It has been a deja vu session of that day nearly a month ago when the Banco Espirito Santo (BES) problems were first revealed, sending European stocks and US futures, however briefly, plunging. Since then things have only gotten worse for the insolvent Portuguese megabank, and overnight BES, all three of its holdco now bankrupt, reported an epic loss despite which it will not get a bailout but instead must raise capital on its own. The result has been a record drop in both the bonds (down some 20 points earlier) and the stock (despite a shorting ban instituted last night), which crashed as much as 40% before stabilizing at new all time lows around €0.25, in the process wiping out recent investments by such "smart money" as Baupost, Goldman and DE Shaw. The result is a European financial sector that is struggling in the red, while adding to its pain are some large cap names such as Adidas which also tumbled after issuing a profit warning relating to "developments" in Russia. Then there was European inflation which printed at 0.4%, below the expected 0.5%, and the lowest in pretty much ever, and certainly since the ECB commenced its latest fight with "deflation", which so far is not going well. The European cherry on top was Greece, whose dead cat bounce is now over, after May retail sales crashed 8.5%, after rising 3.8% in April.
Overnight markets have been a continuation of the relative peace observed yesterday before the onslaught of key data later in the week, with the biggest mover standing out as the USDJPY, which briefly touched 102 before sliding lower then recouping losses. This sent the Nikkei 225 up 0.57% despite absolutely atrocious Japanese household spending data, coupled with a major deterioration in employment: at this rate if Abenomics doesn't fix the economy it just may destroy it. Aside from that the last 24 hours could be summed as having a lot of noise but not a lot of excitement. This was best illustrated by the S&P500’s (+0.03%) performance which was the second smallest gain YTD. And while the SHCOMP is starting to fade its recent euphoria and China was up only 0.24%, Europe continues to cower in the shade of Russian sanctions as both German Bund yields rose to record highs, and Portugal's BES tumbled by 10% once again to 1 week lows. Today Europe is expected to formally reveal its latest Russian sanctions, which should in turn push Europe's already teetering economy back over the edge.
But... but... the VIX said everything is ok, and European rates were the lowest they have been in centuries... How can something possibly go wrong?
It just did.
Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.
Following yesterday's S&P surge on the worst hard economic data (not some fluffy survey conducted by a conflicted firm whose parent just IPOed and is thus in desperate need to perpetuate the market euphoria) in five years, there is little one can comment on how "markets" react to news. Good news, bad news... whatever - as long as it is flashing red, the HFT algos will send momentum higher. The only hope of some normalization is that following the latest revelation of just how rigged the market is due to various HFT firms, something will finally change. Alas, as we have said since the flash crash, there won't be any real attempts at fixing the broken market structure until the next, and far more vicious flash crash - one from which not even the NY Fed-Citadel PPT JV will be able to recover. For now, keep an eye on the USDJPY - as has been the case lately, the overnight USDJPY trading team has taken it lower ahead of the traditional US day session rebound which also pushes the S&P higher with it. For now the surge is missing but it won't be for longer - expect the traditional USDJPY ramp just before or as US stocks open for trading.
She came, she spoke, and she sent stocks to a new all time high. That is perhaps the simplest summary of what Janet Yellen did yesterday when, as a result of her droning monotone, she managed to put the VIX literally to sleep, which closed at the lowest since 2007 and the resulting surge in the S&P was a fresh record high, because despite the "concerns" Fed member have about record high complacency, all they are doing is adding to it. And now that apparently the Fed has a market "valuation" department, and Yellen can issue fairness opinions on whether the S&P is overvalued, the only question is whether today, as a follow through to yesterday's "buy everything, preferably on leverage, sincerely - the Fed" ramp, the VIX will drop to single digits today.
With newsflow out of Iraq having slowed down as has the ISIS offensive, which appears to have been halted north of Baghdad, the market now shifts its attention to the Fed's two-day meeting which begins today and continues through tomorrow afternoon, when it will be leaked by media outlets to ultra-wealthy speculators and robots, breaching the embargo (in exchange for a hefty payoff) some 10 minutes before 2 pm.
Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan's future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won't have to worry much about 2015 as he won't be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
Considering that both key overnight news reports: the Chinese HSBC PMI (printing at 49.4, vs 49.7 expected) and the Eurozone CPI print from a few hours ago (print of 0.5%, down from 0.7% and below the 0.6% expected), we find it odd that futures are red: after all this is precisely that kind of negative data that has pushed the market to record highs over the past five years. And speaking of odd, considering the ongoing non-dis-deflation in Europe, the fact that Bunds and TSYs are being sold off today makes perfect sense in a New Normal bizarro world.
The complete implosion in volume and vol, not to mention bond yields continues, and appears to have spilled over into events newsflow where overnight virtually nothing happened, or at least such is the algos' complete disregard for any real time headlines that as bond yields dropped to fresh record lows in many countries and the US 10Y sliding to a 2.3% handle, confused US equity futures have recouped almost all their losses from yesterday despite a USDJPY carry trade which has once again dropped to the 101.5 level, and are set for new record highs. Perhaps they are just waiting for today's downward revision in Q1 GDP to a negative print before blasting off on their way to Jeremy Grantham's 2,200 bubble peak after which Bernanke's Frankenstein market will finally, mercifully die.
The near-term outlook for the US dollar appears to be improving. Here is why.
Another right of perfectly round number supports: while the Shanghai Composite once again dipped below 2000 overnight to as low as 1991 only to close modestly higher, and the Nikkei followed suit, also sliding below the psychological support level of 14,000 to an intraday low of 13,964 only to close just above 14,000 if in the red, it was the USDJPY that has suffered the most technical pain when shortly after 2:30 am eastern time, the USDJPY dropped by nearly 40 pips, hours after the BOJ indicated that not only is it happy with where in the QE process it stands, but hinted there may well be no more QE, and certainly nothing imminent . In the process, the USDJPY fully smashed the 200 DMA, with the next key parallel support being the 200DMA in the EURJPY at 138.08 (which was at 138.34 last). When that too gives way, it is a straight line to double digits in the USDJPY, and the countdown to the end of the Abe regime begins in earnest.
Not much going on tonight, except for the non-coupy martial law announcement in Thailand where the government is said to still be in charge of everything except for martial law decisions taken by the army of course, which in turn is in charge of everything else apparently including the central bank which intervened so extensively in the market, the Baht was barely changed at one point. There was also news of explosions and clashes in Benghazi but as everyone knows, what difference does Libya make at this, or any other, point. Additionally overnight there were reports that the cities of Slavyansk and Kramatorsk in east Ukraine were being shelled by the Ukraine army but that too barely registered as bullish for the USDJPY (which in now traditional fashion ramped during the US day session then sold off during Asia hours).
If, in the New Normal, newsflow and facts mattered, facts such as the German Zew Investor Expectations index crashing from 43.2 to 33.1, smashing expectations of a 40.0 print to the downside and down to the lowest since January 2013 nearly half the 7 year half reported as recently as December confirming Germany can no longer be Europe's growth dynamo courtesy of a still nosebleed high EURUSD, or facts such as overnight Chinese data missed in every category with industrial output up 8.7% y/y in April vs an estimated 8.9%, retail sales up 11.9% below the estimated 12.2% rise and ; Jan.-April fixed-asset investment growing 17.3% vs est. 17.7%, then futures may just posted a downtick. However, since it is a Tuesday, with a ~$1 billion POMO, one can ignore the fundamentals and proceed straight to buying anything and everything with indiscriminate abandon. The only question is whether the NY Fed orders Citadel to slam the VIX under 11 to start off the morning S&P rampage which should push the broad market index above Goldman's 1900 price target for the end of the 2014.