With almost 30% price inflation for China's Tier 1 home prices, Goldman will need a bigger chart very soon...
BofAML's Mike Cantopoulos' distaste for corporate fundamentals, displeasure with the efficacy of QE and easy monetary policy on spurring growth and inflation, and concerns that a further deterioration in credit conditions will create deeper economic troubles not appreciated by many have left credit markets with poor default adjusted valuations and little room to absorb a negative shock. He highlights nine key reasons below why BofAML believes this rally won't last (and in fact may have already seen its end).
The SPV Loophole: Draghi Just Unleashed "QE For The Entire World"... And May Have Bailed Out US ShaleSubmitted by Tyler Durden on 04/22/2016 17:38 -0400
"The ECB stands ready to buy bonds from Euro Area issuers even when their parent companies are outside of the bloc. Already we can find a number of US, UK and Swiss headquartered names that issue out of SPVs incorporated in the Euro Area. If this trend to SPV issuance catches on, then the ECB’s policies will likely be very reflationary for all credit markets across the globe, and because of a likely refinancing wave – equity markets too."
- The CSPP aims to further strengthen the pass-through of the Eurosystem’s asset purchases to the financing conditions of the real economy.
- Purchases will start in June 2016.
- The CSPP will be carried out by six national central banks acting on behalf of the Eurosystem, coordinated by the ECB.
- In combination with other non-standard measures, the programme will provide further monetary policy accommodation and help inflation rates return to levels below, but close to, 2% in the medium term.
Following yesterday's OPEC "production freeze" meeting in Doha which ended in total failure, where in a seemingly last minute change of heart Saudi Arabia and specifically its deputy crown prince bin Salman revised the terms of the agreement demanding Iran participate in the freeze after all knowing well it won't, oil crashed and with it so did the strategy of jawboning for the past 2 months had been exposed for what it was: a desperate attempt to keep oil prices stable and "crush shorts" while global demand slowly picked up. And whether it is central banks, or chronic BTFDers, just 12 hours after oil opened for trading with a loud crash, the commodity has nearly wiped out all losses, and both brent and WTI were down barely 2%, leading to both European stocks and US equity futures virtually unchanged on the session.
Two days after stocks slid in a coordinated risk-off session, and one day after a DOE estimate of US oil inventories sent US stocks surging while the failed Allergan-Pfizer deal unleashed torrential hopes of a biotech M&A spree leading to the single best day for the sector in 5 years, sentiment has again shifted, this time due to a violent surge in the Yen as the market keeps testing the resolve of the Japanese central bank to keep its currency weak, and so far finding it to be nonexistent.
While not as quixotic as Morgan Stanley's Adam Parker piece on market-chasing cockroaches, BofA high yield analyst Michael Contopoulos has moved beyond merely bearish and is now outright catastrophic . That may be a little far fetched, but in his latest note - while he doesn't call rally chasers "cockroaches" (yet), he seems at a loss to explain the ongoing junk bond rally. His reasoning: fundamentals just keep getting worse by the day, while price action has completely disconnected from reality, and virtually nobody expects what is about to unfold in the junk bond space.
On the last day of an extremely volatile first quarter, following the latest torrid push higher in risk assets over the past two days following Yellen's dovish Tuesday comments, today has seen a modest pull back in risk, whether because the market is massively overbought, because someone finally looked at what record multiple expansion that has taken place in Q1 as earnings are set to collapse by nearly 10%, or simply due to fears that tomorrow's payrolls number will show an abnormal amount of minimum wage waiters and bartenders added.
Following yesterday's dollar spike which, which topped the longest rally in the greenback in one month, the prevailing trade overnight has been more of the same, and in the last session of this holiday shortened week we have seen the USD rise for the fifth consecutive day on concerns the suddenly hawkish Fed (at least as long as the S&P is above 2000) may hike sooner than expected, which in turn has pressured WTI below $39 earlier in the session, and leading to weakness across virtually all global risk assets.
When last we checked in on Credit Suisse, the bank had just reported its first annual loss since the financial crisis and the stock had plunged to its lowest level in a quarter century. Things have not gotten better since then. On Wednesday, CEO Tidjane Thiam announced his second restructuring plan in five months. "I will not be a hostage to fortune," Thiam told Bloomberg.
"While police say there were many people who stopped and helped police pick up the money, there may have been a few who pocketed some bills"...
While Asia was up on China's bad data, and Europe was higher again this morning to catch up for the Friday afternoon US surge, US equity futures may have finally topped off and are now looking at this week's critical data, namely the BOJ's decision tomorrow (where Kuroda is expected to do nothing), and the Fed's decision on Wednesday where a far more "hawkish announcement" than currently priced in by the market, as Goldman warned last night, is likely, in what would put an end to the momentum and "weak balance sheet" rally.
"To the extent this week’s ECB decision marks a shift towards private sector asset purchases, the ammunition the ECB has expands hugely. Assuming the ECB will be willing to navigate eventually into other private sector asset classes, the asset universe for QE purchases could expand to include uncovered bank bonds, bank loans and equities."
No doubt, more about the ECB’s plans for credit will be revealed in the weeks ahead. But if ECB buying is material in size (something we questioned though last week), investors could end up “crowded into” what the ECB isn’t buying. And, if a large, price-insensitive buyer in the corporate bond market (The ECB) has indeed just emerged today, we think credit market liquidity may deteriorate even further.
With China's Plunge Protection Team having intervened and set a positive spin on another poor session, traders put declines in Asia behind them as European markets rose along with U.S. index futures and commodities. European shares advanced for the first time in three days on speculation the region’s central bank will ramp up monetary stimulus on Thursday. A gauge of raw materials rebounded from its biggest selloff in a month, buoyed by gains in oil and copper. Furthermore, the previously noted selloff in Japanese government bonds - one which triggered circuit breakers and which some speculated may have been precipitated by the BOJ itself - dragged Treasuries and German bunds lower, gold fell a second day and the euro dropped versus most of its major peers.