It appears wherever one looks in the markets there are the skidmarks of PIMCO adjusting to life after Bill Gross. First it was MBS (and related derivatives), then CDS indices adjusted as redemption expectations raised risk premia, and now it is the short-end of the Treasury curve. As The FT notes, 3-month Eurodollar futures (instruments enabling traders to bet on the front-end of the yield curve and thus more accurately pinpoint their bets on Fed actions) saw asset managers (cough PIMCO cough) liquidate a record 868,853 contracts in the week to September 30 – the largest one-week change on record (each contract has a notional value of $1m). This dramatic shift suggests both a disagreement with Gross' "new normal" view of rates lower for longer (since liquidation is concentrated around the 2-year maturities) and a need to meet liquidity requirements from redemption requests.
While the biggest micro news of the weekend is certainly the report that Hewlett-Packard has finally thrown in the towel on organic growth (all those thousands laid off over the past ten years can finally breathe easily - they were not fired in vain), and has proceeded to do what so many said was its only real option: splitting into two separate companies, a personal-computer and printer business, and corporate hardware and services operations (which will certainly lead to even more stock buybacks only not at one but two companies) which in turn has sent its stock and futures higher, perhaps the most notable development in the macro world is Japan's realization finally that the weaker Yen is crushing domestic businesses, which has resulted in the USDJPY sliding to lows last seen at Friday's jobs report print, and also generally leading to across the board wekness for the dollar, whose relentless surge in the past 3 months is strongly reminiscent of the euphoria following the Plaza Accord, only in the other direction (and making some wonder if the Plaza Hotel caterer are about to see a rerun of September 22, 1985 in the coming weeks).
I think this is a time where people will look back on us and see it as a period of practically central bank worship. The central bankers – Draghi, Yellen, Bernanke – have become almost celebrities in America. People have invested unreasonable hopes in what these central banks can know, and what they can do. I think that, sooner or later, the investing public will become disillusioned of these ideas.... I dare say that stock prices will not continue to rise uninterrupted at the same pace. That’s not a very interesting prediction, but the stock market is certainly a cyclical thing. I think it’s fair to observe that today’s ultra-low interest rates flatter stock market valuations. Stock prices are partly valued based on a discounted flow of dividend income. To the extent that the discount rate you use to value that stream of dividend income, which depends on interest rates, is artificially low, stock prices are artificially high. I think that the burden of proof is on anyone who would assert that we are in a new age of persistently and steadily rising stock prices.
It has been a week since Bill Gross dropped a tape-bomb on the fixed-income market and walked away from the firm he founded decades ago. Since then the world and their pet rabbit have commented (most notably David Tepper's "who cares?"); but one man has been markedly silent... until now. In an interview on Bloomberg TV, former PIMCO Co-CEO Mohamed Al-Erian told Betty Liu that Bill Gross' "departure - the fact that it happened and how it happened - was a surprise."
- How you know it is all a lie: Pelosi Presses Obama to Talk Up Stronger U.S. Economy (BBG)
- Secret Goldman Sachs Tapes Put Pressure on New York Fed (NYT), Uh, no they don't
- Clashes Break Out at Hong Kong Protest Site (WSJ)
- N.Y. Fed Lawyer Says AIG Got Billions Without Paperwork (BBG)
- Ebola’s Disease Detectives Race to Track Others Exposed (BBG)
- UPS, FedEx Want Retailers to Get Real on Holiday Shipping (WSJ)
- No more mailman at the door under U.S. Postal Service plan (Reuters)
What one can not exclude is that Blackrock, having worked with the ECB for an indefinite period of time, is intimately familiar with the long-term strategy of the biggest jawboning back in the world: Mario Draghi's ECB. Because while Draghi will say anything, as he started two years ago with his infamous "Whatever it takes" speech, his actual policy options are painfully limited. It is in this context that all those betting that public, US-style, QE will inevitably follow the private QE which is set to last at least two years, may want to sit down and read the following note from Reuters, which warns "investors loading up on some of the euro zone's riskiest government bonds on expectations that the European Central Bank will buy them are making a mistake" according to none other than BlackRock's head of European and global bonds said on Wednesday.
- As we warned in May 2013... Gross Exposes $42 Trillion Bond Market’s Key Flaw in Exit (BBG).... hint: no liquidity
- WTI Crude Slips Below $90 for First Time in 17 Months (BBG)
- Traders Thank Fed for Once-in-Decade Surge in Profit (BBG)
- Islamic State committing 'staggering' crimes in Iraq: U.N. report (Reuters)
- Philippine Islamist militants threaten to behead German on October 17 (Reuters)
- Draghi’s Buying Spree for the ECB Might Start Modestly (BBG)
- Russian Officials Say No Plans for Capital Controls (WSJ)
- Indians Join the Wave of Investors in Condos and Homes in the U.S. (NYT)
- Leader of Mexican drugs cartel captured (FT)
- Dallas Ebola patient vomited outside apartment on way to hospital (Reuters)
While we already documented the crash in Japanese stocks earlier, the biggest market development overnight is the plunge in crude, with both Brent and WTI plunging, the latter sliding under $90 for the first time in 17 months, extending yesterday's selloff after Saudi Aramco cut Arab Light OSP in Asia to 2008 levels. Brent drops to lowest since June 2012. This also confirms that the global slowdown whose can is kicked every so often in a new bout of money printing, is arriving fast. That, and the imminent crackdown on today's Hong Kong protest will likely be the biggest stories of the day, even as the spread of Ebola to the US is sure to keep everhone on edge.
He's back. A month after Appaloosa's David Tepper explained the end of the bond bull market was here (and 10Y rates are now 5bps lower), the trend-following master-of-the-universe explained to Bloomberg TV's Stephanie Ruhle and Erik Schatzker how the departure of Bill Gross from PIMCO was "nothing... who cares?"; why "the US economy is pretty good", how junk bonds are at "fair value" and stocks are cheap as "multiples are not high." Finally he explains how he "wished he didn't have any investment" in Fannie Mae and Freddie Mac and clarifies in his billionaire-all-knowing-ness how he is sure the United States can contain Ebola.
So not surprisingly, today brings the latest hedge fund unwind, with the WSJ reporting that $6 billion veteran acitivst hedge fund Relational Investors LLC, plans to wind down its operations and dissolve its current funds by the end of next year, according to people familiar with the matter. The reason? The same reason why Jamie Dimon is about to quit the financial industry any second: the firm's co-founder and public face, Ralph Whitworth, has throat cancer and while he said he was taking a leave of absence in July, he appears to have changed his mind and made it permanent.
Bill Gross receives a mile high welcome from Janus CEO Dick Weil and President Bruce Koepfgen
- European Bond Yields Go Negative (WSJ)
- Traveler from Liberia is first Ebola patient diagnosed in U.S. (Reuters)
- Hong Kong Protesters Step up Pressure on Leung to Quit (BBG)
- JPMorgan to face U.S. class action in $10 billion MBS case (Reuters)
- Turkey mulls military action against Islamic State (Reuters)
- Singapore Home Prices Fall for Fourth Straight Quarter on Curbs (BBG)
- Italy's Economic Woes Highlight Dilemma for European Central Bank (WSJ)
- Advanced iOS virus targeting Hong Kong protestors (Reuters)
- Fed Scrutiny of Leveraged Loans Grows Along With Bubble Concern (BBG)
- Mosquito Virus That Walloped Caribbean Spreads in U.S. (BBG)
Things are rapidly shifting from bad to worse for PIMCO. In a triple whammy this morning, Bloomberg reports the Total Return Fund ETF (managed previously by Bill Gross) has suffered $446 million outflows (or over 12.5% of assets) so far; Morningstar downgrades the fund from 'gold' to 'bronze' citing "uncertainty regarding outflows and the reshuffling of management responsibilities"; and perhaps most concerning - given our previous warnings over bond market illiquidity - The FT reports, US regulators are monitoring trading and fund flows surrounding PIMCO's Total Return Bond fund warning investors they should contemplate the unintended consequences of pulling their money and the possibility of systemic risk disruptions, fearful of "runs."
- Hong Kong protesters stockpile supplies, fear fresh police advance (Reuters)
- Protesters stay out on Hong Kong streets, defying Beijing (Reuters)
- Traders Turn Up Grilling Sausages at Hong Kong Protests (BBG)
- Ukraine Army Sees Worst Day Since Truce as Battles Flare (BBG)
- Islamic State uses grain to tighten grip in Iraq (Reuters)
- For Putin Ally, U.S. Sanctions Only Add to Anti-Russia Conspiracy Theory (WSJ)
- Coinbase Leads Move to Bring Bitcoin to Masses (BBG) - good luck
- Austria Cracks Down on Spies -- and Jihadis (BBG)
- EU Believes Apple, Fiat Tax Deals Broke Rules (WSJ); Apple’s Irish Tax Deal ‘Engineered’ to Boost Employment, EU Says (BBG)
It has been a night of relentless and pervasive disappointing economic data from just about every point on the globe: first the Chinese HSBC manufacturing data was well short of expectations (50.2 vs. Exp. 50.5), which was promptly spun as bullish and a reason for more stimulus by the PBOC even though the central bank has been constantly repeating it will not engage in western-style shotgun easing. Then Japanese wages, household spending and industrial production came in far below expectations - in fact at levels which suggest Japan is once again in a recession - which once again was spun as bullish, because the BOJ has no choice but to do more of the same failed policies that have made Abenomics the laughing stock of the world. Finally, moments ago Europe reported the lowest inflation data in 5 years, as well as core CPI sliding to just 0.7%, and which was, wait for it, immediately spun as bullish for risk as once again the local central bank would have "no choice but to ease." In other words, thank god for horrible news: because how else will the rich get even richer?