Overnight weakness from Japan (NKY -3%) and USDJPY slowly leaked away as Europe was bid - bouncing higher on Draghi's SovQE "whatever it takes" comments (and multiple broken markets), but once he stopped speaking stocks faded to the lows of the day at the European Close. Once it was just the American algos playing, the S&P and Dow ripped back to green. However, Small Caps, Nasdaq and Trannies were not playing along, nor was VIX or HY Credit. The USD surged 0.45% (on EUR weakness) which stalled the bounce in commodities. Gold flatlined through the US session (-0.25%) with Silver -1% (bouncing this afternoon). Oil prices slipped 0.5% again (but above Friday's lows) at $75.50. Treasury yields rose 1-2bps on the day (but 5-6bps off the overnight lows as Europe opened) but flatlined during US session. Most notably, it seems many feel like Carl Icahn that a major correction is coming and hedging via VIX and HY credit was significant.
People blame human nature as the source of our global problems, but they rarely see themselves as part of the problem. And yet there they are, smack dab in the middle of the mess, demanding someone else clean it up.
JPMorgan Cazenove's global equity strategy group has decided enough is enough - the underperformance of the Eurozone is getting stretched (they note), and are upgrading Euro equity allocations to Overweight at the expense of an Underweight in US stocks. Here are the fives reasons why they made the shift...
David Cameron warned last night that the global economy risked another crash and said in an article that 'red warning lights' were 'flashing on the dashboard of the global economy' and the eurozone was 'teetering on the brink' of another recession.
A stunner this morning by ECB board member Yves Mersch who said earlier today that the ECB balance-sheet expansion is "neither an end in itself nor a fetish." As quoted by Bloomberg, the ECB member said that "the effect on rates that comes along with it is at best a collateral benefit." Nothing new here: we have discussed why unlike Japan and the US, the biggest gating factor for Europe is the presence of freely-available, unencumbered collateral that could, at least in theory, be purchased by the ECB. Which brings us to the Mersch punchline: "Theoretically the ECB could purchase other assets such as gold, shares, ETFs to fulfill its promise of adopting further unconventional measures to counter a longer period of low inflation."
Perhaps the biggest shock following last night's completely expected and very predictable (previewed here over a month ago) Japanese slide into triple- (actually make that quadruple) dip recession, is that it took the BTFTripleDip recession algos as long as they did to recover most of the overnight futures losses. Because after surging to 107 on a confused short squeeze kneejerk reaction, the USDJPY subsequently tumbled 150 pips to 105.50 as rationality briefly emerged, and the market wondered for a few brief hours if rewaring the destruction of one's economy is actually a prudent thing. Then, however, when European traders started walking into work, the now default USDJPY levitation on no volume came right back, and with that the correlation algo buying of E-mini futures, no doubt helped by the Bank of Japan itself taking advantage of the CME's ES liquidity rebate program. Because without confidence as expressed by the lowest and only common denominator left - global equities - there is nothing else.
Abenomics Officially Leads Japan Into A Triple-Dip Recession - Weather Blamed; Nikkei Drops 600 Points, Back Below 17,000Submitted by Tyler Durden on 11/16/2014 22:30 -0500
AMARI: ABENOMICS HASN'T FAILED (so this was the expected outcome?)
SUGA: INVENTORIES, WEATHER, CONSUMER MINDSET CAUSED GDP FALL (nothing to do with record-high misery-index induced by crushing the currency of an energy-import-dependent nation?)
Japanese GDP fell for the 2nd quarter in a row making it official - as we warned a month ago - that Japan has entered a triple-dip recession. Againstr hope-strewn expectations that the rebound from a sales-tax-driven slump would create a magical 2.2% (annualized) expansion, Japanese GDP slumped 1.6% in Q3 - missing by the most since March 2011. So no tax increase... and thus fiscal responsibility goes out the window. Abe dissolves government and bails on another failure? The initial kneejerk reaction sent USDJPY surging back over 117.00 (and NKY followed) but that has quickly reversed and NKY futures are 600 off their highs (and S&P futures are back to last Monday's lows).
While Americans are preached that "free market capitalism is the best path to prosperity," it appears that not everyone is buying it. Whether it is the failure of prosperity to trickle down (and the inequality that has been created) or just the herd-like need to be told what to do (and never take risks), Pew Research finds a stunning 25% of Americans do not believe people are better off in a free market system - implicitly preferring centrally-planned lives. Ironically, belief in the free market tends to be highest in developing countries while in Japan and Spain, a majority prefer to be managed than free.
Washington’s ability to rig markets has allowed Washington to keep its economic house of cards standing. The extent of financial corruption involving collusion between the mega-banks and the financial authorities is unfathomable. The Western financial system is a house of cards resting on corruption. Can it stand forever or are there so many rotted joints that some simultaneous collection of failures overwhelms the manipulation and brings on a massive crash? Time will tell.
What is the main culprit for the contraction in China's all important credit formation? In two words: shadow banking. As Bank of America summarizes "shadow banking is being tamed" because "the changing structure of TSF suggests that Beijing’s efforts in controlling some types of shadow banking have made some achievements. Two major drivers for the steep decline of TSF from Sept to Oct were the falling of non-discounted bills (down RMB241bn) and falling trust loans (down RMB22bn). By contrast, new corporate bonds were at RMB242bn, a sharp rise from RMB151bn in Sept." In other words, China's shadow banking not only ground to a halt, it actually continued moving in reverse!
The inevitable result of the centrally planned Asian Miracle Model is credit bubbles and the crippling misallocation of capital in Building Bridges to Nowhere.
If there were no puppet masters in Washington DC or the Kremlin, what would happen next week?
Needless to say, this relentless expansion of the bubble eventually kills off the bears, the skeptics, the prudent and even the militantly incredulous. Undoubtedly, that is where we are now because the global economic news has been uniformly negative since the October dip, yet the market has resumed its relentless melt-up. Under such circumstances, therefore, it is well to remember that we are in the middle of the greatest central bank fueled inflation in recorded history, and that this insidious inflation has been channeled into financial assets owing to the arrival of peak debt everywhere around the world. But that is the Achilles heel of the game. As the bubble takes on ever greater girth, it becomes increasingly susceptible to a negative shock to confidence.
Brace yourselves, the zero sum game is on like Donkey Kong.
The weak dollar trend has lasted long enough to become embedded in diversified portfolio models used by financial advisors as many have accepted typical non-dollar ETFs as a common investment inclusion for most diversified portfolios.
But things are changing.