Following yesterday's disappointing results by Visa, which is the largest DJIA component accounting for 8% of the index and which dropped nearly 3%, while AMZN's 10% tumble has weighed heavily on NASDAQ futures, it has been up to the USDJPY to push US equity futures from dropping further, which it has done admirably so far with the tried and true levitation pump taking place just as Europe opened. One thing to keep in mind: yesterday the CME quietly hiked ES and NQ margins by 6% and 11% respectively. A modest warning shot across the bow of what may be coming down the line?
As if trying to figure out the impact of the central banks' balance sheets and China's record debt creation on stocks wasn't enough of a complexity (actually it really isn't that complex) for a market where fundamentals haven't mattered in 5 years, there is also the issue of ETF basket creation, best known for the daily 3:30 pm ramp when ETFs catch up with their underlying components in a rising market, giving it all a procyclical turbo boost. It is here that SocGen reports that in the past fortnight, there was record equity ETF creation, mostly focusing on the S&P 500.
We show that equity markets are stretched (e.g., more than 80% of the S&P rally since last year is due to re-rating), but we also find that the fixed income market has become quite rich (we have been overweight European peripherals for more than a year on valuation grounds, we show that this argument no longer holds), and the same is true of the credit market. Second because capital has been flowing rapidly into risky assets, we document that argument and here too find evidence that the market might be ahead of itself. We read the market reaction last week to the Portuguese news as a sign that the market is indeed too complacent and could correct rapidly.
"Simple Jack" is back. Yesterday it was the 4x oversubscription for Kenyan debt at 7% yield; today we see bailed-out Cyprus (yes that Cyprus - in "emergency situation" and still with capital controls) managed to sell EUR 750 million of 5 year maturity debt at a 4.85% yield. As Reuters reports, this is the fastest comeback to the public markets of any bailed-out European country. "People are searching for yield," said of Martin Wilhelm, founder of IfK, a German Kiel-based bond boutique, which runs a bond fund with Acatis; and that is clear as Cyprus just issed at a cheaper cost of funding than Greece (4.95% 2 months ago). In the understatement of the day, Michael Leister, senior strategist at Commerzbank. said "the risk is that valuations and primary market dynamics aren't related to fundamentals anymore." Cyprus economy is expected to contract 4.2% this year. Like Greece's deal in April, the buyers are expected to largely British- and U.S.-based hedge funds.
When it comes to stocks - "everyone" knows the "Tuesday effect". When it comes to volatility - "everyone" knows the "just sell you idiot" effect. But, as Citigroup's Richard Cochinos explains (and Bloomberg annotates in charts so simple a 5th grader can get it), there is now an FX trade for dummies...
- U.S. Plans to Hit Putin Inner Circle With New Sanctions (BBG)
- Russian Billions Scattered Abroad Show Trail to Putin Circle (BBG)
- GE’s Alstom Bid Gains Steam as Hollande Said Not Opposed (BBG)
- Russia-West tensions pressure stocks, buoy oil prices (Reuters)
- Toyota Said to Plan to Move U.S. Sales Office to Texas (BBG)
- Egyptian court seeks death sentence for Brotherhood leader, 682 supporters (Reuters)
- Greece warned of 14.9 billion euro financing gap (FT)
- Comcast to shed 3.9 million subscribers to ease cable deal (Reuters)
- Big U.S. Banks Make Swaps a Foreign Affair (WSJ)
Investors take note. One of the primary market props of the last five years is being removed. What happens when the markets finally catch on?
PBOC Denies It Will Bail Out Collapsed Real Estate Developer While Chinese Property Developer Market CrashesSubmitted by Tyler Durden on 03/18/2014 10:15 -0400
The PBOC is reported to be scrambling to bail out China's second corporate default in one month, real estate company Zhejiang Xingrun, even as the Chinese property developer market is crashing and rapidly shutting down. So why did the PBOC personally just go to Weibo to deny such speculation. And what happens next?
In a carry-trade driven world in which news and fundamentals no longer matter, the only relevant "variable" is whether the JPY is down (check) and the EUR is up (check) which always results in green equities around the globe and green futures in the US, with yesterday's sudden and sharp selloff on no liquidity and no news long forgotten. The conventional wisdom "reason" for the overnight JPY underperformance against all major FX is once again due to central bank rhetoric, when overnight BOJ's Kiuchi sees high uncertainty whether 2% CPI will be reached in 2 years, Shirai says bank should ease further if growth, CPI diverge from main scenario. Also the BOJ once again hinted at more QE, and since this has proven sufficient to keep the JPY selling momentum, for now, why not continue doing it until like in May it stops working. As a result EURJPY rose above the 4 year high resistance of 138.00, while USDJPY is bordering on 102.00. On the other hand, the EUR gained after German parties strike coalition accord, pushing the EURUSD over 1.36 and further making the ECB's life, now that it has to talk the currency down not up, impossible. This is especially true following reports in the German press that the ECB is looking at introducing an LTRO in order to help promote bank lending. Since that rumor made zero dent on the EUR, expect the ongoing daily litany of ECB rumors that the bank is "technically ready" for negative rates and even QE, although as has been shown in recent months this now has a half-life measured in minutes as the market largely is ignoring whatever "tools" Draghi and company believe they have left.
If there is one single event that could derail the euro experiment it is the German Federal Constitutional Court ruling on the European Stability Mechanism (ESM) and Outright Market Transactions (OMT).
Today we present the Target2-system and the fiscal bail-out facilities in our series on European efforts to bail out itself. For new readers, check out part 1 here http://bawerk.net/?p=123
Despite media rumors that the Portuguese foreign minister Portas, who resigned on Tuesday precipitating a complete collapse in Portugual bond prices and ushering in the latest European political crisis, has agreed to stay in the government as a Deputy PM and economy minister (nothing like some title inflation-pro-quo), things in Portugal are rapidly turning from bad to worse. To wit:
PORTUGUESE 10-YEAR BONDS DECLINE; YIELD RISES 14 BPS TO 7.60%
PORTUGUESE TWO-YEAR NOTE YIELD RISES 60 BPS TO 5.64%
PORTUGUESE 2-YEAR YIELD REACHES 5.66%, HIGHEST SINCE NOV. 20
The main reason for the collapse appears to be the near consensus developing this morning that no matter what the government does at this point, a second bailout of the small country is inevitable.
Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.
Extreme Developed Market (DM) monetary policy (read The Fed) has floated more than just US equity boats in the last few years. Foreign non-bank investors poured $1.1 trillion into Emerging Market (EM) debt between 2010 and 2012 as free money enabled massive carry trades and rehypothecation (with emerging Europe and Latam receiving the most flows and thus most vulnerable). Supply of cheap USD beget demand of EM (yieldy) debt which created a supply pull for EM corporate debt which is now causing major indigestion as the demand has almost instantly dried up due to Bernanke's promise to take the punchbowl away. From massive dislocations in USD- versus Peso-denominated Chilean bonds to spiking money-market rates in EM funds, the impact (and abruptness) of these colossal outflows has already hit ETFs and now there are signs that the carnage is leaking back into money-market funds (and implicitly that EM credit creation will crunch hurting growth) as their reaching for yield as European stress 'abated' brings back memories of breaking-the-buck and Lehman and as Goldman notes below, potentially "poses systemic risk to the financial system."
Tuesday's weak 2 Year bond auction is now a distant memory, and following yesterday's strong 5 Year it was not surprising to see a very strong pick up in demand for the just concluded 7 Year auction. On the surface, the auction was very strong with the high yield printing at 1.496%, stopping through the 1.515% When Issued if still the highest since March 2012. The internals were also very strong, with the Bid to Cover closing at 2.70, in line with last month's 2.71, and above the TTM average of 2.68. More importantly, Direct demands soared with 20.68% of the takedown going to Direct bidders, the second highest ever in this series, and lower only to December's 23.11%. Indirects were no slouch either, with a final allotment of 40.84%, leaving just 38.48% for Dealers, the lowest take down for 2013. So with very strong primary market demand along the belly, it is safe to say all rumors of a blow up in the US bond market are greatly exaggerated. Remember: TSYs still continue to be the primary source of repoable collateral and for the time being at least, everyone still wants them.