November's asset performance can best be summarized in just three words: oil, oil, oil. "For Brent November was the biggest one month decline since the height of the Lehman crisis in October 2008 whilst for WTI it was the worst since December 2008. Brent and WTI are now 33% and 28% lower versus where it started the year and are now trading at their lowest level since the spring of 2010."
A look at the global capital markets as if analysis matters.
Recently we posted the following article commenting on the impact of USD appreciation and dollar circulation among oil exporters, as well as how the collapsing price of oil is set to reverberate across the entire oil-exporting world, where sticky high oil prices were a key reason for social stability. Following today's shocking OPEC announcement and the epic collapse in crude prices, it is time to repost it now that everyone is desperate to become a bear market oil expert, if only on Twitter...
The Petrodollar, long serving as the US leverage to encourage and facilitate USD recycling, and a steady reinvestment in US-denominated assets by the Oil exporting nations, and thus a means to steadily increase the nominal price of all USD-priced assets, just drove itself into irrelevance. A consequence of this year's dramatic drop in oil prices, the shift is likely to cause global market liquidity to fall. This decline follows years of windfalls for oil exporters such as Russia, Angola, Saudi Arabia and Nigeria. Much of that money found its way into financial markets, helping to boost asset prices and keep the cost of borrowing down, through so-called petrodollar recycling. But no more: "this year the oil producers will effectively import capital amounting to $7.6 billion.
Despite claims of containment, Reuters reports seven more people turned themselves in late on Thursday to an Ebola isolation unit in Madrid; but following a visit by PM Rajoy, Spanish citizens can relax as the government is setting up a special Ebola committee. Following yesterday's scare in Paris, The Independent reports authorities are investigating a 'probable' case of a French national who may have contracted the disease in Africa. The World Health organization has warned that East Asia is at risk of becoming a "hot spot" for diseases - but is well prepared after SARS and avian flu but it is the appearance of a confirmed case in Brazil that is most concerning. A 47-year-old man, originally from Guinea, is LatAm's first case and suggests SOUTHCOM's "nightmare scenario" is closer than many would care to believe. Finally, the CDC has issued special guidance to 911 operators on dealing with suspected Ebola cases across America.
Global Equities In "Sea Of Red" After German Industrial Data Horror, Hints Japan May Give Up On Weak YenSubmitted by Tyler Durden on 10/07/2014 05:44 -0500
While the economic data, especially out of Europe, just keeps getting worse by the day, with the latest confirmation that Europe is now officially in a triple-dip recession coming out of Germany and the previously observed collapse in Industrial Production which tumbled the most since February 2009, it was once again the Dollar and especially the New Normal favorite currency, the Yen, that was in everyone's sights overnight, when it first jumped to 109.20 only to slide shortly after midnight eastern, when Abe repeated once again that a plunging Yen is hurting small companies and consumers - and to think it only took him 2 years to read what we said would happen in late 2012 - but also the BOJ minutes which did not reveal any addition easing, which apparently disappointed algos and triggered USDJPY slel programs, pushing the USDJPY 80 pips lower to 108.40.
There were some minor fireworks in the overnight session following the worst Australian unemployment data in 12 years reported previously (and which sent the AUD crashing), most notably news that the Japanese Pension Fund would throw more pensioner money away by boosting the allocation to domestic stocks from 12% to 20%, while reducing holdings of JGBs from 60% to 40%. This in turn sent the USDJPY soaring (ironically, following yesterday's mini flash crash) if only briefly before it retraced much of the gains, even as the Pension asset reallocation news now appears to be entirely priced in. It may be all downhill from here for Japanese stocks. It was certainly downhill for Europe where after ugly German factory orders yesterday, it was the turn of Europe's growth dynamo to report just as ugly Industrial Production which missed expectations of a 1.2% print rising only 0.3%. Nonetheless, asset classes have not seen major moves yet, as today's main event is the ECB announcement due out in less than an hour. Consensus expects Draghi to do nothing, however with fresh cyclical lows in European inflation prints, and an economy which is clearly rolling over from Germany to the periphery, the ex-Goldmanite just may surprise watchers.
With everyone focused on China as the source of next systemic risk, most forgot or simply chose to ignore Europe, which through Draghi's verbal magic was said to be "fixed." Or at least everyone hoped that the rigged European bond market would preserve the "recovery" illusion a little longer giving the world some more time to reform pretend it is doing something to fix it. Turns out that was a mistake, confirmed earlier not only by the plunge in German Factory Orders which cratered -4.3%, down from 7.7% and below the 1.1% revised, and UK Industrial production which missed expectations of a 0.6% boost, rising only 0.3%, but most importantly Italy's Q2 GDP shocker, which as we reported earlier, dropped for the second consecutive quarter sending the country officially into recession. As a result, European stock markets, Stoxx600, has joined the DJIA in the red for the year while Germany's 2 Year Bund just went negative on aggressive risk aversion, the first time since 2012.
Up until the last day of July, everything was going great: stocks were solidly up for the month, the DJIA was on the verge of 17,000, and the wealth effect was flourishing, if not the economy. Then yesterday happened, and everything changed: not only did the S&P turn red for the month, but the DJIA slid to red for 2014. So what is the best performing asset class in July? With the PBOC now openly unleashing QE in its economy, no surprise that it was the Shanghai Composite, which returned over 8%, if virtually nothing since 2009. However, don't expect this to last: for China real estate is orders of magnitude more important than the stock market to boost the wealth effect. As for the best returning assets class in 2014 YTD: don't laugh - it's still Spain and Italy. Expect the day of reckoning for Europe's periphery to be fast, unexpected and very brutal.
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.