It would appear the BFTATH mentaility has morphed into a BTFICBMD perspective as the "market" shrugs off an 'apparently expected' ICBM launch to soar to new record highs with the best day in stocks for months (if not years). USDJPY was in charge intraday as 102 was flushed through (with JPY's biggest drop in 2 months) and dragged stocks (led by the "most-shorted") non-stop. Equity volumes were 20-30% below yesterday's. The USD was relatively unmoved on the day (modestly higher oddly on a risk-on day). Gold and oil prices slipped (but remain in the green on the week) as Silver slipped into the red. Copper rallied. Treasury yields surged 6-8bps (the biggest jump in 4 months) as 2s10s steepened 6bps. VIX was cracked 2 vols lower to 14%. The S&P closed at 1873, just 27 points shy of Goldman's 2014 year-end target.
The Nasdaq plunged by the most in over 8 months today and broke all the way back to unchanged from the December taper decision of the Fed. All major US equity indices are now negative from the time the Fed decided to slow its flow of free money. The Dow closed below its 200DMA for the first time since December 2012. The S&P 500 closed the furthest below its 100DMA since QE3 started. USDJPY was in charge and everything was higher or lower beta off of that as it broke 102 early then 101 later in the day (with the Nikkei -700 points from the day's highs). Treasuries rallied around 5bps to fresh 7-month low yields for 30Y. Gold and Silver surged, adding 1% on the day as the USD lost 0.25% on the day (led by the 1% strength in the JPY). VIX smashed to 14 month highs over 21%. Credit deteriorated but stocks are catching down.
JPY crosses were in charge of stocks again today - and not in a good way - as a sideways market gave way to weakness late on as Goldman released part two of their market-bashing research. With the dramatic help of AXP and V (78 of the Dow's 41 points!), the Dow was the only index green today and managed to close just green on the week. Since the taper, Homebuilders have tumbled from heroes to almost zeroes (+1.5% from +6.5% at year-end in spite of the big drop in TSY yields in recent weeks) with Healthcare outperforming (+5.5%). Away from stocks, things were also escalating rapidly this afternoon. Treasury yields limped lower all day then dropped notably starting around 1445ET with 30Y -5bps on the week (and 5s30s at 212bps - the flattest term structure in 4 months). The USD rose on the day (up 0.75% on the week) led by EUR weakness (JPY was relatively stable). Despite the USD strength, gold and silver closed green on the week (+0.25% and+0.7% respectively) but WTI crude led the way up 1.5% on the week at $94.10. Despite valiant efforts to VIX-slam the market higher into the close, the S&P closed red and VIX +0.6vols higher on the week at 12.7%
Treasury yields collapsed 10-12bps today with the largest decline since 9/18/11. Treasury yields in general slipped back to the lowest level in 3 weeks. The USD was slammed lower (except against CAD which pushed lower - down 2.5% on the week!). JPY strength was offset by AUD and the cross provided the ammo to lift equities back to day-session highs in the last hour (104 USDJPY was defended aggressively). Stocks broadly bounced immediately after the knnjerk selling off the NFP print, then leaked lower until 3pmET when a decidedly low volume meltup took NASDAQ and Russell back to almost unchanged on the year. Trannies outperformed, Dow underperformed (TRAN +0.65%, DOW -1% YTD). Silver and gold surged back into the green for the week with the latter closing above its 50DMA for the first time since October and its highest in a month. VIX tumbled to 12.2% as hedges were lifted and recoupled with the S&P.
The Treasury bond has now closed for 2013 with the (highest duration) 30Y Treasury Future down 13% for the year. Of course, those invested in fixed income are not all long the long-end but across the whole complex yields are at highs. 10Y ended at 3.03% - its highest since July 2011 and 30Y at 3.97% - its highest since August 2011. The short-end remains under control (though 15bps higher than its mid-November trough and double the May lows at 40bps) but the 7Y yield has surged back to 2013 highs also not seen since mid 2011. Perhaps most notable is that despite all these moves, 5s30s is unchanged on the year, while 2s10s is +120bps.
Sadly, that "something" has nothing to do with the real economy, but it has everything to do with the stock market which is all that matters to the Fed. Presenting the Adjusted Reserves held by Fed banks: it is, logically, at a fresh all time high. This is the low-powered money that due to capital allocation preferences continues to go, every day for the past 4 years, not into the broader economy (blame it on the 2s10s, or the disastrous state of the US consumer who has no desire for loans, or what have you) but straight into the S&P500. Since the full blown launch of QE3 excess bank reserves have grown by $500 billion, or roughly a 30% increase in six months. Which is also the reason why the S&P has correlated not with any actual fundamental data, but only this chart for the past 6 or so months.
Maybe our man Kevin just got pissed off that he has to re-use his starbuck's cup & stopped working for the past few days.
No Bazooka As ECB Backtracks: Draghi Won't Pursue Yield Caps, To Sterilize Bond Buys In SMP ContinuationSubmitted by Tyler Durden on 09/05/2012 08:15 -0400
In what can only be interpreted as a huge disappointment for the ECB and Draghi yielding to German demands, Bloomberg has leaked what likely will be the final plan of the ECB tomorrow, which contrary to previously rumors stating that the ECB will pursue yield caps, or even just buy bonds on an unsterilized basis, appears to be a huge dud:
- ECB BOND PLAN SAID TO REFRAIN FROM SETTING PUBLIC YIELD CAPS
- DRAGHI'S BOND PLAN SAID TO PLEDGE UNLIMITED, STERILIZED BUYING
- ECB PLAN SAID TO FOCUS ON GOVT BONDS, MATURITIES UP TO 3 YEARS
- ECB SAID TO CONSIDER SELLING BONDS IF CONDITIONS NOT MET
- ECB PLAN SAID TO STRESS CONDITIONALITY OF ANY BOND PURCHASES
- ECB BOND PLAN SAID TO HAVE BROAD COUNCIL SUPPORT - but not unanimous, as Germany again objects
The keyword above is highlighted: sterilized, which simply means for those who are unaware, such as all the algos taking the EURUSD higher, that the ECB's entire overhyped plan is nothing more than a continuation of the Securities Market Program, or the SMP, which has been dormant for over 25 weeks, and which was deactivated because it did not work! Because sterilized means no new money enters the system, something which for Europe is unacceptable considering Spain alone is now seeing $100 billion in outflows each month.
Yesterday we dedicated significant space to the most recent piece of perfectly ludicrous propaganda out of the ECB, namely that monetizing debt with a maturity up to three years is not really monetization but is instead within the arena of "money market management" (images of Todd Akin defining when something is 'legitimate' and when it isn't swimming our heads). The implication of course is that debt under 3 years is not really debt, but some mystical piece of paper that nobody should be held accountable for. Hopefully all those consumers who have short-maturity credit card debt which nonetheless yields 29.95% APR are made aware of this distinction and decide to follow through with Mario Draghi's logic, which is about to take the war of words between Germany and the ECB to the next level. Sure enough, this is precisely the news item that is dominating bond risk markets this morning, if not so much futures, and sending Spanish and Italian 2s10s spreads to record wides on hopes Draghi will definitely announce some sub 3 year monetization program for the PIIGS. Bloomberg summarized this best last night when it commented on the move in the EURUSD, since retraced, that we now have speculation Draghi's move will bolster confidence. In other words: the market is now hoping there is hope. Sure enough, even if Draghi follows through, for the ECB to monetize Spanish bonds, Spain still has to demand a bailout, which however is now absolutely out of the question as mere jawboning has moved the entire highly illiquid curve so steep Rajoy (and Monti) have absolutely no reason to hand over their resignations (i.e., request a bailout). And so we go back to square one. But logic no longer matters in these markets.
Between the thinness of European bond markets during the summer doldrums and the hair-trigger momo-monkeys, it would appear that all the hopes and prayers of the Draghi "promise" have been more than priced into the Spanish bond curve already. Of course, short-dated yields could drop further on ECB buying; but where exactly 'should' that risk premia be? Of course, longer-dated yields could compress but does anyone really see a solution here, as opposed to short-term support to get through some debt maturities and avoid a catastrophic contagion? The critical point being - for all the anticipation of Draghi's bond-buying plan and its implicit conditionality, the Spanish yield curve has priced it all in and more - as the 2s10s curve is now at all-time (pre- and post- Euro-era) record steeps. We have seen this pattern before - into and during LTRO - that did not end well; and the crowd is getting larger and doors smaller in this one (and don't forget Corzine won't be your fall-guy this time)...
Sigh. Spain's IBEX gained over 3%; Italy's MIB gained over 2%; and all but the UK's FTSE equity index ended very nicely green today (all jerked higher by Spain's comments on their bad-bank and then Bernanke's cover). However, European Government Bonds (EGBs) failed dismally. Spain's 10Y spread to bunds ended the week 46bps wider and Italy 15bps wider and while some point to the short-end as evidence that all is well, Spain saw modest weakness in the 2Y today post Bernanke (though Italy rallied). The curve steepening was dramatic to say the least as the market appearsd to be increasingly assuming the ECB will monetize short-dated govvies - our own view - consider what the implied forward financing costs are given these steep curves as clearly noone trusts this as a solution and will merely subordinate the entire market. Spain 2s10s curve is now at its steepest on record at 328bps! and this is not helping:
*SPAIN’S CATALONIA REGION CUT TO JUNK BY S&P, OUTLOOK NEGATIVE
But buy stocks...
Romney's selection of Paul Ryan as his veep clarifies the policy debate (forcing typically middle-of-the-road voters to become more polarized to the size of government) into the November election and materially changes the odds of the fiscal cliff's resolution. As Morgan Stanley's Vince Reinhart notes, "by tying one side to an explicit plan for fiscal consolidation, the Ryan selection makes it much more likely that the campaign will focus on the appropriate role of the government. That is, the debate will be about the right level of federal expenditure relative to national income, the progressivity of the tax system, and the extent to which family incomes are protected on the downside by Washington, DC." Although theoretically the Ryan pick raises the chance of a benign, before-the-election resolution to the fiscal cliff 'issue', it also worsens the likely outcome if the legislative stand-off continues into 2013 - which the odds suggest is the case.
As Goldman observed last night, the "metaboring" meme continues, as things go from boringer to boringest. Nothing notable has happened overnight. Some things that did happen was news that Spain is about to receive an emergency disbursement from its €100 billion euro bank bailout because of restriction imposed by the ECB on bank borrowings; Italian banks announced plans to dispose of more bad loans to avoid "potentially bigger losses" (to whom? the ECB?), non-voting Fed member Kocherlakota saying that cutting IOER would have a minimal impact (are you paying attention former visiting Fed advisor David "the Fed will bail everyone out always and forever" Zervos), UK retail sales coming in stronger on bigger gas and food purchases (so aside from being ignored for inflation purposes these are useful when extrapolating economic "growth"), July Eurozone inflation coming in just as expected unchanged at 2.4% Y/Y, China FDI collapsing 8.7% as data revealed the longest run of declining inward investment growth in China since the 2008-09 financial crisis sending local markets to 2 week lows as the MOFCOM said the country's 2H export outlook will be even more grim and Premier Wen said easing inflation (not in food) allows for more room to adjust monetary policy, a statement that had zero impact on domestic stocks. As a result we have seen minimal flattening in Spanish and Italian 2s10s, and a continued gradual drift lower in the EURUSD. And this, aside from another week of initial claims that will have the prior week's data revised higher, and a Philly Fed, may be as good as it gets, as volume is set to plumb another multi-year low, and with the 2s10s flattening again, guarantees that bank profits in Q3 will be atrocious, forcing banks to fire even more (or cause various unnamed market makers to accidentally activate 1000x buy algos).
Another day, another LCH margin hike on Spanish and Italian bonds. Spanish SPGBs which will have to post more margin beginning tomorrow are all bonds with a maturity between 0.75 and 3.25 years, as well as bonds between 10 and 15 years, as well as all short-term Italian bonds between 3.25 and 7 year, in effect offsetting Draghi's "reverse Twist" house of cards. Expect to see more flattening in the Spanish and Italian 2s10s curve, followed by more promises of imminent action by the ECB, which however, may finally be realizing that for Spain to actually demand a bailout, its 10 years will have to be closer to 10% than to 5%. Finally, if this ratcheting up in asset encumbrance in Europe doesn't send the VIX to single digits nothing will.
A funny thing happened in European peripheral bond markets: they sold off - Spain is wider across the board, with the 2 Year back over 4%, and the 10 Year threatening to blow out above 7% for the first time since the market was re-re-fooled by Draghi. Same in Italy, where the 2s10s is once again in flattening mode. In other words after getting Draghi right for one day, then flipping and confusing what he said for the next week, the market is back to being right in itis initial kneejerk reaction to the ECB head's words. One reason (among many) - a Rabobank report by Richard McGuire and Lyn Graham-Taylor which states that Spain won’t ask for more aid if more conditions are attached add to likelihood "crisis must worsen before it improves." Hmm, where have we seen an identical turn of the phrase before. Oh yes, here. Rabobank also adds that the ECB will have to show willingness to buy across the curve (not just in tenors of less than one year) when it does intervene. Of course, for that to happen, things must get far, far worse. Just as we explained to the five-year olds in charge of the market this past weekend.