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This morning, when we reported that the latest flood of margin calls, resulting from $600 billion in shares pledged as collateral for loans and representing a whopping 11% of China’s market cap, sent the Shanghai Composite tumbling 3% to the lowest level since November 2014, we noted that local government efforts to shore up confidence in smaller companies had, quite obviously, failed to boost sentiment… or stem the selling.

So, as many expected, just before Beijing announced the latest batch of stagflationary economic data including retail sales, industrial production and fixed asset investment, of which the most important was Q3 GDP which printed at 6.5%, the lowest level since Q1 2009, and missing consensus expectations even as inflation has continued to creep higher…

… the central bank delivered another round of massive verbal intervention, telling investors stocks are undervalued, the economy is sound, the central bank will use prudent, neutral monetary policy and keep reasonable, stable liquidity. Additionally, according to a Q&A statement with Governor Yi Gang posted on the PBOC website:

the PBOC will use monetary policy tools including MLF lending to support banks’ credit expansion
the PBOC to push forward bond financing by private cos.
the PBOC says recent stock market turmoil was caused by investors’ sentiment
the PBOC is studying measures to ease cos.’s financing difficulties
the PBOC to push forward bond financing by non-state firms; calls for private equity funds to support cos. with financing difficulties

In other words, the central bank’s “got this.”

And just to make sure the “all clear” message is heard loud and clear, also this morning the China Securities Regulatory Commission (CSRC) encouraged various funds backed by local government to help ease pressure on listed companies from share-pledge risks…

…click on the above link to read the rest of the article…

China Crashes As Flood Of Margin Calls Sparks “Liquidity Crisis”, Panic Selling

October 18, 2018

China Crashes As Flood Of Margin Calls Sparks “Liquidity Crisis”, Panic Selling

The Treasury’s latest semiannual FX report may have spared China the designation of currency manipulator (for now… in a new twist, there was a section dedicated exclusively to China in the Executive Summary, a clear signal from the Treasury that China is the disproportionate focus of the report stating that ‘it is is clear that China is not resisting depreciation through intervention as it had in the recent past’), but the market was not as forgiving.

In the latest shock to Chinese confidence and stability, overnight Chinese shares extended the world’s worst slump as the yuan touched its weakest level in almost two years, testing the government’s ability to maintain market stability and calm as risks continued to mount for Asia’s largest economy.

Two days after we reported that concerns about pledged shares, in which major investors put up stock as collateral for personal loans – a disastrous practice when stock prices are dropping, emerged as a key pressure point for China’s market, overnight Bloomberg reported that “rising fears of widespread margin calls fueled a 3 percent tumble in the Shanghai Composite Index, which sank to a nearly four-year low as more than 13 stocks fell for each that rose.”

The concentrated selloff, sent the Shanghai Composite down 2.9%, closing at session lows of 2,486, the lowest level since November 2014, as China’s plunge-protecting “National Team” was nowhere to be seen.

Chinese stocks have dropped 30% below their January highs, as the spread between China’s market and the rest of the world grows alarmingly wide.

Meanwhile, local government efforts to shore up confidence in smaller companies failed to boost sentiment, while the yuan tumbled to 6.94, just shy of its one and a half year low of 6.9587 touched in August, after the U.S. Treasury Department stopped short of declaring China a currency manipulator, a move that some interpreted as giving Beijing breathing room to allow a weaker exchange rate.

…click on the above link to read the rest of the article…

Saxo Q4 Outlook: A New Easing Cycle Based on Ugly Realities

October 17, 2018

Saxo Q4 Outlook: A New Easing Cycle Based on Ugly Realities

Saxo Bank, the online trading and investment specialist, has today published its Q4 2018 Quarterly Outlook for global markets, including trading ideas covering equities, FX, currencies, commodities, and bonds, as well as a range of macro themes impacting client portfolios.

“We are clearly at a crossroads on many fronts: globalisation, geopolitics and economics”, says Steen Jakobsen, Chief Economist and CIO, Saxo Bank.

“The next quarter will either see dampening of volatility by a less aggressive Fed, more active easing in China, and a compromise on the European Union budget… or a further escalation in tensions between all three areas. I would not bet against the latter into Q4, but I remain confident that we stand only a few months away from the beginning of a new easing cycle based on ugly realities, not the hope expressed by politicians and often market consensus.

”For now, we estimate that the US economy has peaked – the powerful expansionary cocktail of unfinanced tax cuts, repatriation of capital, and fiscal spending ramped up growth in the US, but these one-off effects will peter out as the year ends. Already the US housing market is showing signs of strain as the higher marginal cost of capital (the higher yield on mortgages, more specifically) is starting to have a material impact on future growth.

”As certain as we are about the US having peaked, we are less certain as to how soon China will reach the bottom of its deleveraging process and begin to expand more forcefully again.”

Against this uncertain backdrop, Saxo’s main trading ideas for Q4 include:

Equities – Setting the stage for a comeback in value stocks

…click on the above link to read the rest of the article…

Forced Buy-Ins Spark “Liquidity Crisis” In China’s ‘Nasdaq’

October 17, 2018

Forced Buy-Ins Spark “Liquidity Crisis” In China’s ‘Nasdaq’

Marking the worst year since 2008, China’s tech-heavy (Nasdaq-equivalent) Shenzhen Composite index is down a shocking 35% year-to-date, and it’s starting to become a self-feeding vicious circle…

As Bloomberg reports, the most recent slump in the teach-heavy index comes despite regulators’ efforts to rein in risks of share-backed loans following reports over the weekend that insurers are being ‘encouraged’ to invest in listed companies to reduce liquidity risks connected to such loans.

Share pledges, where company founders and other major investors put up stock as collateral, have emerged as a pressure point in China’s debt-laden economy, especially as the stock market tumbles.

“There’s a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,” said Yang Hai, analyst at Kaiyuan Securities Co.

“Stocks in Shenzhen typically bear the brunt of loss of confidence in the stock market because of their higher valuations.”

Bloomberg additionally notes that this attempt to slow the impact of this crisis has been ongoing all summer…

China in June told brokerages to seek approval before selling large chunks of stock that have been pledged as collateral for loans, according to people familiar with the matter…

while the top financial regulator in August warned the industry that it’s closely watching corporate stock pledges.

And quite clearly, has failed… with two-thirds of Shenzhen Composite stocks now at 52-week lows or worse…

And it appears investors are screaming for The National Team to step in and rescue them (just like in the housing market)…

“If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk,” said Hai.

“Authorities keep saying that there is room for more polices, but where are they?”

Shock, horror! What are we to do in a ‘free-market’?

Blain: “Liquidity Will Be The Murder Weapon”

October 15, 2018

Blain: “Liquidity Will Be The Murder Weapon”

“Slain, after all man’s devices had failed, by the humblest things that God, in his wisdom, has put upon this earth””

After last week’s stock market ructions, my market spidey senses are tingling… https://morningporridge.com/stuff-im-watching

In the headlights this morning:

Saudi Arabia: forget the IPO and worry about MbS threating an oil war if the West doesn’t let him murder whomever he doesn’t like. $100 by year end?
Brexit: The next millennium bug? Very good interview on Andrew Marr show with head of Next outlined a no-deal will be less than optimal, but it won’t be a disaster. Lets get on with it.
Germany: Merkel’s affiliate party takes a pasting in Bavaria. Who is out a job first? Merkel or May?
Trumpland: It’s the Fed’s fault. “I know more about markets than anyone else..” Blahbity blah blah blah.. That man never ceases to amuse us.

Thought for the day: “It’s always about politics..”

Market Psychology

I’ve never met a stupid chief investment officer*, but market moves never cease to bemuse me. Market perceptions seldom reflect economic reality. The “group-think” that is the market’s collective mind doesn’t have the time to ponder the deeper implications of news and events – it spontaneously reacts to headlines. The group psychology of markets swings from profoundly fearful to over-exuberant in a heartbeat.

At the moment the mood remains profoundly negative – reflecting very scared traders. The stock market’s crash, the news flow, the IMF and others predicting a slowing global economy, Italy vs Brussels, Brexit – and its doom’n’gloom all round. A few bright spots of news, like Brazil, aren’t improving sentiment. The market believed we were doomed on Thursday and saved by Friday. This morning the coin flip says: “we’re all dead by Wednesday.” Risk-off then?

…click on the above link to read the rest of the article…

Has “It” Finally Arrived?

October 13, 2018

Shutterstock

Has “It” Finally Arrived?

Is this week’s 6% market drop the start of the Big One?

With the recent plunge in the S&P 500 of over 5%, has the long-anticipated (and long-overdue) market correction finally begun?

It’s hard to say for certain. But the systemic cracks we’ve been closely monitoring definitely got an awful lot wider this week.

After nearly a decade of endless market boosting, manipulation and regulatory neglect, all of the trading professionals I personally know are watching with held breath at this stage. The central banks have distorted the processes of price discovery and market structure for so many years now, that it’s difficult to know yet whether their grip on the markets has indeed failed.

But what we know for certain is that bubbles always burst. Inevitably. Each is built upon a fallacy; and when that finally becomes apparent to enough people, the mania ends.

And today, there are currently massive bubbles in stocks, bonds and real estate. Every one courtesy of the central banks (as we have written about in great detail here at PeakProsperity.com over the years).

And with no Plan B in place to gracefully exit the corner they have painted themselves — and thereby the global economy — into, the only option available to them is to double-down on the pretense that we’d all be screwed without their stewardship. They have to do this I suppose. To admit the truth would throw the world into panic and themselves out of a job.

Who knows what they think privately? But in public, they give us real gems like these:

Williams Says Fed Rate Hikes Helping Curb Financial Risk-Taking

U.S. interest-rate increases will help reduce risk-taking in financial markets, Federal Reserve Bank of New York President John Williams said.

…click on the above link to read the rest of the article…

As The Markets Sell-off The Precious Metals Rebound

October 12, 2018

As The Markets Sell-off The Precious Metals Rebound

To the surprise of many investors, the precious metals have rallied while the broader markets continue to sell-off. Currently, both gold and silver are solidly in the green while the major indexes were all the red following a huge sell-off yesterday. The Dow Jones Index has lost nearly 1,000 points in the past two days while the gold price is up nearly $25.

However, even though we could see a late-day rally in the markets, and even higher stock indexes over the next few months, the bear market for stocks is still coming. The Dow Jones Index has now suffered two large sell-offs in the past ten months:

In January, the Dow Jones Index fell by more 3,000 points, and the current correction is only one-half of that amount. So, I expect to see a continued correction over the next month. Because October is the worst month for market Crashes, this could be one hell of a blow for not only the economy but also, for investor confidence.

For example, according to the Zerohedge article, Used-Car Prices Plunge Most In 15 Years:

Looking deeper at the core inflation print, it reflected a 3% monthly drop in prices for used cars and trucks following increases in each of the last 3 months, and the biggest drop in 15 years…

And then, of course, the continued disintegration of the U.S. Retail Market, Sears Creditors Push For Bankruptcy Liquidation As Vendors No Longer Paid:

Amid recent reports that Sears is set to file for bankruptcy as soon as this weekend ahead of a $134 million debt payment due on Monday, the only question is whether the filing will be a Chapter 11 debt for equity reorganization or a Chapter 7 liquidation. And contrary to the desires of Sears CEO and biggest creditor, Eddie Lampert, who would like to preserve the core business, others are pushing for an outright liquidation.

…click on the above link to read the rest of the article…

Amid Market Rout, Decade of “Financial Repression” Ends, Capital Preservation Suddenly is a Thing

October 12, 2018

Amid Market Rout, Decade of “Financial Repression” Ends, Capital Preservation Suddenly is a Thing

This will dog the stock market going forward.

Fixed-income investors – a financially conservative bunch buying Treasury securities, FDIC-insured CDs, and similar products that largely eliminate risk – have been getting crushed for a decade: Except for brief periods when inflation dipped to near zero or below zero, their minuscule returns have been eaten up by inflation, or worse, they lost money after inflation, as was the case with shorter-term Treasuries and just about all savings products. But it has ended.

The Consumer Price Index (CPI) rose 2.3% in September (2.27%), compared to September a year ago, the Bureau of Labor Statistics reported this morning. This was down from the 2.9% increase in July. These numbers are volatile, but the trend is pretty clear: Outside of the Oil Bust and a few quarters during the Financial Crisis, inflation is a fixture in the US economy:

The CPI without food and energy – “core CPI” – rose 2.2% in September. Cost of shelter rose 3.3%. Cost of transportation services rose 4.0%. So prices are going up as measured by CPI.

What has changed is that interest rates and yields are also going up, and they’re now higher than inflation as measured by CPI across nearly the entire spectrum of US Treasury securities – and if you shop around, across many CDs too.

This ends a decade of “financial repression” — a condition when the Fed repressed interest rates below the rate of inflation.

The chart below shows the US Treasury yield curve across the maturity spectrum, from 1-month to 30 years, at the close yesterday. The 1-month yield, at 2.18%, was the only yield still below the rate of inflation. The 3-month yield at 2.27% is right on top of CPI (green line). Every Treasury security with a maturity longer than three months is beating inflation.

…click on the above link to read the rest of the article…

Stock Market Chaos Sparks Oil Selloff

October 12, 2018

Stock Market Chaos Sparks Oil Selloff

The plunge in global equities on Wednesday and Thursday dragged down crude oil, with even concerns about falling Iranian supply not enough to keep crude from a steep selloff.

Brent fell more than 1.2 percent on Wednesday and was down another 1.5 percent in early trading on Thursday, falling back to the low-$80s per barrel, down from over $86 last week.

The same supply concerns are still there – Iran’s oil exports are dwindling, and it is unclear if OPEC can fill the gap. But the sudden cracks in the global economy took on a higher priority.

The conditions for an equity selloff have been building for quite some time. On October 9, the International Monetary Fund cut its forecast for global growth to 3.7 percent for 2018 and 2019, down from a previous estimate of 3.9 percent. The Fund said that “growth has proven to be less balanced than hoped,” and that the “likelihood of further negative shocks to our growth forecast has risen.” Also, the ongoing trade war between the U.S. and China, combined with the strength of the dollar and the turmoil and emerging markets could also lead to an economic slowdown.

China’s economy is already showing some signs of strain, and China’s central bank just slashed the amount of cash that banks have to hold in reserve, the so-called reserve ratio, by one percentage point. The move is seen is an attempt to keep growth aloft amid worrying signs of trouble.

In the U.S., the Federal Reserve has been going in the opposite direction, tightening interest rates in an effort to avoid inflation.

These various red flags for the global economy have been known for a while and are the background context for the sudden and painful selloff in global equities that began mid-week.

…click on the above link to read the rest of the article…

Wednesday’s Rout Was An 8-Sigma Event: The 5th Largest Tail Event In History

October 12, 2018

Wednesday’s Rout Was An 8-Sigma Event: The 5th Largest Tail Event In History

With markets in rebound mode today, the sellside’s fascination with Wednesday’s sharp, unexpected selloff continues.

In the latest “hot take” on Wednesday’s dramatic drop, Goldman’s derivatives strategist Rocky Fishman takes on a different approach to the Wednesday rout, looking at it in terms of pre-event realized vol (of 6.4%), and notes that in this context, “Wednesday’s 3.3% SPX selloff naively represents an 8-standard deviation event, the 5th-largest tail event in the index’s 90-year history, as 6.4% annualized vol implies a 40bp one-standard deviation trading day; instead the drop was more than 330 bps.

As Fishman adds, what makes the drop unique is that most of the top events of this severity, and listed in the chart above, “have often had a clear, dramatic, catalyst (1987 crash, Eisenhower heart attack, Korean war, large M&A event breakup).”

Part of the reason this week’s volatility looks like a tail event is that realized volatility had been surprisingly low prior to Wednesday: the five least-volatile quarters for the SPX over the past 20 years were Q1/2/3/4 of 2017, and Q3 of 2018.

For Goldman, the Wednesday spike is reminiscent of the Feb. 27, 2007’s China-led selloff, “which marked the end of an extended low-vol period.”

That said, Fishman also notes that mathematical tail events have been more common recently, almost as if central bank tinkering with markets has broken them, To wit, “five of the top 20 one-day highest-standard deviation moves (comparing the SPX selloff with ex-ante realized vol) since 1929 have happened in 2016-8.”

Fishman then shift focus to the VIX, which while not as violent as the February record spike, “was also the 25th-largest one-day VIX spike on record.”

…click on the above link to read the rest of the article…

The Myth Of The Eternal Market Bubble And Why It Is Dead Wrong

October 12, 2018

The Myth Of The Eternal Market Bubble And Why It Is Dead Wrong

Economic collapse is not an event — it is a process. I’ve been saying this since the initial 2008 crash, and I suppose I will keep saying it until it burns into people’s minds because I don’t think that it is a widely understood concept. When alternative analysts talk about financial collapse, we are not talking about something that suddenly happens out of the blue, we are talking about an ongoing decline that occurs in stages. This decline is happening today in the U.S. and around the world, and it has been accelerating since the chaos of 2008. When we bring up the reality of collapse, we are referring to something that is happening NOW, not something waiting on the distant horizon.

The reason why some analysts can see it and others cannot is most likely due to the delusions surrounding market bubbles. These fiscal fantasy worlds are artificially created by central bank intervention and represent an attempt to mislead the populace on the true health of the system — for a limited time. People with foresight see beyond the false data of the bubble to the core economic reality; other people see only the bubble and nothing else.

When it comes to stock markets, bond markets, forex markets and the general casino economy, much of the public has a terrible inability to look beyond the next month let alone the next year. If the markets appear good now, the assumption is that they will always be good. If the central banks have intervened for the past 10 years, the assumption is they will intervene for the next 10 years.

…click on the above link to read the rest of the article…

“This Is Becoming Dangerous” Morgan Stanley Warns, As Forced Liquidations Loom

October 11, 2018

“This Is Becoming Dangerous” Morgan Stanley Warns, As Forced Liquidations Loom

Today is adding to the accumulated pain of the last few days for most funds. Momentum has retraced nearly all of its YTD gains and names with high active ownership are underperforming names with high active ownership by 3 standard deviations.

This is becoming dangerous because as managers give back P/L and approach flat on the year a broader de-risking is more likely. While a crude estimate, the below shows rolling returns of reported longs per 13F filings versus the broader market. On the left is the last 2 weeks – nearly as negative as late July, while on the right is the last 3 months (so combines July and now) – the worst underperformance since Feb 2016.

So far the unwinds are rotational, keeping index dispersion in-line with historical averages. Notably most of that dispersion is at the sector level while most single names within sectors are trading together, indicating the pain is in sector/factor/thematic trades.

But given the overlap of crowded stocks with the market (i.e. Tech = largest sector), the pain is spreading to the index level. And on the back of today’s moves there will now be some systematic supply – QDS estimates $10 to $15bn total over the next several days. This supply could start to move the volatility from sectors / factors into the index level as correlation increases.

“It’s Just Beginning”: US Futures Plunge As Global Rout Hammers Asia, Europe

October 11, 2018

“It’s Just Beginning”: US Futures Plunge As Global Rout Hammers Asia, Europe

It is a sea of blood red this October morning as the biggest market rout since February and the longest selloff of the Trump administration triggered a surge of global selling from the U.S. through Asia and spreading to Europe on Thursday, with markets from Tokyo to London slumping amid fresh fears the decade-old bull market may be coming to an end.

“Equity markets are locked in a sharp sell-off, with concern around how far yields will rise, warnings from the IMF about financial stability risks and continued trade tension all driving uncertainty,” summed up analysts at ANZ.

The sell-off that started in the U.S. ripped across Asian stock markets Thursday, with indexes in Japan, Hong Kong and China all tumbling.

All but one stock listed on Japan’s Nikkei 225 Stock Average retreated, while the country’s Topix index posted its steepest decline since March losing around $207 billion in market value, falling 3.5%. China’s Shanghai Composite sank 5.2%, its biggest drop since February 2016 to close at its lowest since November 2014, while the Hang Seng Index lost 3.5%. Taiwan’s Taiex index led the rout with a 6.3% slump.

The MSCI Asia Pacific Index had its worst day since June 2016, when the U.K. voted to leave the EU, with the index plunging 3.5% and closing in on entering a bear market.

Turbulence spiked in Asian markets as the Nikkei Stock Average Volatility Index surged 44%. The MSCI Asia Pacific Index ex Japan closed down 3.6%, hitting its lowest level since March 2017. China’s main indexes had slumped over 5 percent

The Asian regional benchmark gauge has slumped 13 percent this year as uncertainties such as the U.S.-China trade war weigh on investor sentiment. The Shanghai Composite Index has lost 22 percent in 2018, while Japan’s Topix is down 6.4 percent.

…click on the above link to read the rest of the article…

Asian Markets Crushed By Capitulation Carnage

October 11, 2018

Asian Markets Crushed By Capitulation Carnage

No “National Team”… No “Plunge Protection Team”… No RRR Cuts… and not a word from Powell. The US equity market massacre is extending overnight as the liquidation crisis smashes into Asia…

The initial red box is the after-hours drop and the second drop is as Asian cash markets opened… (Nasdaq is now down over 6%)

Nasdaq’s plunge led by a bloodbath in FANGs (NFLX -10% now)…

From yesterday’s cash close at 26,449, Dow futures are now down almost 1300 points…

AsiaPac markets are a sea of red…

MSCI AsiaPac is plunging almost 4% to its lowest since May 2017…

Taiwan is getting monkey-hammered…

China is opening in freefall…

And it’s not just equity markets.

Currencies are tumbling…led by the Won and Taiwanese Dollar…

Yuan is back near cycle lows…

And cryptocurrencies are crashing too…

There is some green in the world, however…

US Treasuries are bid with 10Y now down 12bps from Tuesday’s highs…

…click on the above link to read the rest of the article…

How Dangerous is the Month of October?

October 8, 2018

How Dangerous is the Month of October?

A Month with a Bad Reputation

A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.

The road to October… not much happens at first – until it does. [PT]

Nevertheless, the prospect of such an extremely strong decline is scary: what use is it to anyone if markets typically perform well in October most of the time, when the phenomenon of the gains of an entire year evaporating in the blink of an eye is repeated? What about intermittent losses? We will apply seasonal analysis to the issue in order to shed light on whether one should adopt a risk-averse stance in October.

The Biggest Crashes Tend to Happen in October

Let us take a look at the largest declines in recent history. The following chart shows the twenty largest one-day declines in the Dow Jones Industrial Average. Crashes that occurred in October are highlighted in red.

The largest one-day declines in the DJIA in history – almost half of the crash waves occurred in October, including the two largest ever recorded on 19 Oct. 1987 and 28 Oct. 1929. The fourth largest decline happened on 29 Oct. 1929 hence these two days of consecutive declines were actually worse than the record one-day plunge in 1987 (similar to 1987, the market had already fallen sharply in the week immediately preceding the crash). [PT]

9 of the 20 strongest one-day declines happened in October. That is an extremely disproportionate frequency. In other words, October has a strong tendency to deliver negative surprises to stock market investors in the form of sudden crashes. What does this mean for us as investors?

…click on the above link to read the rest of the article…

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