CDS

Dispassionate view that Italy poses the biggest risk for the euro area and it will not wait for the German elections.

As previewed extensively previosuly, Javier Martin-Artajo, one of the two JPMorgan scapewhales resulting from the London CIO prop-trading fiasco in which JPM used some $400 billion in deposit funding to corner the HY and IG CDS markets and then proceed to liberally redefine what a mid-market mark means, has been arrested.

Last week it was the Nasdaq, today it was the Eurex Exchange, which broke down "due to technical issues" shortly after 2 am Eastern and which was offline for over an hour. Further keeping a lid on liquidity and upward momentum is today's UK market holiday which has resulted in a driftless move lower across European stocks, following a red close in the Nikkei225. It only means that the inevitable ramp up in the disconnected from all fundamentals and reality market will have to come only during US trading hours when the NY Fed trading desk steps up its POMO-aided levitation.

Following the market's shocking realization that the taper is coming prompting a kneejerk to the kneejerk reaction after the FOMC minutes, and yet another painful session in Asia, stocks were desperate for some good news from somewhere, which they got thanks to a Goldilocks PMI from China printing by the smallest possible expansionary quantum, or 50.1, and well above expectations, as well as a continuation of better than expected European PMI data with the August composite rising from 50.5 to 51.7 vs. Exp. 50.9, based pm a Services PMI rising into expansion to 51.0 from 49.8, (Exp. 50.2), and Manufacturing at 51.3 vs. Exp. 50.8 up from 50.3, the highest since June 2011. It is perhaps stunning just how conflicting this "improving" data is with private sector industrial and manufacturing company metrics, but with the credit creation situation in Europe (read: all that matters) at record lows, and with banks retrenching and needing to delever by trillions, it is only a matter of time before this latest propaganda wave is exposed for what it is. The net effect of the overnight data is to push the USDJPY to nearly 99.00 which thanks to the ubiquitous correlation algos has dragged US equity futures higher, if only briefly (the 10 Year is at 2.91% - under 10bps from redline territory), while slamming the offsetting EURUSD despite the "better" than expected European data.

Following yet another rout in Asia overnight, which since shifted over to Europe, US equity futures have stabilized as a result of a modest buying/short-covering spree in the 10 Year which after threatening to blow out in the 2.90% range and above, instead fell back to 2.81%. Yet algos appear confused by the seeming USD weakness in the past few hours (EURUSD just briefly rose over 1.34) and instead of ploughing head first into stock futures have only modestly bid them up and are keeping the DJIA futs just above the sacred to the vacuum tube world 15,000 mark. A lower USDJPY (heavily correlated to the ES) did not help, after it was pushed south by more comments out of Japan that a sales tax hike is inevitable which then also means a lower budget deficit, less monetization, less Japanese QE and all the other waterfall effect the US Fed is slogging through. Keep an eye on the 10 Year and on the USD: which signal wins out will determine whether equities rise or fall, and with speculation about what tomorrow's minutes bring rife, it is anybody's bet whether we get the 10th red close out of 12 in the S&P500.

It's all about rates this largely newsless morning, which have continued their march wider all night, and moments ago rose to 2.873% - a fresh 2 year wide and meaning that neither Gross, nor the bond market, is nowhere near tweeted out. As DB confirms, US treasuries are front and center of mind at the moment.... the 10yr UST yield is up another 4bp at a fresh two year high of 2.87% in Tokyo trading, adding to last week’s 20bp selloff. As it currently stands, 10yr yields are up by more than 120bp from the YTD lows in early May and more than 80bp higher since Bernanke’s now infamous JEC testimony. We should also note that the recent US rates selloff has been accompanied by a rapid steepening in the rate curve. Indeed, the 2s/10s curve is at a 2 year high of 250bp and the 2s/30s and 2s/5s are also at close to their highest level in two years.

Over the last thirty some odd years, the world has seen an unprecedented level of economic growth and prosperity. That much is certain. However, things are not as they appear when the bullish rose-tinted glasses that most view the world through are removed.

And the issue is debt.

The last few days have seen JCPenney's saga take a decided turn for the worse - if that's possible. With the stock price EKG-ing on every utterance from a CNBC mouthpiece, a desperate hedge fund manager, or a board looking to remain relevant; it seems - as usual - that credit markets not only saw through the news but remained stoic in their cash-flow-discounting reality check. Critically, the last few days have seen the short-end of the JCP CDS curve surge and the term structure has inverted. At current levels, the credit market assigns a 13% probability that JCP will default by March 2014. Not good... It is extremely unusual (though not unprecedented) for a credit to 'recover' from an inversion such as this.

While outlining the ridiculous spectacle of the last 24 hours news flow on JCPenney is useful for some, a step back to view this charade for what it is - a hedge fund manager massivley under-water, a company careening into bankruptcy, a board desperate to show it has any relevance, and a most senior creditor (Goldman Sachs) chomping at the bit to securitize the firm's T-Shirts and small appliances... the entire 'bounce' from yesterday has been retraced as Ackman and JCP's board fling insults at each other... JCPanic has been downgraded to JCPandemonium... on its way to JCPoof...

Bullish on one, no so much on the other. 

It would appear that in the order of who knows what when, in the case of JCPenney, it is C-level executives first, credit markets second (was Goldman's line a pre-DIP?), and equity shareholders (Ackamn included) last. With the torrent of executve departures in the last year, credit market investors led the equity over the past two weeks as credit lines were (allegedly) pulled. Today's 50bps rise in JCP's 5Y CDS pushes the company's risk of bankruptcy to its highest ever (arguably higher than 65% over the next few years given the secured assets). JCP's stock is down 2% on the day but still holding above its April (and 2009) lows (for now).

• Botulism toxin? There's an apology for that - Fonterra CEO apologizes, sees China dairy curbs lifted within days (Reuters)
• Patent troll-In-Chief strikes again: Veto of Apple Ruling Likely to Upend Big Patent Battles (WSJ)
• Because scapegoating means justice FTW - SEC Gets ‘Shot in the Arm’ With Victory in Tourre Case (BBG)
• Insider-Trading Probe Caught in a Washington Knot (WSJ)
• Miners return to hedging as gold  (FT)
• Toyota’s $37 Billion Cash Pile Means Turning Point for Abenomics (BBG)
• Inside the battle at Germany's Siemens (Reuters)
• ‘One million’ UK workers on zero hours contracts (FT)
• Wag the dog, part 1984: Iran Seen Trying New Path to a Bomb (WSJ)
• Tokyo Cheap to Hong Kong Luring Asian Bargain Hunters (BBG)

Crashing Australian and a miss in South Korean PMIs, following days of weak Japanese data, and a divergence in the official and HSBC Chinese manufacturing indicators to a 15 month high (HSBC PMI sliding to 11 month low) was just the bad news Asian market needed to break out higher from the recent range and thanks to the return of overnight USDJPY levitation as well as a modest reverse repo liquidity injection by the PBOC overnight, not only did the Nikkei and Shanghai rise 3% and 1.8% respectively, but US futures are right back to where they were before yesterday's dramatic turnaround in the market following a strongly dovish FOMC statement and just shy of the 1700 once more. As for Europe, while there a smattering of noise following the release of final PMIs which did not change the preliminary picture much (Spain 49.8, vs 50.6 exp; Italy 50.4 vs 49.8 exp; France 49.7 vs 49.8 exp; Germany 50.7 vs 50.3 exp) it is all up to the ECB today to preserve the myth of a European improvement coupled with a EUR currency at or near multi-month highs.

While we have heard this rumor before, the NY Post is reporting that CIT - the largest commercial lender/factor in the US apparel industry - has abruptly stopped supporting deliveries from smaller manufacturers to JCPenney stores. Insiders speculated that CIT got skittish after meeting with JCP officials yesterday and getting a glimpse of financials. It really is not Bill Ackman's day - HLF +10%, JCP -6.7%.

Problem ... What Problem?