Yield Curve

Here come the revisionists with new malarkey about the 2008 financial crisis. No less august a forum than the New York Times today carries a front page piece by journeyman financial reporter James Stewart suggesting that Lehman Brothers was solvent; could and should have been bailed out; and that the entire trauma of the financial crisis and Great Recession might have been avoided or substantially mitigated. That is not just meretricious nonsense; its a measure of how thoroughly corrupted public discourse about the fundamental financial and economic realities of the present era has become owing to the cult of central banking. The great error of September 2008 was not in failing to bailout Lehman. It was in providing a $100 billion liquidity hose to Morgan Stanley and an even larger one to Goldman.  They too were insolvent. That was the essence of their business model. Fed policies inherently generate runs, and then it stands ready with limitless free money to rescue the gamblers.  You can call that pragmatism, if you like. But don’t call it capitalism.

Everyone remembers March 6th, 2009, right? Some days are easier to remember than others and March 6th, 2009 will not easily be forgotten as that was the day when the S&P 500 made its now infamous "666" intraday low and it also marked the closing price low of 683 for the S&P 500 during the financial crisis. Seems like a very long-time ago as the S&P 500 is roughly 1300 points higher than the intraday financial crisis low. Interestingly, as of the close yesterday, the spread between the 10-year treasury and the 30-year treasury fell to its lowest level (69 bps) since that infamous day.

First it was the foreign exchange markets, then commodities, followed by fixed income markets. Now it’s the equity markets. Wherever we look, volatility has been creeping higher. To some extent, this is not surprising. At the end of the US Federal Reserve’s first round of quantitative easing, and at the end of QE2, the markets wobbled. So with QE3 now winding to a close (and with the European Central Bank (ECB) still behind the curve), a period of uncertainty and frazzled nerves should probably have been expected.

Three are four developments in the fixed income markets that represent a clear and present danger for stocks.

The ECB again cut the interest rates it controls, deeper into negative territory. It says it’s trying to nudge prices higher, but it’s actually feeding the cancer of falling interest.

With the snoozer of an FOMC meeting in the rearview mirror, as well as Scotland's predetermined independence referndum, last week's key events: the BABA IPO and the iPhone 6 release, are now history, which means the near-term catalysts are gone and the coming week will be far more relaxed, if hardly boring. Here is what to expect.

Forget the Siren calls of the impending end of days and the imminent collapse of civilization.  Here is a non-polemical non-bombastic overview of three key events in the week ahead:  FOMC meeting, TLTRO launch in Europe and the Scottish referendum.  

While BofAML's Michael Hanson expects Yellen’s overall tone to remain dovish, market perception will be key. The combination of changes to the forward guidance language, upward drift of the dots, and any comments seen as potentially hawkish, could lead to a selloff...

If yesterday's tailing 10 Year auction left people concerned that today's final for the week 30 Year bond issuance would be weak, then the results put that promptly to rest, after the $13 billion reopening of Cusip RH3 priced at 3.24%, pricing 2.3 bps through the 3.263% When Issued. Furthermore, the Bid to Cover if 2.67 was above the August 2.60, well above the TTM average of 2.40, and the second highest of 2014, second only to June's 2.69. The internals were very solid as well, with Directs taking down 21.8%, above the 16.8% average, Indirects holding 45.5%, in line with last month and above the TTM average of 43.4%, and Dealers left with 32.8% of the paper which they can quickly flip back to the Fed for the next 6 or so weeks until QE ends (before it has to resume once again of course).

“At This Point You Just Have to Laugh”. In every important respect, the Fed and the ECB and their brethren are no longer central banks at all. They are Ministries of Markets, no different from a Ministry of Industry or – even more eerily similar – the Ministry of Culture you would find in most European governments. At this point the Narrative hegemony is complete. There’s no longer even a cursory bow to the idea that fundamentals matter. So I’m calling a top. Not a top in markets, because I honestly have no idea what’s going to happen next. But I’m calling a top in the Narrative of Central Bank Omnipotence because it has, in fact, reached its asymptotic limit of influence and belief.

It has been an odd session: after yesterday's unexpected late day swoon despite the ECB launch of "Private QE", late night trading saw a major reversal in USDJPY trading which soared relentlessly until it rose to fresh 6 year highs, briefly printing at 105.70, a level not seen since October 2008, before giving back all gains in overnight trading. It is unclear if it was this drop, or some capital reallocation from the US into Europe, but for whatever reason while Europe has seen a stable - if fading in recent hours - risk bid, and European bonds once again rising and Irish and Italian yields both dropping to record low yield, US equity futures have slumped and are now trading at the lows of the session ahead of a US nonfarm payroll print which is expected to rise and print for the 7th consecutive time above 200K, at 230K to be precise, up from 209K in July (down from 288K in June). It is unclear if the market is in a good news is bad news mood today, but for now the algos are not taking any chances and have exited risky positions, with the ES at the low end of the range the market has been trading in for the past week centered aroun S&P 2000.

A dispassionate discussion of the technical condition of the dollar.  

The Fed causes a perverse outcome: gorging corporations and dehyradted startups.

US GDP beat expectations 'proving' that government data shows the recovery meme is on track (as long as it doesn't snow ever again). The market's reaction... intriguing - stocks shrugged even as a USDJPY pump tried to get things going; gold and silver moved modestly higher; and Treasury yields... fell notably at the long end. 30Y is now trading with a 3.06% handle and 5s30s is back below 145bps...!

Once Europe closed, US equity markets rolled over on what is a new 'lowest-volume-day-of-the-year' led by recent winner Russell 2000. The Dow is now red on the week and the Nasdaq up 11 days in a row. Today was not about stocks though (aside from the close). While CAD saw its best gain in over 2 years, it was US Treasuries (as EUR weakened and Bund yields plunged) that made the flashing red headlines with 30Y back at 15-month lows (at 3.10%) and 10Y -3.5bps at 2.36% as the yield curve flattened even further. 2s30s dropped below 260bps - its flattest since Dec 2012. Un-de-escalation concerns evident in TSYs and credit finally started to bleed into VIX and stocks. Gold, silver, and oil limped higher as US weakened (and copper fell). A desperate buying panic into the close smashing S&P futures to VWAP magically enabled the S&P to close at the confidence-inspiring centrally-planned 'wealth effect' level of 2000.07!!