When Governments Say No More...

What happens then?

Yesterday’s price action was interesting I thought. The market tried and failed to rally. The consensus was that the home sales number took us lower and that’s a pretty convenient explanation. I felt then, and sent out a piece accordingly that the real reason for the sell off was the cutting of the size of the TAF and TSLF. Existing homesales is a volatile number and while it certainly didn’t help the market, I struggle to believe it was the driving force. It could however be just that over the coming months if the Pragmatic Capitalist is right.
Anyway, I was a little surprised not to see anyone really talk about the cuts to the Fed programmes. Jim Reid of DB mentions it this am and so does Macro Man but that’s about it. I guess there is a pretty easy argument that these programmes were far from heavily used so cutting them back shouldn’t make a difference…or that the Fed are winding things up because they think things are looking up, and to be fair there were some statements in the FOMC statement to that effect. However, I think the market is starting to wonder about what happens if/when the massive government intervention is no more. Where to from then? It’s not hard to argue that we are priced at the moment for a sustained recovery and anything short of that will lead to a rude awakening. Nor is it hard to argue that a sustained recovery is unlikely in a bailout free world, given the lack of pick up in the consumer.

As I type the headline durables number is very poor with the largest drop since Jan 09. Ex transport is flat but ex defense is -2.4% with a slow down in orders of non defense aircraft -42.2% vs +98.2% previously.

Sterling continues to get beaten from all angles while DXY is making hay. Predictably bonds are rallying and oil is being hit, as are the resource currencies. This is two days in a row now that risk off has been en vogue.

While it feels very much like this could be it, the end of the bull run or bear market rally or whatever you want to call it, we’ve said that many times before and been stung many times before. Also, bear in mind, we only sold off 1% on SPX yesterday and 1.7% on Estoxx and today’s moves aren’t exactly massive either. We wouldn’t bat an eyelid to those sorts of moves on the upside, so perhaps there’s an element of confirmation bias in our focus as the market moves south? It could be the beginning of the end of the bull (in every sense of the word), but I think it will take a few more down days and lower prices to really get the sellers to pull the trigger as trading downside momentum has been a treacherous business of late.

Any Given Friday c2007

Well it may be a quiet day here in Europe, indices little changed and little intraday movement to boot; but the rumour mill is working overtime, bid spec in Man grp from BarCap, Telefonica for KPN, Eni for Tullow, Chinese stakebuilding in IPR and cap raising in Pru. It’s like the old days, a Friday in 2007! And why not, for as we know, the last two years never happened and everything is perfectly rosey again.

The UK CPI and RPI came in ahead of expectations and the RICS survey even showed an rise in house prices for the first time since May 20007. In spite of this, sterling has seen some selling as Merv says cutting rates the BOE pays on deposits could be a "useful supplement" to monetary policy. And the friendless pound can’t even get some lovin’ from the Euro today as EURGBP rallies in the face of the negative ZEW survey. 1.6455 is the next level in cable where stops will be triggered, I am told by those on FX desks.

Equity markets are not wholly voluminous today, running sub 100% of the 20day MAV, which sounds healthy enough but if you strip out the Italian divi washes that number will be lower. Some of the steels are strong today, up a couple of percent perhaps post the Citi note today and JPM note yday. Tech is outperforming too, up 1%. Mind you, if you constructed a rights issue sector, that would certainly be the leader today, in percentage terms anyway, if not weighting Heidelberger Cement up 10%, Petroplus up 7%, Wienerberger up 4%.

This afternoon’s excitement comes in the form of retail sales which could be a decent number. Certainly the auto side will get a big boost from the cash for clunkers programme but how the clean number comes in will be a different question especially if CFC has seen money channelled in its direction which could have been put into other areas.

Monday Musings

With the markets threatening resistance levels on Friday, President Obama came out and bumped some pretty hefty import tariffs on Chinese tyres. China responded in a tit for tat fashion and have started an investigation into chicken and auto part imports.

A couple of things came to my mind when I read this: ok, so Chinese tyre imports are up and have apparently caused the layoff of 7,000 workers. While it’s bad news for these workers, for sure, 7k is a rounding error (on the Nth decimal place) when it comes to the unemployment figures. Is it worth potentially starting a trade war over 7k jobs? I know you can extrapolate it etc but given the tender state of affairs at the moment, it seems like quite a big risk to take to me. If you recall back at the start of Obama’s presidency there were real worries about protectionism from the administration as trade volumes worldwide plunged. Admittedly the world worried a lot more back then than now but that was an issue which really got people talking. And given many believe China is going to lead the world out of this, it probably isn’t the best idea to enter a game of, erm, well, chicken, with them. And also, of the “disruption” caused to the US domestic tyre market the 3-4 years which is under scrutiny here, how much can be attributed to/blamed on Chinese imports and how much due to the most serious recession since WWII?

Anyway, this, along with more equity issuance in the form of Swedbank, Heidelberger Cement and Wienerberger, has weighed on markets today. Interestingly, or oddly, everywhere is down except China.

As equities give back some ground, DXY rallies, oil sells off and the same goes for the commodity currencies. Bonds continue their oddly positive correlation with equities and have sold off to the 3.36 level. It seems we must wait a bit longer for the back to school effect to kick in an volumes to pick up. They are running c80-90% today although futures are tracking higher ahead of expiry on Friday.

Why the About Turn?

The market was full steam ahead first thing this am but has reversed course somewhat. Why so? I think it’s to do with a few things…

First and foremost, and as we’ve noted for a while, fixed income just really isn’t paying attention to equities and this is holding us back. Coming in this morning and the 10yr yield had fallen back through the 3.50 level. This in spite of equities having had broad gains and the fact there hasn’t exactly been a dearth of govvie supply; $20bn of 10yrs yesterday and $12bn of 30yrs today.

The dollar has started to rally back a bit, particularly against the commodity currencies. We saw poor data from Australia yesterday and overnight, comments from the minutes of RBNZ noted that rates were likely to remain unch and that the strength of the currency was an issue. Both AUD and NZD are falling today as is CAD. So essentially, this looks like a bit of a risk off trade.

Thirdly, Zhu Min from the Bank of China has come out talking of asset bubbles forming. Ok, Wen Jiaboa has also said that the country will not pull away from its stimulus plan. This could easily be construed as a positive, albeit an artificial one but it doesn’t seem to have had much effect today.

On top of all this, we’ve had another raft of secondaries overnight and this morning as the insider buying:selling ratio remains extremely high so perhaps the market is just taking stock of this before deciding whether or not it wants to push on, especially as we’re at levels at which we’ve encountered resistance before.

(Still) All About the Benjamins

After a lacklustre start to the day, equities have managed a useful about turn. This is in spite of c$6bn of stock coming to market last night in the US; a really stinky consumer credit number (-21.6b vs-4b est); Alibaba, CSK and Metro Pac sales in Asia; the GEA and Petroplus deals in Europe and talk of Conti following suit in the not too distant future. There should be no rush to buy this market with all this stock coming our way, right? Well, no, wrong it seems and pain trades are dotted around the market place by the look of it, Commerzbank and Renewable Energy sticking out like sore thumbs.

The $ remains the focus today, ironically it is in everyone’s minds precisely because it is so unloved. And with that, bloombergs abound, notifying us of DXY breaking the 77 level. Anyway, as a result of the dollar’s demise, oil continues up (but not as much as you’d expect), the resources are now positive on the day and the commodity currencies are rallying. Even AUD, which given the poor Australian retail sales, home loans and lending sales released today, wudda, cudda shudda put pressure on the currency as rate hike calls are quelled somewhat.

Yet again however, bonds haven’t sold off a huge amount, flirting with the 3.5% level. Now while I said yesterday I’m sceptical about buying into the reflation trade (given the still rising unemployment and wage deflation etc). Still we don’t just need reflation thoughts for bonds to sell off. With the rally we’ve had, you would ordinarily expect to see more funds directed away from bonds and into equities. This really isn’t happening and shows us that the fixed income massif are not so enamoured with the stock market’s ebullience. So something’s got to give, which it is remains to be seen…I’ve got to believe it’s stocks.

All About the Benjamins

Well the market melt up continues. Between the employment data, the return of M&A (Kradbury to be (?) and the DTE/FTE UK tie up) and China maintaining its monetary and fiscal policies, it’s a feel good day for equities.

Not so for the dollar though, it has taken a serious dirtnap today as, not only is the risk trade back on, but China is talking about looking for alternatives to US bonds due to inflation worries, and the UN are in on the dollar hater play too, calling for a new global currency. It is not; it turns out, all about the Benjamins.

Now with all this going on and with gold trading through $1000, it looks like the reflation trade is back on again in earnest. But if it was, surely bonds would have sold off more, no? They’ve actually been pretty well bid so far today. If inflation’s on its way, rates have got to be going up again soon for sure? And the Fed funds futures will reflect this right? Well, looking at them, and there’s not much change there either, showing a 3.8% chance of a hike to 50bps by the year end… now while this is up from the 1.6% on Friday, its actually down from 5.3% at the start of the month, 26.2% at the start of August and 42% at the start of June, you get the picture (see attached). Anyway, it all makes me sceptical as to the veracity of the reflation trade argument and I’d be wary of the jumping on into the resources names, currencies and commodities as a result.

Ominous Background Music

The market is really starting to feel very heavy. Yet again yesterday we failed to move up on a stronger piece of macro data. The old adage that “bull markets don’t end with bad news, they end with good news” springs to mind as the marginal buyer seems to have packed his bags and headed off on holiday, just as other participants begin to make their way back. In a piece of Shakespearean symbolism, it is a cloudy day outside with rain showers breaking through (cue ominous background music). Of course the market isn’t quite as scripted as Shakespeare (despite best governmental efforts) so we don’t know for sure that bad things lie ahead but it kinda looks like that way.

It’s the low quality stuff which is really got smoked yesterday in the US and that looks set to continue today. The ADP numbers were worse and have taken the sheen off a better productivity figure, not that the latter would necessarily have had any impact given the markets disregard for all things positive of late. We’ve got the defensive names again outperforming in Europe as risk is sold, even NZD is seeing some follow through from yesterday’s move. Asia was far more mixed as China ended up on Jiabao monetary policy comments. Tighter, looser, tighter, looser; the usual palaver. The Kospi, of course is still within spitting distance of its highs because it is immune to the rest of the world and Japan took a tumble on the stronger Yen.

It’s tough to find a reason to buy the market here, especially when you hear comments like this from Lou Jiwei, head of China’s $298bn sovereign fund…

“It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose,"

And I would think fingers are on the trigger ready to put the shorts on should this downward momentum continue. Certainly some have already discharged some opening salvos as volumes were far better yesterday. Given one of the arguments against the bull market thesis has been the lack of volume, it is perhaps instructive to see Eminis print 3.2m yesterday vs an average of c1.75. And looking at where the volume went through, it was heaviest at the lows…(cue more ominous background music).

September Shakes

I know September is historically the worst month for equities and people have been wary of an Autumnal market fall, but we probably didn’t expect the selling to start right from the off on day 1. Is it just futures selling? Euro and China PMIs were better; the market should be up no? Well, the UK PMI was light and there is a whisper of a below consensus ISM from across the Atlantic, so perhaps these are the culprits. We also had the explanation of a big Estoxx options print with the resulting hedge being 35k futures to sell. But 600k futures have traded so far today and 130k traded in the 9-9.30 period when the markets fell, so I question if this could be the cause, although admittedly I'm not a Estoxx trader. Or maybe, it’s a bit of catch up being played by Europe after the ravages wrought on China during the month of August.

Tempting as it is to see this as the start of the rollover, especially given the market’s inability to push forward post better macro last week; it behooves us to remain cognizant of the fact that volumes will remain light this week, ahead of the Labour day weekend. Only into and after next week can we expect to see market participants donning their trading hats once more and approaching markets with a bit more zeal.

The bid for bonds has been maintained today as investors become ever more wary and in CDS world, XOver has traded through the 600 level again. While the reason(s) behind today’s equity move has been much questioned, it is interesting to note a bit a risk off yesterday afternoon. Equities were not much changed all day but bonds went better and we saw a big sell off in oil, this in spite of a dollar fall. Much of that dollar move has reversed today however as equities stumble. So perhaps this sell off was in the cards from yesterday afternoon. There certainly is a defensive bent to equities today with tobaccos, pharma, food & bev and telcos outperforming and the usual suspects on the cyclical front leading us down. Utils however, are not showing their usual resilience as E.ON drags the sector lower on a GS downgrade.

All that said, we’re only off 1%. Perhaps the song and dance made of this move is a sign of just how nervous the market is. Cue massive market rally no doubt…