"...the deterioration in both economic data and profitability data leave a good bit of cause for near-term concern..."
Venezuela, Argentina, and... China? are the 3 best performing stock markets in March in USD terms (with Ukraine close behind). It is the Greeks that have borne the brunt of global derisking through The Ides, Athens Stock Index down over 15% and the worst-performing stock market in the world for March. Year-to-date, Russia joins the 3 amigos at the top of the list (up almost 11% in USD terms) and Ukraine remains the clear laggard, down almost 33% in USD terms. The best performing global stock market in 2015 in local currency terms is... Denmark!?
Something stunning and unexpected took place in the third quarter: Citigroup, or rather its FDIC-insured Citibank National Association entity, just surpassed JPM and is now the biggest single holder of total derivatives in the US. Furthermore, as the charts below show, while every other bank was derisking its balance sheet, Citi not only increased its total derivative holdings by $1 trillion in Q2, but by a whopping, and perhaps even record, $9 trillion in the just concluded third quarter to $70.2 trillion!
The new year is not even a week old and already the volatility fireworks are off, as well as the continued commodity derisking. But while for now US stocks continue to be an island oasis in a turbulent global sea where GDP forecasts decline every single day, the same can not be said about either the Euro, which after crashing overnight to a 9 year low, and rebounding briefly, has continued to decline and is now once again flirting with a key support level, this time 1.19, last reached during the May 2010 first Greek bailout. The catalyst, as usual, Greece which may or may not be leaving the Eurozone shortly, as well as ongoing bets on ECB QE following this morning's regional German inflation data which declined once more and now hints at outright deflation in Europe's strongest nation.
US equity futures started to slide once German confidence data hit early in the morning (and Treasuries rallied modestly) but as the US opened, the ubiquitous "markets are open and I must buy' rip hit... but didn't last. Stocks leaked lower but stopped as Europe closed (in a mirror of yesterday) but could not hold bounce gains as worries over Russia's convoy weighed on markets late on. The S&P and Dow end the day unch (Russell -0.5%, Trannies up 0.6%) on the week. As stocks old off, somewhat oddly, so did the US Dollar (on EUR strength - reptariation?), US Treasuries, gold and copper. 330RAMPCAPITAL turned up (well it is Tuesday), slammed VIX, and jammed stocks (except Russell) back to green (VWAP) but it didn't hold. S&P futures volume was over 40% below average.
There is a glaring divergence between the performance of US equities and high-yield credit's spread over investment-grade credit. As BofAML warns, "either HY rallies or stocks soon in a bit of trouble," because the only pillar left to hold up the fragile un-bubble-like stock market - buybacks - will disappear if costs of funding start to surge (there's always a limit to the leverage a credit cycle will bear). The more concerning aspect is that it appears investors are already rushing for the doors... as this week saw the largest HY outflows in over a year.
Remember when Ukraine was fixed and you could BTFATH as no geopolitical concerns could ever harm US equity markets... well that just changed... News that a Malaysian Airlines passeneger jet carrying 280 passengers was shot down in Ukraine has sparked major derisking across stocks and slammed bonds to the low yields of the day. Gold and Silver are jumping and the USD is fading.
From Goldman's Sales & Trading Team, "The equity rout continued. Growth tech names felt the heat once again as Nasdaq led the way down, but the weakness was truly wide spread as all sectors ended in the red – both in domestic and overseas developed markets. Earnings season continued, but derisking is the name of the game in these markets."
The jobs number expectation had been falling for a few days into the print this morning and despite the desperate efforts of every status-quo-hugging TV talking-head's Goldilocks scenario, it was not a good report - it missed low expectations and it seems the market is realizing (having been told the bar is very high for an un-taper) that the Fed will not rescue it any time soon. GDP expectations are also tumbling and thus the hope-driven hyper-growth stocks have been monkey-hammered. This is the worst swing for the Nasdaq since Dec 2011 (with Russell, Dow, and Nasdaq -1% YTD). Momos and Biotechs were blamed but this was broad-based selling as JPY carry was unwound in a hurry. Gold rallied above $1300 (+8.1% YTD) as bond yield ripped lower for 5Y's biggest daily drop in 10 weeks (short-end -4bps on the week). VIX pushed back above 14 (but it was clear derisking exposure - as opposed to hedging positions - was the order of the day).
UPDATE: Stocks have bounced on USDJPY's jump back to 102 (as we warned) but Treasuries are not playing along
Bonds are surging and gold is well bid as the jobs report had little to offer the hopeful. The anti-goldilocks number slammed bonds with the 10Y Yield to unchanged on the week (down around 8bps on the kneejerk), gold is testing $1270 as JPY strength provides ammunition for derisking in the equity markets. S&P futures spiked 11 points higher on the release as algos went wild, then fell over 20 points from that high and are bouncing back modestly now. Of course, we are still 45 minutes from the US open so expect USDJPY to be levered back to 102 and lift stocks to make retail believe everything is fine...
The recent market weakness (selling off in equity indices and widening in credit spreads) shares many elements of the previous dips this year, which should give bulls some comfort (the Italian- and Cyprus-led dips didn't last very long). However, there are elements which are concerning - as Citi notes, positioning in long equity and credit positions are notably 'long', and how weak cash credit has been this time around. As Citi points out, investors and the Fed are trapped in a prisoner's dilemma. Will everyone collaborate (investors hold to cash positions & dovish Fed) or betray (investors start unwinding cash positions & hawkish Fed)? The strategy each player follows will determine whether the weakness this time around is to be faded (like the previous ones this year) or not.
Some might be surprised by the title's positivity, but while the barbarous relic has meandered in an ever-compressing (triangle pattern) series of waves in the last few months, it has rather notably outperformed relative to global risk aversion, CFTC positioning, and central bank balance sheet dynamics - especially in the last few weeks. Whether the yellow metal's zero-yield is now 'technically' attractive to safe-haven flows relative to the NIRPs of Germany and Switzerland - or in fundamental anticipation of the next bout of central bank largesse, Citi's global macro strategy group remain bullish of the precious metal and the charts below suggest they are not alone - as the view that precious metals are a put on political stupidity remains front-and-center.
After a brief spike higher (just to flush all those stops) in front of Draghi's 'dis-believe' press conference this morning, markets plunged. Some wanted more but algos tickled us up to VWAP into the close once again though we note that once there - volume and average trade size surged, allowing those bigger momo players a better exit than mere mortals. Equities and broad risk assets stayed in very close sync all day with cross asset class correlation surging systemically, VIX rose and fell on the day ending down 1.4 vols at 17.5% (after touching 19.25% after the European close) - but notably VIX is now more back in line with equity/credit implied values. The USD ends today up 0.8% on the week, and implicitly commodities tumbled (copper and oil down 3-3.5% on the week and gold/silver -2%). Treasury yields bounced higher as stocks nibbled back to VWAP into the close but ended down 2-4bps (long-end outperforming). All in all - no capitulation, but a broad based derisking that seemed to benefit from some pre-positioning in protection (and help from the VWAP algos twice). Wil tomorrow's NFP be good enough to be bad or bad enough to be good (high volume and low average trade size suggests few want to position for it too aggressively).
As he began to speak the EUR rallied, EGBs rallied and ES rallied - last minute hopiness wrung out of the system, but as soon as he explained that his plan to promise a plan which plans to promise a solution was nothing but another promise and not an actual plan, so everything reversed. S&P futures are -17pts from pre-Draghi, Gold back under $1600, and the USD is ripping higher, Treasury yields are down 8bps from pre-Draghi, EURUSD is down 50pip sfpom, pre-Draghi after trading up over 1.24 as he began, and has retraced over 75% of the post-Draghi 'believe' speech. Spain and Italy have given back the immediate euphoria with Italy now 50bps wider from pre-Draghi and Spain +25bps (having retraced over 60% of the post-'believe' rally).
A slow leak higher in risk assets (assisted by Knight Capital's exposing the 'tickle-algo') into the FOMC in general was abruptly extinguished by a lack of anything new to report at all. The knee-jerk derisking was then caught as BTFD'ers could not resist and while FX markets in general were not buying the rebound, Treasuries sold off as stocks reverted back up into the green, above VWAP and above pre-FOMC levels. But as the real trading of the last 90 seconds of the day began, stocks smashed back down towards their lows with JPY crosses also dragging lower. Financials appeared to be the signal that 'all bets were off' as they went all humpty-dumpty and couldn't get back to pre-FOMC levels. Treasuries ended up 4-5bps with the belly underperforming (though off their worst levels), Gold and stocks recoupled lower, the USD closed at its highs of the day, VIX staged a come-back and closed unch at 18.9% (as stocks caught down to it too and it ended at its flattest in 10 weeks), and while HYG staged what appeared to be a miraculous effort to save the day to close unchanged (but was HYG-SPY arb), equities ended at their lows - underperforming credit notably. Of course KCG was the talk of the day, dumping over 32% of its market cap to end with a $6 handle as all those market-making algos start to look each other in the eye and fight over that last 100-lot 'real' transaction.