It's Tuesday but not everyone had fun... Having been told by the Fed that small-caps were stretched, investors bid Trannies and Industrials into the green (well the Fed never said they were rich?) Russell and Nasdaq were sold (but only dropped around 1% as every trick in the book was found to "fight the Fed"). VIX slams, JPY ramps, Gold slams... but amid all the furore of the "Sell" momo stocks signal from the Fed, bond markets shrugged (admittedly with some noise) closing flat in 10Y (and modestly higher in yields in the short-end). Gold was monkey-hammered once again, smashed back below $1300 (but remains above June FOMC levels) with its worst 2-day drop in 10 months (breaking its 20, 50, and 100DMA). Biotechs closed worst among Yellen's shorts and Russell 2000 ends -0.65% for 2014.
We can hear the headlines now... thin of the tax cuts, think of the improved discretionary spending, see Iraq was a storm in a teacup... WTI Crude's drop back below $100 provdes so much great news for the world that many perhaps are missing that the world and his brother were long black gold into this and this squeeze appears anything but reflective of the rising tensions... (or is it due to tumbling demand?) Russia won't be happy - time to escalate.
It’s time to think like a contrarian. Why? Because capital markets seem as bulletproof as one of those up-armored military personnel carriers you see in war zones. So what could really rattle stock, bond and commodity markets over the next 3-6 months? The go-to answer, steeped in history, is geopolitical crisis, where the logical hedges are precious metals, volatility plays, and possibly crude oil. Look deeper, however, and other answers emerge.
This clown parade of clueless opinions (did we mention Goldman had BES at a buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
Maybe its time for a new version of the old regime at the Fed. That is, for the Eccles Building to eschew interest rate-pegging and ZIRP entirely, and thereby allow financial markets to once again engage in honest price discovery and two-way trading; and to allow the natural business cycle to meander along its own capitalist path as determined not by the 12 members of the monetary politburo, but the 317 million consumers, producers, investors, entrepreneurs and even speculators who comprise the real main street economy.
It appears "reach for yield" has consequences after all - and remember how exuberant the market (stocks) were after PR managed to get that bond off earlier in the year? Quietly behind the scenes and away from the exuberant stock market trading headlines of the mainstream media, Muni bond markets are in turmoil. Thanks to the 'shenanigans' in Puerto Rico - after lawmakers last month approved a bill allowing some public corporations to restructure debt - PR bonds have collapsed to record lows (and dragged a number of large Muni funds with them).
The venture capital world is currently paying inordinate amounts of money for software companies which are making a lot of noise and not much else!
Poor algos: after they got no love on Monday from the overnight USDJPY selling team which took the all important pair back to the 200 DMA, today, inexplicably (it is a Tuesday after all, and if one can't frontrun a rigged market surging higher on Turbo Tuesday may as well throw in the towel on free money and learn about fundamental analysis) the same overnight USDJPY selling team has pushed the key carry pair to below the 200 DMA, and has dragged US equity futures lower with it for the second day in a row.
The Russell 2000 had its worst day in almost 3 months. The S&P retraced all of its gains from the 'great' jobs report (on heavy volume). The Dow desparately clung to that critical indicator of economic wealth/health - 17,000 & Treasury yields slipped further - back below Thursday's lows. So every headline-writing muppet that correlated equity strength with a belief in the headline jobs data is now shown up as once again - as we noted on Thursday, it appeared bond traders read the jobs report and stock traders read the headlines. Is good news, bad news - or are equities actually comprehending that the jobs report was actually bad news away from the propaganda. Gold rallied back close to unchanged, silver dropped. The USD sold of early gains back to unch. TWTR dropped for the 3rd day in a row as camera-on-a-stick bounced 5% as options started trading. "Most shorted" stocks dropped their most in 3 months. VIX rose over 1 vol to 11.5 (its highest close since June and biggest %age gain in 3 months).
In Wenzhou - dubbed the capital of China's private businesses - nearly 90 per cent of loan guarantors have failed since the start of the credit crisis arising from the underground banking system, according to the media. As SCMP reports, although their services are critical for the economic system and the millions of small firms - that provide the majority of the mainland's jobs - hundreds of loan guarantee groups are creaking under the weight of bad loans and are simply unable to bear any more. "It could become the last straw that breaks the camel's back," exclaims the head of a local law firm, "without the privately owned small businesses, China's economy won't have a future." But PMIs are up so everything's fine?
Risk assets have started the week off on a slightly softer footing but overall volumes are fairly low given the quiet Friday session last week and with the lack of any major weekend headlines. Equity bourses are down between 25-50bp on the day paced by the Nikkei (-0.4%). In China, a number of railway construction stocks are up 3-4% after reports that China Railway Corp will buy around 300 sets of high speed trains and may potentially launch 14 news railway construction projects soon as part of national investment plans.
With the "Islamic State" grabbing all the headlines, it appears the Taliban have had enough. As Reuters reports, Taliban insurgents set fire on Saturday to about 400 oil tanker trucks supplying fuel for NATO forces in an attack just outside the Afghan capital Kabul, police said. It was unclear how the fire was started. Some Afghan media reported that insurgents had fired rockets at the tankers late on Friday. The attack precedes Monday's preliminary announcement of Afghanistan's presidential election winner - in which both sides have accused the other of mass fraud. The Taliban had vowed to disrupt the process.
"First they ignore you, then they ridicule you, then they fight you, and then you win." Mahatma Gandhi
"It is no crime to be ignorant of economics... but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance." - Murray Rothbard
This week was very busy with economic data. For the most part, the majority of the data came basically inline with expectations. However, the internals of the various reports were much less encouraging. The most noteworthy report, and the least important from an investment standpoint, was the monthly employment report which came in at 288,000 jobs for the month. As with the bulk of other reports, the more important details were lost to the headlines... full-time employment relative to the working age population has remained primarily stagnant since the financial crisis and actually fell in the latest month. This is a key reason why economic growth continues to struggle.
It seems the bond market 'read' the report and the stock market skimmed the headlines...