Stocks had their worst day in a month; Treasuries their worst day in 3 weeks; and the USD strengthened the most in 3 weeks as Gold dropped. All seeming signals that the printing machine is less a factor than it was yesterday. The 'Taper' action apparently reflects better headline data this morning (EU PMI once again being claimed that all is well - just like in Jan 2012; US home sales beating expectations (but home prices collapsing); and US PMI beating expectations (in its typical lower highs cyclical pattern of the last few years). Today's good-is-bad drop in stocks was also accompanied by the heaviest volume in almost 3 weeks (as the 3rd day in a row saw the S&P 500 fail to break 1,700 at the opening rush). WTI slid back to around $105 (as gas prices have stabilzied at highs) and the spread to Brent leaks back wider. VIX rose 0.6 vols (its most in a month) back above 13%.
Plunging Chinese manufacturing and an 11 month low PMI got you down? Don't worry: there's a Europe for that, which overnight reported that manufacturing and service PMI in Germany and, don't laugh, France soared far above expectations (German Mfg and Services PMIs of 50.3 and 52.5, up from 48.6 and 50.4, and above expectations of 49.2 and 50.8; French Mfg and Services PMIs of 48.3 and 49.8, up from 47.2 and 48.4 and an 11 and 17 month high, respectively, blowing away expectations of 47.6 and 48.8). The result was a composite Eurozone Manufacturing PMI of 50.1, above 50 for the first time since February of 2012, up from 48.8 and at a 24 month high - reporting the largest monthly increase in output sunce June 2011, as well as a composite Services PMI of 49.6, up from 48.3, and an 18 month high. In other words, European Composite PMI is expanding (above 50) for the first time since January 2012.
With earnings season in full swing as some 20% of the S&P is expected to report, the quieter macro picture moves to the backburner especially with the Fed now silent for a long time. Looking at key central banks events, at the Turkey central bank meeting this week, Goldman expects that the bank is more likely to deliver a moderately hawkish “surprise” and hike the lending rate by 100bp to 7.5% (7.0% for primary dealers), and leave the key policy (1-week repo) and the borrowing rates unchanged at 4.5% and 3.5%, respectively. Among the other central bank meetings this week, benchmark rates are expected to remain unchanged in New Zealand, Philippines and Colombia, in line with consensus, while a 25bp cut is expected to be announced at the Hungary MPC meeting.
Markit has released its global business confidence survey, and it makes for sobering reading. Due to sharp declines in business confidence in both the US and China, a new post crisis low has been reached in June. Only the UK was a notable exception, as business confidence there jumped. We would submit that this is no coincidence, as the pace of money supply growth is increasing sharply in the UK, while it it slowing down in both the US and China. The culprit for the slowdown in money supply growth in the US is lending by commercial banks, which is decelerating sharply even as monetary pumping by the central bank continues at full blast.
CEOs have a primary job: manipulating up the stock of their company. But why they now wallowing worldwide in 2009-like gloom about the economy’s future?
The central bank "reason" goal-seeked for today's US overnight ramp - because it sure wasn't fundamentals with both German exports (-2.4%, Exp. +0.1%) and Industrial Production (-1.0%, Exp. -0.5%) missing - was the weekend Spiegel story that despite the unanimous decision by the ECB last week to keep rates unchanged, ECB chief economist Peter Praet and Mario Draghi himself had insisted on a 25 bps rate cut. They were, however, stopped by seven council members from the northern euro states, including Weidmann, Knot and Asmussen. As a result, Draghi was steamrolled in the final vote. Yet somehow this is bullish for risk, pushing equity futures higher and peripheral debt spreads lower, even as the EURUSD has drifted higher. Of course, one can't have an even more dovish ECB as a risk on catalyst alongside a rising Euro, but who cares about news, fundamentals, or logic at this point. All that matters is that US futures are higher, which was especially needed following yet another rout in the Shanghai Composite which dropped 2.44% back under 2,000 following news that China's Finance Ministry has told central government agencies to cut expenditures by 5% this year, and a 1.4% drop in the PenNikkeiStock225 on a weaker USDJPY. Remember: all is well in the global economy (whose forecast is about to be cut by the IMF) if the US is generating a record number of part-time jobs.
A busy week, with a bevy of significant data releases, starting with the already reported PMIs out of China and Europe (as well as unemployment and inflation numbers from the Old World), the US Manufacturing and Services PMI, another Bill Dudley speech on Tuesday, US factory orders, statements by the ECB and BOE, where Goldman's new head Mark Carney will preside over his first meeting, and much more in a holiday shortened US week.
Following the Friday plunge in the ISM-advance reading Chicago PMI, it was a night of more global manufacturing data, which started off modestly better than expected with Japanese Tankan data, offset by a continuing decline in Chinese PMIs (which in a good old tradition expanded and contracted at the same time depending on whom one asked). Then off to Europe where we got the final print of the June PMI which continued the trend recent from both the flash and recent historical readings of improvement in the periphery, and deterioration in the core. At the individual level, Italy PMI rose to 49.1, on expectations of 47.8, up from 47.3; while Spain hit 50 for the first time in years, up from 48.1, with both highest since July and April 2011 respectively. In the core French PMI rose to a 16-month high of 48.4 from 48.3, however German PMI continued to disappoint slowing from 48.7, where it was expected to print, to 48.6. To the market all of the above spelled one thing: Risk On... at least until some Fed governor opens their mouth, or some US data comes in better than expected, thus making the taper probability higher.
The global capital markets are seeing large moves in response not only to the Federal Reserve, though clearly that is a key impetus, but also to developments elsewhere. Here is a dispassionate review.
China is snugging, trying to rein in its financial system and shadow banking system.
Nothing like a solid dose of schizophrenia to start the week, following Chinese PMI news which showed that once again the Chinese economy was both contracting and expanding at the same time. Sure, one can justify it by saying HSBC looks at smaller companies while the official data tracks larger SMEs but the reality is that just like in the US, so China has learned when all else fails, baffle with BS is the best strategy. As a result the media is attributing he drop in European stocks to the weaker than expected China PMI, while the green prints in US futures are due to... stronger than expected China PMI. There were no split-personalities in Japan, however, where Mrs. Watanable's revulsion with recent euphoria led the Nikkei to tumble over 500 points, to closed down another 3.72%, and is now on the verge from a 20% bear market from its May 23 multi-year highs. The fact that the USDJPY reached within 3 pips of the Abenomics "fail" zone of USDJPY 100 didn't help overnight sentiment.
The Flash PMI had already 'warned' of a contractionary print but the final May HSBC Manufacturing PMI is now the lowest in a year at 49.2. The last two months have seen this measure of the Chinese economy plunge at its fastest rate since March 2011. Of course the 'official' data still remains a handsome 50.8 (not contracting at all) but the underlying data of the HSBC/Markit index is just as awful with little in the silver-lining camp to save the day (or night). Employment dropped, new export orders and total orders fell, purchasing activity fell, with only a meager rise in output saving the index from a more precipitous decline. Output prices also plunged (but input prices dropped on the back of cheaper raw materials - particularly base metals) and inventories rose (in a lack of demand manner as opposed to 'if we build it' perspective according to HSBC). So, once again, just as in Q1 2012 (before the reality swoon) China is both expanding and contracting...
Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.
"The last 36 hours have perhaps been evidence as to what might happen if stimulus is withdrawn before the global recovery has been cemented and what might happen if Japan makes mistakes along the way to their attempted new dawn. With the Chinese data still ambiguous, Europe still in recession, Japan in the very early stages of a growth experiment and with the US recovery still historically very weak one has to say that liquidity has been the main market fuel in recent months. So central banks have to tread carefully and the Fed tapering talk and the BoJ's seemingly benign neglect policy towards JGBs has had the market fretting." - Deutsche Bank
Once again: The FOMC minutes had nothing to do with overnight's events, especially since both Ben Bernanke and Bill Dudley made it very clear previously that for any tapering to occur (and which is supposedly bullish according to David Tepper, who may finally be done selling to momentum chasers) if ever, the economy would have to be be stronger (which is of course a paradox because it is the Fed's QE that is making the economy weaker). If anything, the minutes reminded us that there is a mutiny in the FOMC with finally someone having the guts to say on the record that Bernanke is blowing a bubble - something never seen before on the official FOMC record. And after all, the Nikkei opened way up, not down. It was only after the realization of what soaring bond yields mean for, wait for it, stocks (despite central planner promises that it is soaring bond yields that are a good thing - turns out, they aren't) that the sell-off really started. That, and of course copper, and the end of the Chinese Copper Financing Deals arrangement that has been China's illicit cross-asset rehypothecation scheme for years (more shortly). So in a nutshell, here is what has transpired so far, courtesy of Bloomberg.