Stuff I Don't Understand...(not an exhaustive list)

Markets had a strong bounce yesterday on derisory volumes. In Europe they ran around 62% and were c 75% in the US. It may be end of quarter but no one was doing anything yesterday. Today the rebalances are happening and there are a few decent program trades out there but cash volumes are still featherlight at 64%. It’s interesting speaking to a few desks at the bulge houses today, they all have decent programs on and they’re all very heavily skewed to buy. You would think this would have the market firmer this morning.

The UK economics didn’t help us however and while the Nationwide house price number was better (although the report notes this was on very light activity), the Q1 GDP figure was revised lower and came in with the worst drop since 1958. Greenshoot that. There’s been talk recently that the UK data has been better and the UK may be the first to exit the recession. I pretty much subscribed to that and certainly feel there is more bad news to come from Europe however, given the recent data out of the UK, I am beginning to question that. Looking at the recent data, GDP –bad, retail sales-bad, public sector borrowing – bad, mortgage approvals – bad…and these we bad vs consensus not just in absolute terms. There hasn’t been much in terms of better numbers, jobless claims came in a bit better a couple of weeks ago and the house price number today and that’s about it. GBP has given back the gains it had made prior to the number but I would’ve thought it would move more.

Even stranger are the commodity moves, no? The Sydney Morning Herald is running a story about China ending their commodity stockpiling. To be fair, this story was out yesterday in the Chinese press. Nevertheless, referring back to MacroMan’s impressive charts, we can see just how above trend Chinese commodity imports have been this year. Still, commodities are up, as are the commodity stocks and the commodity currencies! Go figure. The IEA also cut its forecasts for oil consumption and demand and what happens?? Oil bounces to $73.

While this is all counterintuitive to me, I think the only way I can explain it is through the fact that in essence, these are all the same trades: long oil & commodities in general, long equities, short $, long GBP, long AUD,NZD,CAD. These are all expressing the same view, long risk and much of them really, are in fact, just long China. While risk appetite has waned of late for sure, it has not disappeared (see the VIX for clear evidence of that), and often the favourite themes continue for longer than we’d think and take a long time for reality to kick in. Remember how long the market warned of demand destruction last year before the oil price actually took note and decided to descend from its 120+ levels ... about 4 months. Most things I see and read make me believe this whole move is predicated on unsustainable hope and I’m confident that it will pan out that way. Trying to work out when is decidedly trickier however.

Range Roving

Yesterday’s rapid (or should I say vapid?) market move up was met with what seemed to be a universal WTF?? Some pointed to the extension of Fed liquidity programs as a reason but that announcement came out post the move and the market travelled only steadily East after that. I couldn’t see a reason for it then and still can’t now. To be fair, the GDP number was revised slightly better but the jobless claims certainly came in worse. Anyway, it went up, end of story. Unusually, with equities rallying, bonds had a strong bid too with the 7 year auction coming in better than expected with a bid to cover of 2.82 vs an average of 2.35.

The economics today were poor however. Although the Personal Income was up, this was due to transfers under the stimulus plan. Crucially private wages were down $12.4bn vs -0.7bn previously. Wage deflation is not going to help the economy or the argument of the Inflationistas. Interesting to see that in spite of the transfers and bigger overall number, personal consumption came in bang in line with expectations. This extra money is being saved not spent…the savings rate at 6.9% is the highest since Dec 1993. The VIX fell back to the 26 level, the lowest it has printed since 12 September…so are we getting too complacent with our levels? Perhaps not, maybe we’re actually too bearish. The Bull/Bear Index continues to tick steadily up and is often seen as a good contraindicator. The last two weeks has seen us range trading again albeit in a parallel and lower range than the 2 weeks before.
I’m wondering what the catalyst is to get us going again, one way or the other. Earnings aren’t too far away now and with 2/3 of companies beating at the net level last time round, it will be interesting to see how many can maintain this, and more interestingly, where these beats come from. Last quarter, 2/3 actually missed at the revenue lines and the difference was made up through cost cutting. How much of this has been done, how much remains? Or can companies actually deliver strong revenues this time and see that flow through to the bottom line? Given the negative comments from CEOs and the sky high rate of insider stock sales, I wouldn’t bet my "not soon to be inflated out of mortgage" on it.

Nothing Ado About Much

There were some big events yesterday, but in the end, we’re back at ex ante levels. Markets are drifting this am post a strong start. The genuinely better Durables number yesterday provided a fillip for equities (although the new homes sales should have tempered things you would think) but they could not hold onto their strength; fading into the Euro close and continuing to do so post the Fed statement.The market was also shaken somewhat by comments from Republican Darrell Issa claiming the Fed was was engaged in a cover up over Merrill Lynch losses around the time of the BAC deal. It’s only speculation (although pretty plausible) at the moment but a cover up from these guys would, erm, dent their integrity to say the least. Anyhow, yields spiked as the Fed announcement made no note of the deflation threat and said it would not be expanding its QE program. They did however say that rates would be kept low for “an extended period of time” so I’m not sure they aren’t concerned by deflation. It certainly appears they aren’t overly worried by the reflation trade running away with itself any time soon.

The SNB donned its size 12s and entered the FX market again yesterday and given the moves earlier today in the Swiss crosses, there is talk it’s laced up its boots again today.

Within the equity markets, all sectors are down but the main movers are the AgChems, following on from Monsanto’s disappointing performance yesterday. It’s been a tough old couple of weeks for the sector since the NuFarm warning a couple of weeks ago, Agrium and K+S too. GFI have come out with long Wheat call today which I think is interesting. Given the feedback from these companies is that fertiliser demand is down (according to the Brazilian National Fertiliser Assoc, Q109 fertilizer consumption down 24%), and the cure for low prices is…well, it’s low prices (the converse is of course, also true!), so low prices => less supply => higher prices! And if you’re a dollar bear there is that angle too.

Today also brought another bout of cash raising, this time in the form of CBs with Abengoa, Suedzucker and SGL Carbon raising circa Eur 600m between them.

Outside of that, later on today we have the jobs numbers and the final figure for Q1 GDP and expectations are for no revisions. Equity volumes are running at 80%. Feels quiet, is quiet, is Summer.

Short and Sweet

Equities are somewhat rudderless again today as they see-saw from red to blue ahead of the ECB refi and Fed decision. The Euro which confounded (certainly my) expectations and rallied strongly yesterday has stalled today and with GBP’s rally, EURGBP is taking a bit of a dirtnap. The greenback continues to fade with the commodity currencies in particular posting strong gains again today.

The Japanese trade data overnight was poor and as Brad Setser asks today, given the Chinese expansion over the last year, why hasn’t this fed through to the rest of the world? Japanese exports to China are down 29.7% vs -25.9% in April. Still this is better than exports to the US and Europe; overall, exports were down 40.9% vs 39.1% in April. Oh, US and Euro exports to China are down too…but still, China’s going to lead us out of this.

Ah, the results of the ECB refi have just been released with the number coming in at EUR442.24bl, estimates were c300m so I would expect to see Euro pressure. Some are saying this is positive for risk appetite, frankly it just seems like another buying time exercise to me so I’m sceptical as to whether we’ll see the market take too much notice.

Countdown

It is really, really tempting to say this is it. Rally out, reality in; and this could well be it; I tend to think so. But we do have a couple of days of event risk ahead so it would behove us to exercise a little caution before piling in on the short side. Tomorrow, the results of the ECB refi are announced and then later on we have the Fed decision and statement. As I said before I’m not sure equities will pay that much attention to the former and the latter, hmmm, I dunno, I struggle to see the market believing or pretending to believe an upbeat statement...and indeed it will be hard for the Fed to come out with one. Still, you never know.

It seems that companies themselves aren’t waiting for the outcome of the these events and yesterday’s sell off and worries of a continuation on that theme have probably expedited the decisions of Drax, Renewable Energy and Peugeot to raise some cash asap. Volumes are running healthily today at 120% of 20 day average, which could be instructive if the market was actually moving today but equities are sharply unch. Perhaps we’re being supported by the stories out of China of a repo rate cut to encourage lending (but hold on, I thought lending was up in China, no??) and also of the Nat. Statistic Bureau coming out and saying Q2 GDP of 8% was on its way and that the economy had bottomed. In any case, we’re flat-lining here and the real moves are happening in FX. The Euro is having a big bounce, and ahead of the slew of Euros coming into the system with the Refi, this vexes me. Speaking to a contact in FX, I’ve been told Middle Eastern funds have been selling $ all morn and buying EUR and GBP. Well cable is off today and EURGBP is really having a bounce so it doesn’t look like there’s much bid for GBP at all. BOE Chief Economist Dale made some comments but they didn’t seem to have much in them. Commodity currencies, especially the Kiwi have stemmed yesterday’s haemorrhaging and that can be attributed to the China stories and the m&a movements and musings in the sector.

It is interesting to note that the World Bank GDP cuts that got so much press yesterday actually look like they were released mid June! I hadn’t noticed this but saw it on Naked Capitalism. Sometimes the market just ignores what it doesn’t want to hear. At the moment though, it seems focused on the risks, and with more negative statements coming out today from Peugeot, Maersk, BASF et al, I don’t think it will take much to tip us lower; probably not until after tomorrow’s events however.

Risk Off

Quite some moves we’re seeing today. There are plenty of people asking why we're off 2%. A few months ago, no one would bat an eyelid at a couple percent move in the major indices, but things have changed. Asia performed ok, up c 1% on better business confidence in Japan. Alas, here in Europe we weren’t quite so sanguine and while the IFO expectations produced a better number, the assessment of current conditions did not. Did this cause the sell off? I don’t think so really but it added fuel to the fire. Coming in this morning and some of the tell tale indicators were moving against risk appetite; DXY up, bonds had rallied, oil was off a couple of bucks, yet equities were unch. Something was going to give and in light of those other moves, equities were always going to have the odds stacked against them posting a blue performance. Throw in the World Bank cutting their forecasts for the global economy and there was more negativity for investors to focus on. Even the old bear Prof Roubini came out of hibernation and told us why the market is going to fall (the market is pricing in a strong V shaped recovery and the earnings growth isn’t going to be there so the real economy will provide shocks to the market).

The markets are not exactly voluminous this Monday, with cash at 80% and futures at 70% of 20 day average, according to the UBS Voluminator…and I’m not going to argue with something so aggressively named. I’m not sure there’s much reason to see a big change in that regard over the course of the week because while there are quite a few macro releases, there probably won’t be a huge amount of excitement surrounding them. The ECB refi facility should garner some interest I guess but I don’t think it will be all that some are making it out to be. Outside of that, we have the Existing Home sales tomorrow, Durable Goods, (which is probably the most important number of the week) and mortgage apps on Wednesday. These will be followed by the FOMC decision, although all eyes will be on the statement as there won’t be a change to rates. GDP figures come on Thursday and Friday sees the Personal Income and Spending numbers which should provide more ammo for the inflation/deflation debate.

Overall though, equities feel muted and heavy and with, to name but a couple of things, the recent data confounding the recovery argument somewhat (see today’s UK house price release) and the elevated level of insiders selling stock (highest level since Bear Stearns, I have read), I see no reason to be anything other than bearish; and at this point it looks like this view is starting to play out. We’ll just have to wait and see if it gains traction.

Making a Point of Not Talking About Expiry

The market had a little bounce yesterday, a bounce-ette if you will, post the better than expected data. The Philly fed came in well ahead of expectations but the real eye-catcher was Continuing Claims printing lower than the previous week for the first time in 2009. A little bit of deduction and it’s not too hard to work out that last week was…the high. Does it seem counterintuitive to think these previous claimants have now found jobs? When you get results like those from Fedex, and you see statistics such as the number of hours worked declining, it is clear the real economy is still very much in trouble. When companies scale back they tend to cut hours worked before actually cutting headcount. It makes it easier and less costly to increase production when things turn around. No severance pay, no search costs when it comes to rehiring; it makes sense. So it seems surprising that the continuing claims fell last week, no? Surely companies would just allocate some more hours to their existing workforce rather than hiring new staff? It’s interesting to note however that unemployment benefits last for 26 weeks. Continuing claims rose steadily for 22 weeks running. Now you can get extensions in cases etc but it would be my guess that the decrease in claims is largely the result of people becoming ineligible for benefits and not actually finding jobs.

I saw a push yesterday for the imminent return of risk appetite should next week’s ECB refi facility have a lot of takers, which this piece was saying it would, and I don’t disagree with the many takers part. I wonder though…swapping illiquid assets for cash or cash equivalents has been done before although admittedly the 1 year term is attractive, but will the equity market pay that much attention to it? I’m not sure it will. What may well react (although not react well) however is the Euro if all these hundreds of billions of Euros are handed out. Will it simply hit the Euro while employing another buying time strategy?

Outside of the de rigueur doom and gloomery (which I wouldn’t persist with if I genuinely saw something which changed my opinion); something I haven’t seen in a while, a single stock research note getting real traction. Exane have a big piece out on Heineken today, the central tenets of which are A) Buy it…and to back that up…B) Cost savings to come through and C) Raw material price falls will benefit them. UBS have Heineken on their conviction list and published a European Strategy piece last week with their top picks. Anyway it’s up 5% today (and while a bit of good weather is always a good excuse to buy a beverage company), my point is this; people seem to be looking more for best in class names and willing to trade them and believe they will outperform their sectors. During the times of hyper volatility, intra-sector correlations were pretty close to one and buying X to sell Y probably wasn’t going to get you very far. With the fall in volatility, and I believe, even though I am bearish, we won’t see volatility return to the previous levels, or anything like it (I’d point to March 9th VIX to back this up), that there is better opportunities for individual stock selection within sectors. Although for sure, if the market tanks, I’m certain you’ll still make good money getting short of SXAP,SXPP, SX7P and long SXDP, SX3P, SXKP etc etc, you’ll just make more doing the stock specific groundwork and sorting the good, the bad and the ugly.

Retail (Shock) Therapy

It must be a quiet day; CNBC are still showing clips of President Obama killing a fly. It is impressive dexterity for sure, but hardly newsworthy. The SPX exhibited little price action or conviction yesterday as it flirted with the 200 day only find a level there, for now anyway. The risk currencies have had a bounce this morning with the exception of GBP which has slipped on the retail sales banana skin. The numbers were worse for sure but we do need to remain cognisant of the fact the ONS had been inflating the figures for the past 2 years…by 50+%. So perhaps taking that into account, they're not that bad, relatively anyway? The report does note that May 08 saw an unusually high number due to the better weather (and the fact they were cooking the numbers??). All that said, May 09 was not exactly arctic, either in temperature or indeed in the markets. The Green Shoots surely would have encouraged people to go out and spend more, no? Anyway, the number sucked and that, combined with the Net Borrowing data printing a high have led to the GBP tumble.

We had 3 more cash calls this morning (Marstons, GKN and Wavin) and a CB from Air France. We had $64bn of stock issuance in May, that is almost twice the previous record of $38bn according to TrimTabs Research and this pace has continued in June. I’ve said before that companies don’t issue stock when they think it’s cheap and the research shows historically high levels of issuance lead to poor subsequent equity performance. You can see the details on the PragCap link, you need a subscription to access TrimTabs. Volumes are pretty healthy, running c100% 20 day average although they are off the lofty levels of 150% we saw this morning.

Lastly, on a quiet day, I found an amusing piece on the Austrian Filter blog giving another example of why we should be wary of Administrationspeak…
Timothy Geitner: "Don't Believe Us!"
On a speech given at 11:10am on April 6, 2008, Timothy Geitner advised Americans to"...be wary of any organization that claims to guarantee success and demands upfront fees."The only organizations that I can think of that fit that description is Bernie Madoff's Hedge Fund and the Federal Government. In fact, when testifying before Congress, Tim Geithner repeatedly stressed two facts: 1) That his plan will work. 2) That it requires upfront funds provided for by the tax payer.

When Less Bad is Good Enough No More

A fall for equities yesterday, but it was nothing to write home about and SPX held above its 200 day. This morning’s newsflow was not so positive with warnings from SSAB and Sandvik and the market began to drift after hour 1. Interesting on Sandvik, they issued a veiled warning last week at a JPM conference and the market largely ignored it. Not so today. I think this is indicative of the mood change the market has undergone. Typically, it is the miners, cyclical and financials leading the way down. I even saw a lesser spotted negative headline on China!! RTRS-CHINESE ECONOMIC RECOVERY NOT YET ON SOLID FOOTING-XINHUA. Although looking on the Xinhua website I couldn’t actually find the piece. Perhaps The Ministry of Truth got its hands on it? Or maybe it’s just a misquote? Or else I just missed it.

The UK employment data was better than expectations although the earnings continued to decline. GBP has taken a beating post this, I’m not sure why, wage deflation continuing and curbing interest rate hike expectations potentially? In any case, a cursory amount of digging unearthed talk that Citi had sold a big chunk of Cable at 1.643 on the initial uptick and took out all the stops.

Spoos are perched right on the 200 day at the moment so all eyes will be on whether they can hold that level. Volumes are healthy enough today, running c100% but that’s not enough to see real conviction in this sell off. My guess is that the market is waiting for more clarity and conviction, with the real sellers being lower down.
The CPI and Leading indicators provide the excitement for the afternoon although after the PPI yesterday, expectations will be for another tame number. Interesting to note the increase shown in housing starts number yesterday was deemed as positive. Sure it would be ordinarily but there is plenty of supply out there already. More houses being built, not sure that’s not going to aid any recovery in prices. In any case, perhaps the market is more willing to look through these numbers. We saw a better ZEW and “better” Housing Starts yesterday and we still went down. I can’t help believing that a few weeks ago; those numbers would have been greeted with much optimism. Less bad does not really cut the mustard at the moment, the market is looking for more, and I’m sceptical as to whether that search will be successful.

So Is This It?

Last Friday I mentioned a piece about big call spread trades going through on the VIX. July 45/55 call spreads to be precise. It stood out because it was clearly calling for a big market fall, not only that, but a market fall pretty quicksmart too. Who knows if this punter knew something but the timing pretty much bottom ticked the VIX which rallied 10% yesterday and 15% over the last few days.
Equity markets suffered their biggest fall in a couple of months but the reaction is slightly muted this morn. Volumes are at c80% with the defensives again providing the majority of the support. EStoxx closed below the 200 day MAV but SPX didn’t and it makes sense I think that people are reticent to really follow through on the downside until that happens. Oh and we’ve had some good news too, which probably doesn’t’ do any harm, ZEW came in better and the UK inflation numbers came in ahead too. Which is erm, good news right?? Then we get to have rate hikes which stifle growth. High inflation and high unemployment can co-exist. Dr Phillips was disproved…and this is called stagflation…and if that’s a cause for celebration, then we really are delusional. Anyway, I digress, CPI came in at 2.2% YoY vs est of 2%. RPI was ahead too. Sterling caught a bid on the back of this as the Inflationistas point towards rate hikes sooner than previously anticipated. However, look at the trend of these numbers, and also how the actual has come in versus the forecast number over the past X months…this is the lowest CPI print we’ve seen since Jan 08 and typically the actual comes in higher than expected. It’s getting a bit more traction today however.

The Dollar is falling foul of a Russian 180. Despite Kudrin commenting yesterday about not seeking an alternative to the Dollar, Medvedev has turned around today and showed him who’s Boss by calling for…an alternative to the Dollar! Resource stocks are on the fall today but resource currencies are enjoying a bounce. EURGBP continues its trend downwards as Eurozone issues mount and yesterday’s comments from Papademos about banks in the area facing further losses of up to EUR283bn certainly hasn’t helped.

I’m more convinced we’re at a potential turning point in the market here and especially so if the SPX can break through its 200 day and I still like the defensives on this basis. We’ve been near enough to here before though so you can’t discount the wild rally for not much reason but I think we’ve exhausted the uptrend and the path of least resistance is down as reality hits home.

Bouncing Bonds and Lurking Bears

US govies didn't have a friend in the world until last Thursday's 30yr auction. The rallied hard on the back of its success and this has followed on today. The Greenback too is continuing upwards. Given this heady mix, ordinarily you’d expect equities to be off on a day like this; and they are… although in light of the positive, if somewhat (very) premature talk of exit strategies coming from the G8 meeting over the weekend, you’d certainly have a decent case for seeing a market in the blue today, especially given the market’s propensity for blinkered Green Shootery. However US assets are getting their bid from Russian comments about it being too early to talk of an alternative reserve currency to the dollar and it looks like the $ strength is causing the equity sell off as the resource and energy names retreat for obvious reasons. Markets have been flat-lining for a few weeks now and we’re expecting a break, one way or the other. Today’s move is providing fuel to the bear fire although it should be noted that we’re still within the recent range, albeit at the lower end…so support could well be met but a break down towards the 2400 level in the Estoxx would certainly give me more confidence in the sustainability of running a short. Given the market wariness of a possible sharp move one way or another, it is not surprising to see that sector performance has had a defensive bent to it over the last few days and this continues today, while all sectors are down, the foodies, tobaccos, telco and pharma are holding up better than their cyclical, resource related and financial brethren.

TomTom provided the relative excitement on Friday, jumping 20% on talk of Apple taking a stake via a capital raising. The rumour was half true. Unfortunately, not the half anyone who bought it on Friday wanted. Another company taking advantage of the rally, and who can blame them? Could be good timing too as there’s a bit more impetus to the bear camp today with a Barron’s article getting quite a bit of press, saying we’ve come too far, too fast and Forbes running a story noting Sheila Bair is still cautious on the banks and expects further failures. Remember though, it’s expiry this week and low volumes in expiry weeks can lead to exaggerated and unexplained intraday moves.

Treading Water

The market has been a bit of a non event so far this month. We’ve had a 4% trading range on the Eurostoxx and we’re smack in the middle of that range at the moment. Lack of conviction in the imminent sustainability of the rally has beset the bulls and volumes are low as a result. Even the AAII Bull index has ticked down .
The retail sales number yesterday initially buoyed the markets until the devil in the detail was outed and it was clear the beat came from gas, up 3.6% with necessities robust and the higher ticket consumer items continuing to lag. This lack of conviction is manifesting itself in the defensive outperformance today. The pharmas are strong, MS had an upbeat note yesterday, UBS has a big push on AZN today, Liberum are touting Roche and the Telcos are a good market too. That said, the pharma volume and move is particularly impressive so if anyone has a better reason (DXY rally maybe?), I’d love to hear it.

The equity market’s insistence on trending sideways has not spread to other asset classes and yesterday saw a big bond rally. The 10yr traded just about the 4% level intraday, but rallied back hard post the successfully $11bn 30yr auction which came in 4.72% (vs consensus of 4.8%) with a bid/cover ratio of 2.68 (vs 2.14 at the previous auction). While the market has been rife with talk of increasing inflation expectations, and for sure this has contributed to the bond move, the data have not corroborated this, as yet anyway. I subscribe to the school of thought that a substantial amount of the move has been asset allocation out of safe and into risky and certainly the pickup in individual investor appetite for equity mutual funds has been impressive.

Anecdotally, I saw a piece today talking about heavy July 45/55 call spread buying on the VIX which is presently at 28. Somebody thinks there's a big dirtnap around the corner that's for sure.

Chinese Whispers

Asia caught a big bid last night due to press reports that Friday’s May Industrial Production number will come in ahead of estimates…+8.9% YoY vs ests of 7.7% and an April number of 7.3%. Commodities have understandably rallied hard as people hang their hat on the horns of the Chinese Bull run. Remember, as noted before, China power generation is down YoY which doesn’t fit with increased IP.

I mentioned yesterday the strong increase in Iron Ore imports despite flat steel production and have previously doubted China’s ability to lead us out given their export based economy. Today, Macro Man presents some interesting charts showing vast increases in import volumes from China in coal, copper and iron ore, and way above trend from 2003-2008. Interestingly, this is not the case with oil however which is only on trend.

So we see imports up, exports down, and down again in April vs the bounce in March
And South Korea, which releases macro data the quickest just came out with export data for May, showing a fall again…so we may infer exports economies are continuing to suffer.

How then is China holding up so well? Ok it could be data manipulation for sure, but I read an interesting piece from Brad Setser the other day. He posits that while China relied heavily on exports for growth, there was an underlying domestic demand which remained unrequited as the government kept reserve requirements high and loan/deposit ratios low to keep the economy from overheating. So now that exports have fallen, is that pent up domestic investment demand being satisfied as banks are freer to lend? Can it offset the export fall? It’s certainly a theory. I’m not so sure. Most of what I’ve read points to government banks lending to government sponsored projects and then there’s the whole issue of power generation decrease. Still, it’s food for thought and something to keep in mind. We’ll see what IP number is released on Friday although I can’t imagine it will be anything other than bang on the whisper.

Something is Rotten in the State of Last Hour Trading

We have light volumes across Europe again today, 80% or so…as was the case in the US yesterday too…although we did get an uptick in volumes for the mandatory ramping of the index on anything that looks like a bad down day. It is odd the way this continues to happen. There are plenty of conspiracy theories out there, who knows what the reality is but it certainly is strange for a market to move like this, so violently on no news…see the Emini and SPY charts

It is amusing to see the Obama administration come out straight faced, without a hint of irony and urge European Banks to undergo more rigorous stress tests. “Do as I say, not as I do” springs to mind. Banks have stalled in the last couple of weeks and with risk appetite waning, further questions being asked of the European banks and issues such as Latvian devaluation hanging over them, I would think the risk is to the downside.

The performance of the Baltic Dry has been a source of optimism for the Gr**n Sh***ers and why not, it’s a leading indicator after all and has enjoyed 400+% rise from the Q408 lows and a 140% odd rise since April. Well firstly, the BDI is based on USD so the dollar fall has helped it but aside from that caveat; I’ve mentioned before talk of China bulk purchasing and stockpiling raw materials and I came across an article today in Maritime Global News. It casts dispersions on the sustainability of the BDI rally, noting Chinese iron ore imports have risen 27% annualised YoY while actual steel output is largely flat YoY.

Away from this we did see some more good news on UK house prices, with the RICS survey coming in better than expected. I saw some guy on CNBC yesterday talking about the UK housing market and saying that XYZ bank was starting to offer 90% mortgages again “which is good.” Erm, isn’t that the exactly the kind of thing that got us into this mess in the first place?

NFP Hangover

The NFPs have really shaken things up. Not so much in equities, not yet anyway. There were huge bond moves as the curve flattened on Friday and has continued to do so today. The better number allied with the Fed’s Lockhart saying we could see rates rising conspired to make short end yields jump 30bps. At the longer ends of the curve, yields are pretty much at pre NFP levels. This has of course given a big fillip to the previously downtrodden dollar and caused the soaring commodities to come back to earth somewhat. Fed Fund futures are pricing in 40% chance of a rate hike by year end.
We’ve had the inflation trade playing out big time recently in spite of the data not really supporting it (see Friday’s NFP detail and the slowdown of wage inflation for one of many examples). Also, as mentioned before, in order for the so called money printing to be inflationary, we’ve got to see a pickup in money velocity. If however this trend continues and we have a flatter curve, that stellar Q1 that the banks had, locking in those fat spreads, will be a thing of the past...see the narrowing we've had already

The Euro is taking a bit of a knock today and the news of Ireland’s debt rating cut by S&P won’t be helping that either.

Equities are reasonably quiet today with volumes running around 80% of the 20 day average and most I’ve spoken to have said they are net sellers, mainly for hedge fund players. The former is hardly a eureka discovery given the market is down but the latter is further evidence of an increasing trend over the last couple of weeks…bears are more comfortable being short than they were a month ago.

Jobs All Round

Well it was all about the NFPs this week and they didn’t disappoint. The whisper was better, the actual was way better. But then the unemployment rate was worse, reaching a 25 year high. The market spiked, $ fell and bonds sold off. We’re on the road to recovery so saddle up and enjoy the ride. Looking through the numbers and they looked reasonably robust. Government jobs weren’t propping this one up, in fact they were down and the unrounded unemployment rate was (only) 9.357. Joe Lavorgna of DB however pointed out something interesting…
” In particular, the weakness in hours and earnings are reason for concern. The length of the workweek declined by 0.1 hour to 33.1 hours, which is the aggregate hour equivalent of an additional loss of about 350k jobs. More importantly, the manufacturing workweek also declined (39.3 hrs vs. 39.5 previously)?this is a negative sign for inventory restocking in the current quarter, because inventory rebuilds have historically been accompanied by a rise in manufacturing hours worked. Average hourly earnings rose 0.1% in the month, lowering the 3- and 6-month rates of change to 1.7% and 2.2%, respectively. In short, wages are rolling over”

So the lower hours compensate for the better number and wage inflation is slowing. The detail certainly seems to have taken some wind out the sails of this move. $ reversed its previous loss and bonds have rallied back somewhat too with the 10yr around 3.83 having been at 3.90 earlier and equities have come back too.

It turns out the GBP sell off yesterday was due to the FX hedging on the Rio capital raising. This makes more sense to me as I was sceptical of the idea that Brown leaving would be taken badly by the market. Hope springs eternal and all that (and indeed hope has proved a pretty good investment strategy in the last few months). Remember the reaction of the market to the news that Geithner was going to be appointed…

Brownian Motion

The markets were ticking along doing not very much. The impressively named UBS Volumintor was talking of 80% ADVs. BOE unch, ditto the ECB (although to be fair the real interest always comes in the press conference anyway) when along comes a rumour that the beleaguered Brown is getting out of Dodge. Markets fell, as did Sterling. I thought they would have firmed given all the bad press he’s been getting. The Sterling move was also attributed to a rumour that JPM had a big sell ticket, c GBP5bn…talk also this was related to the Rio stock sale.

The resources sector was under pressure anyway with a big sell off in CAD, NZD & AUD overnight but the Rios chat clearly hasn’t helped. Never fear however, the panacea for all market wobbles as we know is a less bad macro number. Enter the continuing claims, a mere 6,735k, and that combined with the words from Trichet, which were reasonably sanguine (albeit with the caveat that 1% rates are not necessarily the lows), and the markets feel stable enough.

Interesting to note that equities rallied sharply in the last 30 mins or so yesterday as the Plunge Protection Team buyers came in and the market bounced off its 200 day MAV. See Estoxx below but the chart is the same for the SPX.
With the imminent NFPs tomorrow will this level be held? Most other assets which have broken through the 200 day have not looked back since; see DXY, GBP, the 10yr etc etc. One cross I’m looking at is EURGBP…I’m bearish on it and have been for a long time as I’ve mentioned before…but that is testing its 200 day post all the Brown hoo-ha. It will be interesting to see if the GBP momentum continues.

Sheikh Shakes the Market

I didn’t get around to penning anything yesterday. A combination of being busy and also a little bereft of inspiration. No matter, a couple of things of note over the last few days. As the $ weakness continues, it’s pretty clear FX is driving the markets at the moment. It’s the commodities and commodity stocks that are trading well as the banks have taken a back seat in the last few weeks. Equities are feeling a bit heavy this morning and it’s not that surprising; the BARC placing yesterday, Gamesa (and MS now owning 5%, ouch), MS, JPM, you name it they’re raising money. Sheikh Mansour’s come under a bit of stick for selling Barclays when the market thought he was a long term investor. To be fair, he has made 70% on it, which is be a pretty good return for a long term investment, let alone a few months and ultimately, investors are in things for the return, not the time frame. If the return comes quicker than expected, and you exit, does that make you any less serious an investor?

There are some headlines out from China saying a quick rebound is becoming less likely. I’m not sure when it was ever that likely but the miners are taking a bit of a breather on the back of this. I’ve mentioned before my doubts about a China led recovery and have talked about things like lower power usage, lack of credit availability to non government sponsored projects etc. I was talking to a mate the other day who’s just come back from 3 months in Beijing (just to give his thoughts some credence, he was out there working in the metal markets, not trying to find himself or anything soulful or worthwhile like that). Now this is anecdotal for sure but he was of the opinion that credit for the man in the street is still very hard to get and you can see how much slower things are over there by virtue of the fact there is far less air pollution than there used to be. I tried to dig out some data on this, the Air Pollution Index (API) but it seemed to only be accessible on a daily basis and then I got bored frankly. Who would have thought accurate Chinese data would be hard to come by??

This last piece is interesting, if not necessarily instructive and was picked up on by David Rosenberg. On Monday, equities rallied 2.5%. On that same day, the VIX rallied almost 4%. This is very odd. The VIX index has historically fallen over 95% of the time that the market rises. Even stranger, at no time in the last seven years did a 2%-plus surge in the S&P 500 coincide with an increase in vol … until Monday. For some good thoughts from Rosenberg, you can see them here…

Frank T.J. Mackey says...

“…Respect the Market”

Low volumes, main stream media cheerleading, data manipulation, these figures aren’t actually good, this is all going to end in tears. V shaped, U shaped, L shaped. Whatever you want to say or believe, this market only knows one way at the moment and it isn’t South.

A better set of numbers today, PI up (although saving at its highest level since the data series began in ’59). ISM a touch ahead too. The beat coming from prices paid. These two adding fuel to the inflation fire and we’ve seen treasuries sell off since. To be fair, order backlog and new orders increased. But then to be equally fair, they’re still below 50, so not growing.

Macro Man noted there’s a good chance of the market closing above the 200 DMA today. What next. Well everything that has traded through it’s 200 DMA of late has carried on storming through. I would bet against equities doing the same. That’s not to say that I don’t agree with a lot of what’s in the first paragraph or the caveats of the second…I’m just cognisant of the (admittedly adapted) words of Frank.