is like death penalty to debt-laden countries. It has been estimated that Italy would need a primary surplus of ~8% if it wanted to stabilize its debt/GDP at zero inflation, which means just stopping it from moving even higher. Spain would need a primary surplus of 2%+, instead of current negative 1.44%. Which means more austerity and more contractionary policies, to cause more internal devaluation than it is currently the case, more declines in unit labor costs, more salary cuts, more unemployment, less consumer spending, less corporate investments.... Incidentally, we have for European assets and the ECB the same feeling we have for Japan and the BoJ. Abenomics has a high chance of failure, in the long term. Nevertheless, on the road to perdition, chances are that efforts will be stepped up and more bullets shot in an attempt to avert the end game. As stakes are raised, financial assets will be supported and melt-up in bubble territory, doing so at the expenses of a more turbulent end-game in the years ahead.
In Bankrupt Argentina CDS Auction, Barclays Buys Whatever JPM Has To Sell; Citi Goes For The Hail MarySubmitted by Tyler Durden on 09/03/2014 14:43 -0400
It has been a while since Creditex ran a CDS settlement auction of any note for two reasons: CDS no longer is a credible or legitimate method to hedge against default risk (see Greece, Banco Espirito Santo), thus making the stated purpose of CDS irrelevant, and when the default carries with it systematic risk ISDA will simply screw over CDS-holders and change terms whenever it sees fit following a few politically-connected phone calls, at which point good luck collecting on your "insurance." Which is why the just concluded Argentina CDS settlement auction following its bankruptcy last month, was a welcome reminder of what markets looked like in the BC (Before Central-planning) era.
If the big hope propelling both ES and S&P cash over 2,000 was the Ukraine-Russian talks, leading to some de-escalation and a thawing of Russian-German conditions, then it was clearly a dud. As the WSJ reports, "face-to-face talks between the Russian and Ukrainian presidents failed to produce a breakthrough for ending the conflict over eastern Ukraine, as Kiev released videos of captured Russian soldiers and rebels pushed toward a government-held city. The one-on-one session, which Ukraine's President Petro Poroshenko described as "tough and complex," ended early Wednesday after a day of talks on the crisis in the Belarusian capital of Minsk. Mr. Poroshenko said afterward that he would prepare a "road map" toward a possible cease-fire with the pro-Russia separatists." In other words, absolutely no progress. There was however escalation, when overnight the September Bund future rose as much as 36 ticks to 151.18, after Poland PM Tusk said “regular” Russian troops are operating in eastern Ukraine. And so we are back to square one, with concerns over Russia pushing European bonds to new record highs, in turn leading to more US Treasury buying, while a brand new rumor of more easing from the ECB, this time by Deutsche Bank, has propped up European equities, which like US futures are trading water around the critical 2000 level.
It is unclear exactly why stock futures, bonds - with European peripheral yields hitting new record lows for the second day in a row - gold, oil and pretty much everything else is up this morning but it is safe to say the central banks are behind it, as is the "de-escalation" algo as a meeting between Russia and Ukraine begins today in Belarus' capital Minsk. Belarusian and Kazakhstani leaders will also be at the summit. Hopes of a significant progress on the peace talks were dampened following Merkel’s visit to Kiev over the weekend. The German Chancellor said that a big breakthrough is unlikely at today’s meeting. Russian FM Lavrov said that the discussion will focus on economic ties, the humanitarian crisis and prospects for a political resolution. On that note Lavrov also told reporters yesterday that Russia hopes to send a second humanitarian aid convoy to Ukraine this week. What he didn't say is that he would also send a cohort of Russian troops which supposedly were captured by overnight by the Ukraine army (more shortly).
After surging all week on the worst volume of the year, US equities hit an air-pocket of reality this morning as last night's news of a Russian 'invasion' was confirmed by Ukraine (and UK reporters), denied by Russia, and met with silence from the US. Of course, thanks to a handy VIXnado, stock bounced back to VWAP, stabilized and closed the week in the green. The last two weeks have been the best for 7Y bonds in 10 months as it closes back under 2% for the first time since Oct 2013. Amid all this chaos, the US dollar closed unchanged on the week (giving up mid-week gains) as AUD and CAD strength dominated EUR weakness. Gold and silver - after a quiet week - was clubbed lower in the pre-open. Gold and oil surged higher on the Ukraine news - closing marginally lower on the week. VIX was cranked down to an 11 handle before Ukraine hit, surged back over 14.5, then jerked lower to close 'weaker' than stocks imply. Once again, US stocks surged once Europe closed (and of course, the panic buying into close makes perfect sense).
If it was crashing German business confidence yesterday setting the somber mood for European economic "growth" in the second half, with a European GDP decline if not outright contraction now almost practically inevitable, then overnight it was disappointing data from virtually every other spot in the globe (and Europe again) to hammer the message in, starting with a historic 6.8% drop in Japanese GDP driven by a record plunge in consumption, quickly followed by total social financing out of China which in aggregate rose by only RMB273.1bn in July, or just 18% of what was expected, with missing industrial production and retail sales just the cherry on top. Then it was Europe's turn again, where June Industrial Production contracted -0.3% on expectations of a 0.4% increase, to set the stage for tomorrow's Eurozone GDP print which, following Italy's triple-drip recession shocker last week, probably means it will be not only Japan but also Europe which are about to have taken a sharp move for the worse. All of which of course, explains why just as Europe opened, the USDJPY blasted off and took both EuroSTOXX and US equity futures higher with it, and at last check ES was some 10 higher.
If the global equity "markets" were in need of a sharp "horrible news is great news" boost overnight, it came courtesy of Germany's ZEW investor confidence survey, which printed at a stunning 8.6, a plunge from the 27.1 in July and far below the 17.0 expected - the lowest print since December 2012 -largely suggesting that a European triple-dip is all but assured. And if that wasn't enough, strong language from John Kerry, assured to fan the flames of geopolitical instability, came hours ago when the US SecState said even more Russian sanctions may be coming. And just to make sure the NY Fed trading desk has to come up with a new narrative is the latest development in the Russian "humanitarian convoy" saga, which as we reported last night, has departed Russia but which Ukraine is now refusing to allow into its country. All in all, it's is setting up to be another super bullish day in the rigged markets for which all that matters is... Tuesday.
Since there is nothing on today's data docket, it will be all about, you guessed it, geopolitical risks, where "consensus" is best summarized by these two Bloomberg headlines:
- Stay USD Long as Geopolitical Risks Loom
- USD is mixed and world stock markets rise as concerns over geopolitical risks ease
That pretty much covers it, although in addition to the Ukraine civil war one can now add an Iraq coup to the list of geopolitical fiascoes instigated by US foreign policy.
Gold Breaks Out As Tensions In Middle East, With Russia Intensify - Technicals and Fundamentals PositiveSubmitted by GoldCore on 08/08/2014 17:06 -0400
Gold is nearly 2% higher this week and its technical position has further improved (see key charts). On Wednesday, gold broke out of bullish descending wedge chart pattern that has formed in recent months. Another buy signal for gold came when gold rose above the 20 EMA and 50 EMA (exponential moving averages). Also positive is the fact that the price momentum oscillator (PMO) has turned up, indicating that a positive momentum shift has occurred.
High-Yield bonds funds saw record outflows of $7.1 billion this week - the fourth week running - as the slow-motion train crash in credit starts to accelerate. As Forbes reports, the huge redemption blows out past the prior record outflow of $4.63 billion in June 2013. The full-year reading is now deeply in the red, at $5.9 billion, with 43% of the withdrawal tied to ETFs. Simply put, everyone in the bond market knew 'not' to sell because liquidity is simply not there; but game theory's first mover advantage finally broke as retail investors run and create a vicious cycle of 'liquid' ETF selling forcing 'illiquid' underlying bond selling... just as we warned here and here. Why should equity investors care? See chart below...
There were some minor fireworks in the overnight session following the worst Australian unemployment data in 12 years reported previously (and which sent the AUD crashing), most notably news that the Japanese Pension Fund would throw more pensioner money away by boosting the allocation to domestic stocks from 12% to 20%, while reducing holdings of JGBs from 60% to 40%. This in turn sent the USDJPY soaring (ironically, following yesterday's mini flash crash) if only briefly before it retraced much of the gains, even as the Pension asset reallocation news now appears to be entirely priced in. It may be all downhill from here for Japanese stocks. It was certainly downhill for Europe where after ugly German factory orders yesterday, it was the turn of Europe's growth dynamo to report just as ugly Industrial Production which missed expectations of a 1.2% print rising only 0.3%. Nonetheless, asset classes have not seen major moves yet, as today's main event is the ECB announcement due out in less than an hour. Consensus expects Draghi to do nothing, however with fresh cyclical lows in European inflation prints, and an economy which is clearly rolling over from Germany to the periphery, the ex-Goldmanite just may surprise watchers.