Crude Oil

Following a brief hiatus for the Veterans Day holiday, the spotlight will again shine on treasuries and emerging markets today. The theme of higher US yields and USD strength continue to play out in Asian trading. 10yr UST yields are drifting upwards, adding 3bp to take the 10yr treasury yield to 2.78% in Japanese trading: a near-two month high and just 22 bps away from that critical 3% barrier that crippled the Fed's tapering ambitions last time. Recall that 10yr yields added +15bp in its last US trading session on Friday, which was its weakest one day performance in yield terms since July. USD strength is the other theme in Asian trading this morning, which is driving USDJPY (+0.4%) higher, together with EM crosses including the USDIDR (+0.6%) and USDINR (+0.6%). EURUSD is a touch weaker following a headline by Dow Jones this morning that the Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly, citing Germany’s Frankfurter Allgemeine Zeitung who source an unnamed ECB insider. The headline follows a number of similar stories in the FT and Bloomberg in recent days suggesting a split in the ECB’s governing council.

Isn't it intriguing that with the cash bond market closed, every other risk-asset-class in the world dies a horrible death of volume-less list-less price action? Today's only activity - bearing in mind the absence of the bond-market's almost ubiquitous POMO leveraging idiocy - was from the US open to the European close. From that point on FX markets (JPY crosses) and stocks went dead-stick pinned to VWAP (but managed new highs in the Dow). There was some divergences... HY credit (via ETFs) dropped rather notably to its lowest in almost a month; VIX was banged back under 12.5% - its lowest in almost 3 months; and crude oil prices jerked higher. Treasury futures indicate a 1-3bps yield rise on the day, the USD leaked lower (led by EUR strength), and PMs went nowhere fast treading water with modest losses. Stocks closed at record highs as the dash-for-trash remains front-and-center: "most shorted' names have tripled the market's 1.4% gain in the last 2 days!

• Twitter's IPO to Make Market Debut (WSJ); Twitter Raises $1.82 Billion, Pricier Value Than Facebook (BBG)
• Worried Senators Press Obama on Health Law (WSJ)
• Greenspan Says Yellen Was His Guide to Economics Research at Fed (BBG)
• European Central Bank seen holding rates despite inflation tumble (Reuters)
• Wall St. Bonuses Over All Are Predicted to Rise 5 to 10% (NYT)
• Cautious consumers seen curbing U.S. economic growth (Reuters)
• China Grants U.S. Investors Indirect Access to Its Stock Markets (WSJ)
• Higher Tax Rates Give Top U.S. Earners Year-End Headaches (BBG)
• Iran Loses Nuclear Leverage as World Ignores Export Drop (BBG)
• NYPD Commissioner Ray Kelly in the running for JPMorgan job (Post)

While the public's attention has been focused recently on revelations involving currency manipulation by all the same banks best known until recently for dispensing Bollinger when they got a Libor end of day print from their criminal cartel precisely where they wanted it (for an amusing take, read Matt Taibbi's latest), the truth is that manipulation of FX and Libor is old news. Time to move on to bigger and better markets, such as physical commodities, in this case crude, as well as Interest Rate swaps. And, best of all, the us of our favorite manipulation term of all: "banging the close."

It was the deep of illiquid night when the momentum ignition trading algos struck. Out of the blue, a liftathon in all JPY crosses without any accompanying news sent the all important ES leading EURJPY surging by 50 pips, which in turn sent both the Nikkei up over 1% in minutes, and led to an E-Mini futures melt up of just about 8 points just when everyone was going to sleep. All of this happened completely independent of the actual data, which was chiefly European retail sales which missed (-0.6%, Exp. 0.4%, prior revised lower to 0.5%), Eurozone Service PMI which dropped (from 52.2 to 51.6) but beat expectations of 50.9 (notably the Spanish Service PMI of 49.6, up from 49.0 saw its employment index drop from 46.5 to 45.3, the lowest print since June), and finally, German Factory Orders which surged from last month's -0.3% to +3.3% in September. And while all this impacted the EUR modestly stronger, it had little if any residual effect on the ES. The bigger question is whether these slightly stronger than expected data point will offset the ECB's expected dovishness when Mario takes to the mic tomorrow).

Texas and North Dakota Crude Oil Production Continue Meteoric Rise

Just as Friday ended with a last minute meltup, there continues to be nothing that can stop Bernanke's runaway liquidity train, and the overnight trading session has been one of a continuing slow melt up in risk assets, which as expected merely ape the Fed's balance sheet to their implied fair year end target of roughly 1900. The data in the past 48 hours was hot but not too hot, with China Non-mfg PMI rising from 55.4 to 56.3 a 14 month high (and entirely made up as all other China data) - hot but not too hot to concern the PBOC additionally over cutting additional liquidity -  while the Eurozone Mfg PMI came as expected at 51.3 up from 51.1 prior driven by rising German PMI (up from 51.1 to 51.7 on 51.5 expected), declining French PMI (from 49.8 to 49.1, exp. 49.4), declining Italian PMI (from 50.8 to 50.7, exp. 51.0), Spain up (from 50.7 to 50.9, vs 51.0 expected), and finally the UK construction PMI up from 58.9 to 59.4.

In addition to the bevy of ugly European unemployment and inflation news just reported, the overnight session had a dollop of more ugly macro data for the algos to kneejerkingly react to and ramp stocks to fresh time highs on. First it was China, where the PBOC did another reverse repo, however this time at a fixed 4.3% rate, 0.2% higher than the Monday iteration and well above the 3%-handle from early October, indicating that China is truly intent on tightening its monetary conditions. Then Japan confirmed that despite the soaring imported food and energy inflation, wages just refuse to rise, and have declined now for nearly 1.5 years. Then, adding core insult to peripheral injury, Germany reported retail sales that missed expectations of a +0.4% print wildly, declining -0.4% from a prior downward revised 0.5% to -0.2%. And so on: more below. However, as usual what does matter is how the market digests the FOMC news, and for now the sense is that the risk of a December taper has risen based on the FOMC statement language, whether warranted or not, which as a result is pushing futures modestly lower following an epic move higher in the month of October on nothing but pure balance sheet and multiple expansion.  The big data week in the US rolls on with the highlights being the Chicago PMI and initial jobless claims, which are expected to print their first accurate, non-impaired reading since August.

While the White House spied on Frau Merkel and Obamacare developed into a slow-moving train wreck, while Syria was saved from all-out war by the Russian bell and the Republicrats fought bitterly about the debt ceiling… something monumental happened that went unnoticed by most of the globe. The US quietly surpassed Saudi Arabia as the biggest oil producer in the world. You read that correctly: "The jump in output from shale plays has led to the second biggest oil boom in history," stated Reuters on October 15. "U.S. output, which includes natural gas liquids and biofuels, has swelled 3.2 million barrels per day (bpd) since 2009, the fastest expansion in production over a four-year period since a surge in Saudi Arabia's output from 1970-1974." After the initial moment of awe, pragmatic readers will surely wonder: Then why isn't gasoline dirt-cheap in the US?

There was some hilarious news overnight: such that supposedly Spain's GDP rose 0.1% in Q3 thus ending a 2+ year recession. There is no point to even comment on this "recovery" - we will merely remind that starving your economy of imports for the sake of generating a GDP-boosting trade surplus, while consumption declines, solves nothing and point readers to charts of Spanish non-performing loans, housing prices, and unemployment, oh and the massive Bad Bank of course, and leave it at that. In terms of real news, futures are lower following a drubbing in Asia over the previously discussed concerns over tighter Chinese monetary policy. Amusingly, as Reuters notes, this has hit global shares still high on hopes of extended U.S. stimulus on Wednesday, when the dollar tentatively steadied at an eight-month low after its latest slide. The immediate casualty is the USDJPY, which continues to slide and is approaching the 200SMA. In short: fears that China may have resumed tapering have offset yesterday's hope that "horrible" job numbers mean no Fed tapering until mid-2014.... New Normal fundamentals.

Just one day after the deal in Congress was reached, the U.S. national debt rose by an astounding 328 billion dollars.  In the blink of an eye we shattered the 17 trillion dollar mark with no end in sight.  We are stealing about $100,000,000 from our children and our grandchildren every single hour of every single day.  This goes on 24 hours a day, month after month, year after year without any interruption. The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. So what will happen when the rest of the world decides that they don't need to use our dollars or buy our debt any longer? At that point the consequences of decades of incredibly foolish decisions will result in an avalanche of economic pain that the American people are not prepared for.

All of these things are not like the other... except one!

• FHFA Is Said to Seek at Least $6 Billion From BofA for MBS Sales (BBG)
• Record Pact Is on the Table, But J.P. Morgan Faces Fight (WSJ)
• Magnetar Goes Long Ohio Town While Shorting Its Tax Base (BBG)
• Mini-Wall Street' Rises in Hamptons (WSJ)
• Obama to call healthcare website glitches 'unacceptable' as fix sought (Reuters)
• Starbucks Charges Higher Prices in China, State Media Says (WSJ)
• Cruz Is Unapologetic as Republicans Criticize Shutdown (BBG)
• Berlusconi struggles to keep party united after revolt (Reuters)
• SAC Defections Accelerate as Cohen Approaches Settlement (BBG)

Every month we say it, and every month it just keeps getting worse: RIP Abenomics... until next month, when it will be RIP-er. Overnight Japan posted its latest, September, trade numbers which were absolutely abysmal, as the trade deficit rose to a fresh record high of 932 billion yen ($9.5 billion), the 15th consecutive monthly shortfall. The deficit for April-September rose to nearly 5 trillion yen ($51 billion), also a record for the first half of the fiscal year. The reason: as we warned in January when we predicted that the surging import costs of energy and food as a result of the plunging yen will far outweigh any incremental benefits for exports, is that, well, surging cost of energy and food far outweighed any incremental benefits for exports courtesy of the ongoing Yen devaluation. But at least Japan's 0.1%, like the 0.1% in the US and Europe, have their wealth effect. The rest can just go on a diet. And walk getting there since they can't afford gas.

While last week's relentless panic buying has been extensively commented on, it was last week's nearly 50% plunge in near-term stock vol that the major news as the world went from risk off mode to risk on. It wasn't just stocks whose volatility imploded: it was the implied near-term volatility of all asset classes that was hammered in the past three days. But while everyone is fascinated by the rapid VIX down move, it is what someone did on Friday by betting that VIX will double by February in a 24/29 VIX Call Spread, that was of note. The amount wagered: $6.7 million. Whether or not this was an outright trade, or a hedge (and if one listens to Jamie Dimon perjuring himself to Congress, any trade is a hedge, adding further to the confusion) is unknown, but it is not pocket change betting that the plunge in vol will be merely transitory.