Stocks in Europe recovered from a cautious start to the trading session and gradually edged back into positive territory, though the DAX index in Germany under performed following less than impressive earnings by SAP. Company’s shares fell around 3% after the company trimmed its outlook for 2013 software revenue, blaming slowing economic growth in China. Elsewhere, Akzo Nobel shares fell 5% in early trade after the company said that its Q2 net profit almost doubled from the same period last year thanks to the sale of its North American paints division and a tax gain. Going forward, market participants will get to digest the release of the weekly jobs report, Philadelphia Fed survey for the month of July and earnings report releases from Morgan Stanley, Verizon, BlackRock and Google. Finally, today is the second day of Bernanke's semi-annual testimony.
Following Barclays' fine of $453 million by FERC for manipulating electric energy prices in California (and other other Western markets), it seems the price of infamy is weighing heavy on Blythe Masters' overlords at JPMorgan in yet another derivative debacle for the "I invented CDS" queen. As we discussed in great detail here, FERC's investigations into JPMorgan's actions saw them pursuing actions against the firm and Ms. Masters. In recent weeks settlement rumors have been heard and now as the NYTimes reports, it appears - in light of last year's PR and P&L 'London Whale' disaster - the best-CEO-in-the-entire-world-so-there is preparing to settle to the tune of $500 million to keep Blythe out of jail. To settle Ms. Masters' alleged “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and then her giving “false and misleading statements” under oath, must mean she has some serious dirt on Jamie (and his fortress balance sheet and best-in-class risk management).
Fear not US: with a Q2 GDP of under 1% now all but assured, and with all economic data reporting now a global bizarro day farce, you will have a chance to take the torch from Europe in the ugliest girl category, and push the S&P to a new record intraday high today following what should be assured epic misses in the Industrial Production print (exp. +0.3%), Cap Utilization and the NAHB housing market index which is set to tumble now that any retail demand for housing was promptly killed following the recent spike in rates. In addition to a relatively lite economic docket, we get the all systematically important hedge fund, Goldman Sachs, reporting which is expected to announce a 21% q/q drop in revenues, led by lower gains in Investment Lending (i.e. prop), offset by 12% drop in operating expenses. Of course, nothing fundamental actually matters as markets continue to be on ultra low-volume, "drift higher" autopilot until tomorrow's Ben Bernanke semi-annual muppet show in Congress, when he is expected to refill the hopium trough once more and finally send the S&P above 1700 on central planning.
The prospect of financial sector deleveraging in China increases the risk of a hard landing - despite yesterday's goldilocks GDP print (and ugly miss in IP). Although the probability of the hard landing is still low, Morgan Stanley warns it’s not low enough to make hedging costs irrelevant: The new government's policy drive to deleverage the banking sector has become more apparent, and they think this deleveraging will likely continue to unfold in the next 6-12 months. In MS' Super-Bear scenario, they expect aggressive policy tightening to reduce 2H13 GDP growth to 5.5% YoY. In this scenario, policy-makers are also slow to respond to this deceleration, leading to more turmoil in the financial sector. Although a low probability event, this would have major implications for global markets. MS estimates that markets are pricing in a 1-in-10 chance of a Super-Bear scenario in China in the coming 12 months, more in equities, less in FX markets.
Ben Bernanke blames fiscal policies out of Washington. However, it is starting to look more and more like Fed policy is equally to blame for the lackluster U.S. GDP growth.
When Bloomberg blasts headlines like this: S&P FUTURES UP 1PT, AT SESSION HIGH, ERASE EARLIER 3.4PT DROP, you know Bernanke hasn't spoken in over 24 hours if a 4 point swing is headline worthy. That said, the exhausted S&P ramp is now going for the 6th consecutive session as all the losses since the June FOMC meeting have now been erased, the S&P is making constant all time highs, and seemingly the Fed's message on tapering and communication has been clarified. The message being that the Fed is tapering its monthly purchases but short-term rates aren't being lifted. Sadly, the market's first reaction was the right one but the herd of cats has once again been herded by the trading desk at Liberty 33.
While we are told that history doesn't repeat, it seems Baupost's Seth Klarman is oddly prophetic in his rhyming reality vision of the markets from over 20 years ago. This brief 'warning' from one of the most independent-thinking asset managers of our time (and least sheep-like) sum it up perfectly: "Caution has not been a profitable investment tactic for a long time now. I strongly believe it is about to make a comeback."
If the worst Chinese trade data in years (and by that we mean unmanipulated, because what was released last night is merely China offsetting blatantly BS Q1 trade data), and yesterday's S&P downgrade of Italy (which has sent BTPs lower although the EURUSD drop was offset by buying pressure resulting from Stolper closing out his EURUSD long) doesn't send the Stalingrad & Poorski 451 to new all time highs, then all the Chairman's efforts to make a complete farce of the "market" will have been for naught. But while the Fed keeps pushing mom and pop into stocks, he may want to tell his friends at the CME to hike WTI margins, because this morning's latest surge in crude to over $105 will really start hurting refiner margins, and due to the overall energy complex roaring higher, gas prices too, which incidentally just crossed $3.50 in the wrong direction this morning.
Overnight news began in China where the CPI came in 2.7% versus consensus of 2.5% although PPI continues to decline at a faster pace than expected (-2.7% v -2.6%). While nobody believes the actual print, that the PBOC is telegraphing an inflationary "leak" shows its willingness to continue with pro-tightening measures which is why despite an Alcoa "beat", the SHCOMP was up only 0.37%. Elsewhere in China, Bloomberg news quoting Xinhua said that some district governments of Ordos of Inner Mongolia is struggling with finances and had to borrow money from companies to pay salaries of municipal employees. Ordos is the infamous "ghost town" spurred by the mining boom in Inner Mongolia. The Bloomberg article noted that Ordos local government entities have CNY240bn of debt versus CNY37.5 billion of revenue last year. And while the Alcoa "beat", helped handily by a hilariously "tapered" consensus into reporting day, did little for China it was the catalyst that pushed global stocks higher worldwide.
The central bank "reason" goal-seeked for today's US overnight ramp - because it sure wasn't fundamentals with both German exports (-2.4%, Exp. +0.1%) and Industrial Production (-1.0%, Exp. -0.5%) missing - was the weekend Spiegel story that despite the unanimous decision by the ECB last week to keep rates unchanged, ECB chief economist Peter Praet and Mario Draghi himself had insisted on a 25 bps rate cut. They were, however, stopped by seven council members from the northern euro states, including Weidmann, Knot and Asmussen. As a result, Draghi was steamrolled in the final vote. Yet somehow this is bullish for risk, pushing equity futures higher and peripheral debt spreads lower, even as the EURUSD has drifted higher. Of course, one can't have an even more dovish ECB as a risk on catalyst alongside a rising Euro, but who cares about news, fundamentals, or logic at this point. All that matters is that US futures are higher, which was especially needed following yet another rout in the Shanghai Composite which dropped 2.44% back under 2,000 following news that China's Finance Ministry has told central government agencies to cut expenditures by 5% this year, and a 1.4% drop in the PenNikkeiStock225 on a weaker USDJPY. Remember: all is well in the global economy (whose forecast is about to be cut by the IMF) if the US is generating a record number of part-time jobs.
While the skeleton crew of market participants are still digesting yesterday's uber-dovish, "forward guidance" conversion by the BOE and ECB, driven in response to the Fed's increasingly tight (at least relatively) monetary policy, they now have month's biggest economic and market catalyst to look forward to. In a day which promises to be rife with illiquidity as the bulk of US market participants are within 100 feet of a sandy beach, we are about to get the number that will shape the market's mood for the next month: will the Fed's tapering planes be strengthened in response to strong NFP, or not. As Deutsche accurately points out, the curveball to throw in is that June-August numbers have tended to be seasonally weak over the whole period we have data (back 70+ years) and again over the last 10 years. Today's number is therefore going to be fascinating. A number between 150-200k is unlikely to change anyone’s opinion on the Fed whereas a number below might start to build a case for a taper delay. Above 200k and the September taper momentum will build. Such a high number (especially in a weak seasonal period) is unlikely to be great for markets but the ECB/BoE might have cushioned some of the hawkish blow for now. For the record the market is expecting 165k on payrolls and 7.5% (DB same) for unemployment. A full NFP preview post is coming shortly.
Given the US holiday, markets are likely to be thin today but there are some big news stories floating around at the moment. If the fast and furious events from the past few days in a revolutionary Egypt bear a striking resemblance to what happened in the spring of 2011, it is because they are strikingly comparable. Only this time, following the ouster of yet another US-supported "leader" by the US-supported military, the country's CDS has normalized at a level that is roughly double where it was two years ago as the implicit backing of the US looks increasingly shaky, following what was yet another bungled foreign policy venture by the Obama administration. But for now, the people are celebrating, just as they did in 2011. One wonders what happens between now and the next coup, somewhere two years (or less) hence. For now focus merely on who controls the Suez - after all that is really all that matters for the US. The other major story of yesterday, Portugal, continues to be in limbo,
The Portuguese government is on the rocks. The junior coalition partner the People’s Party (CDS-PP) will hold a meeting this afternoon to determine whether to support the government, if it withdraws support in parliament, elections seem inevitable, although they could be delayed for some months. Such a move would seriously hamper Portugal’s economic reform program, which is already off track. Portugal has only met its deficit targets due to one-off measures while competitiveness adjustments have slowed and contingent liabilities remain a hidden risk. With the country on the cusp of an unsustainable debt burden any delays would likely be the final straw which pushes Portugal into needing some form of further assistance. Things must be getting serious in Portugal, they just announced a short-selling ban on select banking stocks - how long before capital controls?
Presented with little comment aside to note that Egypt's 2020 bond yields are up 42bps today to a record 10.65%, the 5Y CDS has surged to 925bps and yet the last few days have seen egyptian equity markets jump almost 10%. Is the thinly-traded local market being driven by US ETF-driven news-algo flows or is it all going to be ok after all?
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.