A Market Only A Mother Could Love

We have again reached a point where attempting to explain away an utterly irrational market, in which sentiment and momentum shifts on a dime overriding any fundamental newsflow, and summarizing overnight catalysts has become a moot point. With stocks acting and reacting like petulant, schizophrenic children with ADHD, fundamentals are totally meaningless: yesterday and the overnight trading session have become perfect examples as prepared bulletins by two politicians, which said absolutely nothing of significance or constructive - have been enough to override 72 hours worth of actual fundamental deteriorating data, and also offset each other. Will Congress resolve the Fiscal cliff in its 10 remaining days in session without a major impetus to move such as a market plunge? Of course not, but once again the question has become one of who sells first, and the momentum piles on - and if there is no downside momentum, then logically there are no volume ramps to the upside: the market can no longer just stand still. In the meantime all the sellside firms have gone uber bullish on 2013, setting up the Fiscal Cliff as a perfect strawman. Of course the "Cliff" will be surmounted eventually, and after some near-term pain, but the reality is that the resulting rising taxes across the world in 2013 will be a major economic headwind, just the opposite of what the sellside crew is saying as one after another strategists push out optimistic outlooks on the next year to sucker in what little remaining retail interest in the farce formerly known as the market may be left.

In the meantime, the Shanghai Composite slid by another 0.5% overnight to a fresh post-2008 low of 1,963: why? Because as repeatedly said, the PBOC will not ease on fears of what the past summer's drought will mean for pork prices in 2013, and what every central bank entering eternal monetization phase means for hot inbound capital flows.

Also in the meantime, and confirming the schizophrenic nature of the underlying disconnect, both Japanese and Belgian yields have tumbled to either record or multi-year lows, even as PIIGS bonds are being bought, while stocks are rising at the same time. In other words, the same old mentality of  "buy everything" is back. It failed every time in the past, with bonds always and without fail proven correct over stocks, but perhaps this time it will be different.

We did get some data out of Europe, with Italy pricing EUR6 billion in 5 and 10 Year bonds at the lowest yields since November 2010, a day after Italian banks reported the first material deposit outflow in months. The result was taken as positive even thought the bid to cover on the 2022 BTPs was 1.18, well below the 1.43 prior, and barely covered. And yet the yield was 4.45%, down from 4.920% previously. Can one spell window dressing buying by Italian banks on fumes?

Elsewhere in Germany, unemployment rose for the eigth month in a row as companies curbed investment. The silver light here? The unemployment rise of 5,000 was less than expected. The unemployment rate, which came in just as expected at 6.9%, could not be spun.

Naturally, none of this in itself was market-moving. What was apparently enough to push the market-driving EURUSD to breakout from its trading band in the low 1.2940s? The very fundamental and catalytic opening of Europe around 3:00 am Eastern which forced the move of the major FX pair to 1.2990. Because nothing says Europe is getting stronger than a rising currency which is making the key GDP driver of the export-driven German economy that much more expensive.

Finally, and confirming that all news and data flow is just one big joke, was Eurozone Consumer confidence, which stayed flat at -26.9, same as last, and same as expectations, while Economic Confidence actually rose even as the Eurozone unemployment rate has risen to record highs, as the continent has officially doubled dipped, and as PMIs indicate more pain is coming. Makes perfect sense.

So what can one expect in this ritalin and geodon-addicted market?

Who knows: watch out for any fiscal cliff headlines, which will be spun in any way that the stop hunt du jour wishes them to be spun. And certainly watch out for anyone promising a better economy (which the market has not reflected since 2009) - with taxes about to rise substantially for many, the last thing a rational person should expect is additional so desperately needed CapEx spending. Certainly watch out for more corporate layoff notices as the only thing companies can control - their payroll - is forced to absorb ongoing declining revenues.

Finally, here is SocGen's take on why it may well be best to sleep through the rest of the day, week, month, and maybe year.


Markets continue to trade off headlines pertaining to Greece and the US fiscal cliff and to be honest it is difficult to see anything fundamentally changing today. There are a number of data releases and central bank speakers of note, but the big trends in currencies and rates remain hostage to headlines on the Greek debt buyback and progress between Democrat and Republican negotiators in Washington, and the anticipation in stocks of some sort of breakthrough.

Eurogroup finance ministers are now looking to finalise the terms of a debt buyback by 13 December in order to offer guarantees to the IMF so that the next bailout tranche can be released. The current fear is that if a buyback programme results in new losses for Greek banks then a recapitalisation could be necessary (explaining the hit to share prices yesterday). In addition, markets are speculating that to get debt as a percentage of GDP below 110% by 2022 as stated in the EU communiqué, write-downs will be inevitable. German finmin Schaeuble has hinted in that direction if Greece's primary balance returns to surplus by 2016. For the moment at least, keeping Greece out of the headlines is nigh impossible and not something German leaders are keen on continuing before the election next year. Tabloids like Bild have started to pick up on the extra bailout cost for German taxpayers, but Chancellor Merkel will be pinning her hopes on the economy and the labour market to safeguard her re-election next year. Whether that is intellectually naive remains to be seen. After German inflation data yesterday showed a decline in annual CPI to 1.9% in November, higher unemployment (out today) would underpin the bid in bunds that pushed 10y yields back below 1.40% (swaps sub 1.70%)..