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Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red
Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red
For the first half an hour after China opened, things looked bleak: after opening down 5%, the Shanghai Composite staged a quick relief rally, then tumbled again. And then, just around 10pm Eastern, we saw acoordinated central bank intervention stepping in to give the flailing PBOC a helping hand, driven by the BOJ but also involving NY Fed members, that sent the USDJPY soaring which in turn dragged ES and most risk assets up with it. And while Shanghai did end up closing down -1.7%, with Shenzhen 2.2% lower at the close, the final outcome was far better than what could have been, with the result being that S&P futures have gone back to doing their thing, and have wiped out all of yesterday’s losses in the levitating, zero volume, overnight session which has long become a favorite setting for central banks buying E-Minis.
As Bloomberg’s Richard Breslow comments, the majority of Asian equity indexes finished with losses but on an upbeat note, helping most European markets to start with modest gains that have increased with the morning, thanks to the aforementioned domestic and global mood stabilization. S&P futures have been positive all day other than a brief dip negative at the worst of the day’s China levels. Chinese equities opened quite weak and were down another 5% before the authorities assured the market that speculation they would withdraw from market supportive measures was misguided. This began a rally of over 6% before a mid-afternoon swoon.
…click on the above link to read the rest of the article…
Losing Control
Losing Control
Markets are beginning to signal that policy makers are losing control. Many second-order-effects of the unprecedented and experimental global actions taken since the 2008 crisis are beginning to manifest. There are always causes and effects that develop; but they do so at different speeds. Many actions in recent years have prioritized ‘benefits today’ over ‘consequences tomorrow’. ‘Tomorrow’ is approaching ever more quickly. There is no ‘free lunch’.
Market damage and volatility due to policy interference, or due to the deliberate influence of security prices, are a shame. Markets should ideally operate with unencumbered fluidity. Markets should operate in a manner where adjustments to new information allow buyers and sellers to rapidly, and seamlessly, find a natural clearing price. Authorities and regulations should be like good referees in a soccer match; they provide the conditions for a fair match, and you rarely notice their presence.
- The beginning-of-the-end of official control happened earlier this year when the Swiss National Bank (SNB) retracted its currency-peg-promise, triggering a 40% move in the G-7 currency in 10 minutes.
- In early May, shortly after the SNB event and the launch of ECB QE and EU negative interest rate experiments, the EU bond market became dysfunctional. The absurdity of sustaining $4 trillion of negative rates came into focus. The German 10-year Bund moved from 0.05% to 0.75% in under a month.
- A series of Greek policy and troika bailout mistakes – actions that never resulted in a realistic and sustainable solution – are now culminating toward a tipping point (more tomorrow).
- Chinese authorities that have allowed and encouraged an equity bubble to manifest (and other central banks for that matter) are starting to see how ‘bubble blowing’ typically ends. Other central banks are hopefully watching. Chinese equities have lost $3.2 trillion in value in 30 days. To put this into perspective, this is equivalent to the entire stock market capitalization of Germany and France combined.
…click on the above link to read the rest of the article…
China Soars Most Since 2009 After Government Threatens Short Sellers With Arrest, Global Stocks Surge
China Soars Most Since 2009 After Government Threatens Short Sellers With Arrest, Global Stocks Surge
Here is a brief sample of some of the measures the Chinese government and the PBOC have unleashed in just the past ten days to prop up the crashing market include:
- a ban on major shareholders, corporate executives, directors from selling stock for 6 months
- freezing more than half (1400 at last count per Bloomberg) of the listed companies from trading,
- blocking fund redemptions, forcing companies to invest in the market,
- halting IPOs,
- reducing equity transaction fees,
- providing daily bailouts to the margin lending authority,
- reducing margin requirements,
- boosting buybacks
- endless propaganda by Beijing Bob.
The measures are summarized below.
But it wasn’t until last night’s first official threat to “malicious” (short) sellers that they face charges (i.e., arrest), as Xinhua reported yesterday:
[Ministry of Public Security in conjunction with the recent Commission investigation of malicious short stock and stock index clues ] correspondent was informed on the 9th morning , Vice Minister of Public Security Meng Qingfeng led to the Commission , in conjunction with the recent Commission investigation of malicious short stock and stock index clues show regulatory authorities to the operation of heavy combat illegal activities.
… that the wall of Chinese intervention finally worked. For now.
And since this is all about one thing, the stock, market, it is worth noting that the Shanghai Composite Index had dropped as much as 3.8% to a 4 month low before the news that the cops were going to arrest anyone who used a wrong discount rate in their DCF, when everything suddenly took off, and the SHCOMP closed a “Dramamine required” 5.8% higher, the biggest daily increase since March 2009!
“As China beefs up its efforts to rescue the market, with even the public security ministry involved, market sentiment is recovering slightly from a panicky stage earlier,” Shenyin Wanguo analyst Qian Qimin says by phone
…click on the above link to read the rest of the article…
Will Greek “Hope” Offset “Limit Down” Contagion From The “Frozen” China Crash
Will Greek “Hope” Offset “Limit Down” Contagion From The “Frozen” China Crash
Today’s market battle will be between those (central banks) “hoping” that a Greek deal over the weekend is finallyimminent (which on one hand looks possible after a major backpeddling by Tsipras – who may never have wanted to win the Greferendum in the first place – yesterday in Brussels and today during his speech in the Euro Parliament, but on the other will be a nearly impossible sell to Greece as any deal terms will be far harsher than the deal offered by the Troika 2 weeks ago and will have no debt reduction), and those who finally noticed that the Chinese central planners have effectively lost control.
For those who may have missed the overnight fireworks, here are some more indicative Bloomberg headlines about China:
- China’s Stocks Plunge as State Intervention Fails to Stop Rout
- China Freezes Trading in 1,300 Companies as Stock Market Tumbles
- China’s State-Owned Firms Ordered Not to Cut Share Holdings
- China’s Market Rescue Makes Matters Worse as Prices Lose Meaning
- China Ramps Up Policy Response as Panic Grips Stock Market
While pundits have been eager to downplay what is now a historic rout in Chinese risk assets, one that is matched by the depression of 2008 and which has sent the SHCOMP from up 60% for the year 3 weeks ago to barely green losing some 15 Greeces in market cap since mid-June…
… the same pundits to whom neither the oil crash nor a Grexit nor the imminent collapse in Q2 corporate revenues and GAAP EPS, or anything else matters, the reality is that the Chinese stock rout is very clearly starting to have contagion effects on the rest of the economy, crashing commodities such as crude, gold, copper, iron and virtually everything else where China has been a marginal source of demand, but leading to forced selling of anything that is not nailed down.
…click on the above link to read the rest of the article…
Volatility and Sleep-Walking Markets
Volatility and Sleep-Walking Markets
A recent Business Insider chart of the day feature was particularly interesting. Called The stock market is asleep, it observed that the US market has been in a period of very low volatility:
Market technician Ryan Detrick noted that it’s been 8 weeks since we’ve seen a weekly move of at least 1% up or down in the S&P 500. That’s the longest such streak we’ve seen in 21 years.
Markets enter such periods of complacency when there has been a long uptrend, with periods of very low volatility reflecting where the market has come from, not where it is going. Such periods are far more likely to be a sign of an impending trend reversal than of a continued uptrend.
Under normal circumstances, markets can be expected to show more variation, with regular inhalation and exhalation indicative of healthy risk perception. The loss of that pattern, indicating extreme complacency, is a leading indicator of a rude awakening. The VIX index, or volatility/fear index, is at extreme lows, indicating a historic level of complacency. It is no surprise that this coincides with a market extreme.
…click on the above link to read the rest of the article…
Bond Markets Herald an End to Cheap Government Debt
Bond Markets Herald an End to Cheap Government Debt
Bond markets got choppy at the end of April, when institutional investors began lining up to bet against the market. Since then the situation has gotten worse for bond holders, as spiking yields in Germany, and even US Treasuries, have created a rush for the exit that some fear could turn into a stampede.
Volatility seems to be the new normal for bond markets after a long period of relative calm, and the trend will persist through the Fed’s expected interest rate hike in late 2015/early 2016. On Thursday the 10-year German bund yield reached 2015 highs of 0.995 percent, having languished as low as 0.049 percent just two months ago. It settled back down to 0.84 percent by end-of-trading on Friday.
Spiking yields are sending bond prices lower as holdings from an era of near-zero interest rates begin to lose their appeal. In a reversal of the usual order of things, the German bond market seems to be setting the tone for markets in the US and UK. Treasury yields were spiking alongside the German bund early Thursday, and the 10-year US Treasury yield closed at around 2.4 percent Friday – it’s highest since October of last year.
The reason behind the sudden volatility has divided market watchers. One possible explanation is that euro zone inflation came in at 0.3% for May, up from 0% in April. This suggests stubborn inflationary pressures that, even with low energy prices, will preclude the wave of global deflation that some traders have been betting on. If inflation is back, it doesn’t make sense to hold government debt with borderline negative yields.
…click on the above link to read the rest of the article…
QE Breeds Instability
QE Breeds Instability
Central bankers have promised ad nauseum to keep rates low for long periods of time. And they have delivered. Their claim is that this helps the economy recover, but that is just a silly idea.
What it does do is help create the illusion of a recovering economy. But that is mostly achieved by making price discovery impossible, not by increasing productivity or wages or innovation or anything like that. What we have is the financial system posing as the economy. And a vast majority of people falling for that sleight of hand.
Now the central bankers come face to face with Hyman Minsky’s credo that ‘Stability Breeds Instability’. Ultra low rates (ZIRP) are not a natural phenomenon, and that must of necessity mean that they distort economies in ways that are inherently unpredictable. For central bankers, investors, politicians, everyone.
That is the essence of what is being consistently denied, all the time. That is why QE policies, certainly in the theater they’re presently being executed in, will always fail. That is why they should never have been considered to begin with. The entire premise is false.
Ultra low rates are today starting to bite central bankers in the ass. The illusion of control is not the same as control. But Mario and Janet and Haruhiko, like their predecessors before them, are way past even contemplating the limits of their powers. They think pulling levers and and turning switches is enough to make economies do what they want.
Nobody talks anymore about how guys like Bernanke stated when the crisis truly hit that they were entering ‘uncharted territory’. That’s intriguing, if only because they’re way deeper into that territory now than they were back then. Presumably, that may have something to do with the perception that there actually is a recovery ongoing.
…click on the above link to read the rest of the article…
Bond Crash Continues – Aussie & Japan Yields Burst Higher
Bond Crash Continues – Aussie & Japan Yields Burst Higher
The carnage in Europe and US bonds is echoing on around the world as Aussie 10Y yields jump 15bps at the open (to 3.04% – the highest in 6 months) and the biggest 2-day spike in 2 years. JGBs are also jumping, breaking to new 6-month highs above 50bps once again raising the spectre of VAR-Shock-driven vicious cycles…
The spectre of a self-feeding dynamic is something we’ve discussed at length before, most notably in 2013 when volatility-induced selling — reminiscent of the 2003 JGB experience — hit the Japanese bond market again, prompting us to ask the following rhetorical question:
What happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations?
The answer was this: A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan’s banks.
What we described is known as a VaR shock and simply refers to what happens when a spike in volatility forces hedge funds, dealers, banks, and anyone who marks to market to quickly unwind positions as their value-at-risk exceeds pre-specified limits.
Predictably, VaR shocks offer yet another example of QE’s unintended consequences. As central bank asset purchases depress volatility, VaR sensitive investors can take larger positions — that is, when it’s volatility times position size you’re concerned about, falling volatility means you can increase the size of your position. Of course the same central bank asset purchases that suppress volatility sow the seeds for sudden spikes by sucking liquidity from the market. This means that once someone sells, things can get very ugly, very quickly.
Here’s more from JPM on the similarities between the Bund sell-off and the JGB rout that unfolded two years ago:
…click on the above link to read the rest of the article…
4 Factors Signaling Volatility Will Return With A Vengeance
4 Factors Signaling Volatility Will Return With A Vengeance
Buckle up. It’s going to get bumpy.
No one could have predicted the sheer scope of global monetary policy bolstering the private banking and trading system. Yet, here we were – ensconced in the seventh year of capital markets being buoyed by coordinated government and central bank strategies. It’s Keynesianism for Wall Street. The unprecedented nature of this international effort has provided an illusion of stability, albeit reliant on artificial stimulus to the private sector in the form of cheap money, tempered currency rates (except the dollar – so far) and multi-trillion dollar bond buying programs. It is the most expensive, blatant aid for major financial players ever conceived and executed. But the facade is fading. Even those sustaining this madness, like the IMF, are issuing warnings about increasing volatility.
We are repeatedly told these tactics benefit broader populations and economies. Yet by design, they encourage hoarding, or more crafty speculative behavior, on the part of big financial firms (in the guise of obeying slightly adjusted capital rules) and their corporate clients (that largely use cheap funds to buy their own stock.) While politicians, central banks and multinational government-funded entities opine on “remaining” structural weaknesses of certain individual countries, they congratulate themselves on having staved off more acute crises. All without exhibiting the slightest bit of irony.
When cheap funds stop flowing, and “hot” money shifts its attentions, as it invariably and inevitably does, volatility escalates as it is doing now. This usually signals a downturn, but not before nail-biting ups and downs in the process.
These four risk factors individually, or collectively, drive rapid price fluctuations. Individually, they fuel market volatility. Concurrently, they can wreak far greater havoc:
- Central Bank Policies
- Credit Default Risk
- Geo-Political Maneuvering
- Financial Industry Manipulation And Crime
…click on the above link to read the rest of the article…
Wedges and Triangles: Big Move Ahead?
Wedges and Triangles: Big Move Ahead?
The central bank high is euphoric, the crash and burn equally epic.
Just out of curiosity, I called up a few charts of key markets: stocks (the S&P 500), volatility (VIX), gold and the U.S. dollar (UUP, an exchange-traded fund for the dollar). Interestingly, all of these charts displayed some version of a wedge/triangle.
In a wedge/triangle (a formation with many variations such as pennants), price traces out a pattern of higher lows and lower highs, compressing price action into the apex of a triangle as buyers and sellers reach an increasingly unstable equilibrium.
As price gets squeezed into a narrowing band, the likelihood increases that price will break out of the triangle, either up or down, in a major move.
So which way will these markets break–up or down? One thing is fairly certain: the S&P 500 (SPX) and the VIX (volatility) are on a see-saw–both don’t soar at the same time. If the VIX soars, stocks are plummeting as fear takes hold. If the VIX stumbles along the bottom of its range, market players are complacent and stocks loft higher.
Many observers see the same inverse relationship in gold and the U.S. dollar–when one is going up, the other is weakening.
I tested this widely accepted truism by aligning the charts of both the U.S. dollar and gold, and found that there were lengthy periods during which gold and the U.S. dollar rose in tandem: About That Supposed Correlation of the U.S. Dollar and Gold…. (July 8, 2013)
My conclusion: each is influenced by a number of factors, some shared, some unique to each asset. As a result of this complex confluence, at times both go up together and at times there is a negative correlation (see-saw effect), and during other periods, there is little correlation, i.e. they act entirely independent of the other.
…click on the above link to read the rest of the article…
Oil Prices Most Volatile Since 2009
Oil Prices Most Volatile Since 2009
The nearly 20 percent rally in oil prices over the past week raised hopes in the oil industry that the financial bloodshed might be over. But hopes were quickly dashed on February 4 when prices erased much of their gains – March deliveries of WTI dropped by a whopping 8 percent in a single day.
Oil prices had risen over a three-day stretch on the back of major capital expenditure cuts among the oil majors. BP, ExxonMobil, Chevron, ConocoPhillips, and Royal Dutch Shell have all promised multi-billion dollar reductions in their spending for the year, recognizing the bear market for crude. The realignment in spending encouraged oil markets as investors hoped that the production overhang was close to balancing out. On top of that, rig counts dropped at the quickest rate on record the end of January.
As such, many thought that the supply-side was quickly correcting to the new low-price environment. But the storm may not be over.
Related: The Cure For Low Oil Prices Is Low Oil Prices
The Energy Information Administration (EIA) released its weekly status updateon crude oil inventories across the country. The EIA reported that oil stockpiles (excluding the Strategic Petroleum Reserve) increased by 6.3 million barrels, way above analysts’ estimates of about 3.7 million barrels. That has total oil inventories at 413 million barrels, the highest level in over 80 years.
…click on the above link to read the rest of the article…
Whiplash!
Whiplash!
Over the course of 2014 the prices the world pays for crude oil have tumbled from over $125 per barrel to around $45 per barrel now, and could easily drop further before heading much higher before collapsing again before spiking again. You get the idea. In the end, the wild whipsawing of the oil market, and the even wilder whipsawing of financial markets, currencies and the rolling bankruptcies of energy companies, then the entities that financed them, then national defaults of the countries that backed these entities, will in due course cause industrial economies to collapse. And without a functioning industrial economy crude oil would be reclassified as toxic waste. But that is still two or three decades off in the future.
In the meantime, the much lower prices of oil have priced most of the producers of unconventional oil out of the market. Recall that conventional oil (the cheap-to-produce kind that comes gushing out of vertical wells drilled not too deep down into dry ground) peaked in 2005 and has been declining ever since. The production of unconventional oil, including offshore drilling, tar sands, hydrofracturing to produce shale oil and other expensive techniques, was lavishly financed in order to make up for the shortfall. But at the moment most unconventional oil costs more to produce than it can be sold for. This means that entire countries, including Venezuela’s heavy oil (which requires upgrading before it will flow), offshore production in the Gulf of Mexico (Mexico and US), Norway and Nigeria, Canadian tar sands and, of course, shale oil in the US. All of these producers are now burning money as well as much of the oil they produce, and if the low oil prices persist, will be forced to shut down.
…click on the above link to read the rest of the article…
