Yesterday felt a bit like watching reruns of the Oprah Winfrey Show- you know, the one where she gave a nice prize (an automobile) to every member of the studio audience:
Carney's speech suggesting that he favors a rate cut and possible QE reboot were as unsurprising as they were amusing. After all, this is the same chap who suggested eight weeks ago that rates might have to rise in the event of a successful leave vote if sterling fell sharply...which, by most reasonable standards, it has done. Then again, with summer here (OK, maybe not in the UK) is it any wonder that Carney has once again donned his flip-flops?
The larger question is what sort of impact a 25-40 bp rate cut and renewed bond buying might have. Gilt yields are already well below levels prevailing during the previous QE episode and have already fallen from more than 3.00% at the end of 2013 to 0.84% now. At the same time, the bank has long concluded (probably with some justification, given evidence elsewhere) that base rates below 0.50% could negatively impact the banking sector...does it really make sense to hit bank margins when you're worried about a recession?
The most obvious avenue for such a suite of policies to work is via the exchange rate, which of course has already fallen thanks to the vote. While it is certainly understandable that Carney would want to do something (actually, given his track record, it's actually a bit shocking) to absorb the economic shock that may result from the vote, it's far from clear how efficacious these measures will be.
In Europe, meanwhile yesterday's hot story was that the ECB might alter the capital key rubric for determining QE purchase allocations, shifting instead to buying bonds based on the stock of outstanding debt. This would of course benefit the likes of Italy tremendously, prompting an epic late session squeeze.
That the story has subsequently been denied appears to have escaped the notice of just about everyone. Such, apparently, is the belief in the tale of central bank omnipotence (and omnibenevolence). Of course, while the great car giveaway helped turn Oprah into a billionaire, taking long term bond yields to low or negative levels is a a sure way of escorting pensions to the poor house.
Carney's speech suggesting that he favors a rate cut and possible QE reboot were as unsurprising as they were amusing. After all, this is the same chap who suggested eight weeks ago that rates might have to rise in the event of a successful leave vote if sterling fell sharply...which, by most reasonable standards, it has done. Then again, with summer here (OK, maybe not in the UK) is it any wonder that Carney has once again donned his flip-flops?
The larger question is what sort of impact a 25-40 bp rate cut and renewed bond buying might have. Gilt yields are already well below levels prevailing during the previous QE episode and have already fallen from more than 3.00% at the end of 2013 to 0.84% now. At the same time, the bank has long concluded (probably with some justification, given evidence elsewhere) that base rates below 0.50% could negatively impact the banking sector...does it really make sense to hit bank margins when you're worried about a recession?
The most obvious avenue for such a suite of policies to work is via the exchange rate, which of course has already fallen thanks to the vote. While it is certainly understandable that Carney would want to do something (actually, given his track record, it's actually a bit shocking) to absorb the economic shock that may result from the vote, it's far from clear how efficacious these measures will be.
In Europe, meanwhile yesterday's hot story was that the ECB might alter the capital key rubric for determining QE purchase allocations, shifting instead to buying bonds based on the stock of outstanding debt. This would of course benefit the likes of Italy tremendously, prompting an epic late session squeeze.
That the story has subsequently been denied appears to have escaped the notice of just about everyone. Such, apparently, is the belief in the tale of central bank omnipotence (and omnibenevolence). Of course, while the great car giveaway helped turn Oprah into a billionaire, taking long term bond yields to low or negative levels is a a sure way of escorting pensions to the poor house.
39 comments
Click here for commentsso - traded this bounces in spx-thought had overshot and probably get a chance to sell higher. got pop sold short and given all money made on the pop and a little more.
Replywell , have a goodweekend- i am lost a bit here with this spx move...
http://www.realclearmarkets.com/articles/2016/07/01/why_im_so_aggressively_shorting_bonds_102250.html
ReplyWhy I'm So Aggressively Shorting Bonds
...Here Doug falls into the trader's trap..."I'm smarter than the market, so here's my big bet and why I can now pound my chest as I swing from tree to tree"
This may well be rational...I too think this thing goes south soon, but markets can stay irrational longer than Dougie's wallet can hold onto George's picture...
....Interesting times...
We are confused that while the spoos retraced etrace almost all the losses post results last week. The 10 years is still reaching lows.
ReplyExperience has taught us to trust credit over equity.
Oh my....ICYMI! The Swiss 50-year bond #yield is now NEGATIVE!
ReplyI fell for the trap of fading this bond move today. Am still a but stunned to be honest. Like all bad trades it had me duped from the start, but in retrospect, it seems so obvious. I thought bonds would have a bit of a correction but it's seems to have skipped that due to Brexit, ECB utterances or whatever. In any case major assburn being on the wrong side of that. Equities and bonds seem to be rallying like crazy, which is odd.
ReplyCrazy people here still trying to short spoos... guys please stop this madness!!! Central Banks will underpin equity markets with unlimited liquidity in order to keep risk assets inflated. You will lose your shirts if you insist on play these silly games.
ReplyTo add to recent coments about Dbank. It will be the exposure and guessing who the hell has it to Dbank that will cause things to freeze up.
ReplyHi MM,
Replyhow about a (very temptative, early etc) project of a double bottom on Eurostoxx ? It would compete with index overcoming 3090 area, in a month time, without making new lows
picture: [IMG]http://i65.tinypic.com/axn2xj.gif[/IMG]
Sick Trader
Just to let you know that US equities are going up again today if you wish to short them ;)
ReplyThere is nothing odd about yields falling while equities rise. I mean, assuming you haven't been living under a rock the past seven years or so...
ReplyCarry trader, if you are looking at credit, its actually going same way as equities (CDS indexes). Treasuries are interest rates not credit.
ReplyGlobal asset buying! Also first of month etc. Sure rates have been falling for past 7 years along with rising stock market, but you dont often see gold/silver up, tresuries up and SPX up in same week after a risk off scare (at least off hand, perhaps someone wants to backtest)
Meanwhile CNY is depreciating, China PMI's falling. Setting up nicely for a shot to short when new highs occur in equities.
Happy Clappy Time. A high 5 for the 12 y-o JBTFDers! Yay!! Go Team !!! As for the last few days, the bounce is not hard to explain is it? Dip buyers, shorts covering, squeeze, window dressing, quarter-end rebalancing, and new month/quarter fund flows. Is that too complex for you? Absolutely no question that it was a good trade, and we saw it coming too, but does it have legs? I don't believe so. Get your front row seats for Europanique Trois this Summer. It is ON.
ReplyMM has made a good point over the last few days that most US observers have missed. Here it is. The UK is in disarray. There is essentially nobody in charge at the moment, leadership vacuum in Westminster. The major parties were both REMAIN supporters and didn't anticipate this problem. The LEAVE camp don't have a plan. I mean, they don't have one at all. FX players are sooner or later going to pound sterling lower, guys. Bashing Betty is back. This is going to cause some dislocation around the globe. As if that wasn't enough, the renewed banking crisis (don't think so? look at Italian banks, DB, or just EUFN) is going to first drag EURUSD lower in anticipation of more bazookas, and then will take STOXX down with it.
Today looks like a fabulous opportunity to once again get long those assets that are likely to be in demand once the forced unwind of carry trades gathers pace. JPY and USD guys. They are going from the lower left to the upper right. Upside protection in yen isn't all that cheap, but with the Fed rate hikes out the window, upside dollar protection is inexpensive. We think that a few cheeky UUP calls picked up today might look very clever indeed when September and October roll around. Likewise it is still not very expensive to bet on a lower Euro here, which is remarkable in view of the DB chart.
Lower oil for 2-3 months ahead seems like a lay-up. Lower refinery demand post July 4, storage full everywhere, dollar is firm and perhaps soon to be firmer. We cannot see a more obvious trade here for the summer. The linkage between WTI, HY and IWM should still apply - on the way down as it did on the way up.
Happy holiday to all. Let's celebrate that great victory of freedom over oppression before reality sets in again.
LB - You pose good thoughts, but are entirely wrong on US equities. They will keep on rising, making new all time highs. This is the biggest bull market of your lives. The naysayers here wil keep shorting and losing but btfd is the easiest money out there. Here's one formula:
ReplyA 5% drop in stocks over two days is also a buy signal. All nine times when the S&P 500 was above both its 50- and 200-day moving averages — in a bull phase — the S&P gained an average of 7% in the following three months.
Do that twice a year and you have a 14% return. Time to fire all the fund managers and replace them with a couple of algos to do this I think.
The SPX reached current levels in February of last year. You don't know what a bull market is, son.
ReplyLB on oil ... "We expect US supply for the second quarter of 2016 to be revised up due to completion of DUCs earlier than previously expected. That would explain the high volatility in the adjustment factor as the DOE models US supply assuming no increase in the completion of DUCs. Despite the fact that Q2 is the low point for seasonal demand, we drew inventories while a large amount of DUCs were completed. In the coming months, inventory declines will Accelerate significantly as seasonally Q3 demand is 1.5 mbd higher than Q2 on average. This should be the catalyst for higher crude oil prices in the coming months.
Reply@anon3:40 ('the biggest bull market of your lives') and @mm3:51 ('son'): I suspect our intrepid anon does not appreciate how much there has been to see in the markets, lo these last several centuries for which decent price records of bull and bear markets exist.
ReplyThat said, US equity earnings yield is around 4% and the ten-year is under 2%.
@abee, it's a bearish chart, mate. It's rolled over, lower lows and lower highs these past few weeks.
ReplyGlobal demand is slow, there are storage vessels overflowing everywhere, including floating ones. Even "Nigerian incidents" seem to be showing a seasonal decline. There are few shorts now and a ton of longs, many of whom are tourists in the commodity markets. We'll see at some point how much leverage is involved.
Btw, Magic Dip buyers, Weidmann said "no new stimulus, post-Brexit" so that means no more candy for you for the time being. Draghi is talking bollocks at the moment until there is a real crisis. Banks in Europe are going to have recapitalize on the backs of the investment community and not at the expense of the population, at least for now.
Mindless, anons, please give it a rest, MM and others are tired of your puerile commentary. We have all been long through long stretches of this bull market, but nothing lasts for ever, and even if it did, there have been and will continue to be big dumps in the market before this is over.
China is still out there, btw, eager to devalue, disorderly FX moves await - perhaps a larger risk than Brexit.
Michael Gayed on deflationary signals at the end of the reflation trade....
Replyhttp://www.marketwatch.com/story/summer-crash-of-2016-is-about-more-than-the-brexit-2016-06-28
I have to say that this made me laugh: "LB - You pose good thoughts, but are entirely wrong on US equities. They will keep on rising, making new all time highs." ... take that LB. I don't have much to add to LB and MM ... I think the rookies here should listen. But they won't. Another thing, you guys should remember your BOP crisis A-B-C ... what happens when a central bank presiding over a CA deficit at 7% of GDP signals easing?! ... bashing Betty indeed!!
ReplyLeft is BACK from the fibonacci calculation offsite - good to hear your thoughts mate, and can't say I disagree with any of them, timing issues aside.
Reply@Abee, US supply was up in Q2 when NGL's are included - that is a fact - Chinese teapot refineries went haywire importing crude,and Chinese SPR blasted higher in Q2, that is also a fact. To say that the equation solves in a way that suggests global demand was much higher in Q2, well of course, thats just math - the problem is it was demand brought forward from subsequent quarters and cannot be extrapolated. Will try my best to collate some supporting links and send them your way later today.
As for the 12 yr old traders - if this community was a fund with MM the strategist and participants as PM's, I believe the anons would be on pizza duty - permanently - and not the fun kind you see on porn sites.
Great points on China Washedup. And no, MM and LB would be the PMs, and the anons would be bringing in loads of guacamole; )
Reply@LB, I would hardly say crude has rolled over. Sitting on an upward sloping 50day. Lower highs and lower lows for only 1m. Nothing persistent and we are finally above 100/200 Long term moving averages. FWIW 1m is a good reversal signal for many quant strategies (ie buy high momentum w/1m reversal)
Reply@ Washed, I thought the chinese imported all the crude in Q1. Not a fundi expert just what I heard
I'd like for crude to head lower. would like to be a buyer at $40 and below (assuming no recession).
I'm bullish on commodities and the cmdty equities. The oil & gas names in particular have done a lot of delevering with successful secondaries and and asset sales. This changes the equation from the perspective of the producers from "need to pump to meet debt obligations" to "can afford to be opportunistic and take a longer view on maximizing asset returns". The iran-pumping-5mil/day boogieman has passed, demand is stable (if not growing), and the market is waking up to the realities of coal-to-gas switching effect on summer power burn and the new injection season. Throw in IOEA still rallying, hot rolled steel stable & higher (witness SCHN recent earnings leverage). The next leg higher in the equities will be driven by M&A.
Replyjust my misguided .02
Thinking about the market reactions in the immediate aftermath of Brexit. How much did the Swiss peg removal impact actions ahead of the referendum? Risk desks, FCM's and margin clerks on much higher alert to sudden moves.
ReplyAnecdotal, it was probably the most on the ball our Risk team had been and our positions were tiny at best.
MM, why not require Anons to actually choose a name. Given the usually purile content they pollute this place with, they may mostly fail to meet this requirement ;)
ReplyMM -
ReplyWhat Down side Up said...
double plus ditto, please.
The Anon/username issue has been addressed multiple times. Usually, after the market rallies following a decent sell off when the trolls come out to play. Once every 4/5 months or so.
ReplyLB, I've said it before I'll say it again. Oil is move from chronic over supply to under supply. Massive capex cuts will do that. For meaningful capex increases we need to go substantially higher in oil. Us production is over 1mm off the highs and the key thing to appreciate is that to get us supply up to the highs (which will ultimately be needed) requires a vast amount of new money. This makes the e and p space particularly interesting because it's grossly overvalued, it's issued tons to keep alive, and now oil prices are going to go much higher it's going to issue loads and loads more. Potential for fireworks as the oil equivalent of the tmt bubble has a rude awakening
ReplyEquity indexes up again - must the all the named commentators here being short and losing their shirts..
ReplyI believe the "Muppet" name is still free on this blog should you wish to avail yourself.
Replywww.bloomberg.com/news/articles/2016-07-03/oil-rally-threatened-as-gasoline-supply-surge-swamps-u-s-demand
ReplyLefty,
It appears some here think like Dougie...just keep posting so I can follow it...
BinT
@ anon 9:59am
Replyyes that's simple extrapolation of past cycles: at past average D growth rate, take depletion rate etc you get to some tightness at some point. The effect you are talking about is for conventional investment cycles, indeed today's lack of investment will have an effect on that.
But to LB's point, that is in the future and it is not now. It is undeniable that the re balancing is murky and not clear cut and can shift either side easily. Look at the analyst numbers, even the demand side can swing from 1.8 to 8k bbl/d (and we're into July!). The massive crude and product stocks are not being drawn. The record outages we had in Q2 most likely won't be back to help. Chinese won't pull on the bbl in 2H as they did in 1H. Concerning the drop in US production you refer to, had we told you a couple years ago, that front brent was going to touch $27.88, you would have said much more bbls would have been cut. The US is still producing a lot and importing a lot.
The longer crude stays in this $50 - $55 range, the less the immediate explosiveness upside potential in the near term IMHO. There is a wall selling above in Cal17 and 18 from producers being lined up. Looks to me for now that crude needs much more of a catalyst to breakout higher.
I'd like you to read this and comment:
Replyhttp://www.businessinsider.com/investors-shouldnt-expect-great-returns-2016-7
As an ordinary investor, am I correct in assuming we're never gonna afford to retire?
Copper looks like it is putting in a reversal bar today. It stopped nearly bang on 10% from it's recent bottom, and a nice 8% from the Brexit dip.
ReplyToo early to tell - but maybe a precursor for equities.
More of a heads up, than solid analysis.
Two Standard Life funds suspended due to Brexit. This is the kind of news that makes me nervous. Illiquidity in one market begets liquidity strains in other markets ... obviously, given that it is U.K. property it is not particularly "systemic", but I worry all the same. All that CB liquidity will not be worth much, if the rot spreads through the ETF/funds markets.
ReplyAgreed CV. Worries about retail liquidity going to get this thing going.
ReplyInfo:
Standard Life has been forced to stop retail investors selling out of one of the UK’s largest property funds after rapid cash outflows were sparked by fears over falling real estate values in the week after the Brexit vote.
The £2.9bn commercial property fund will need to sell real estate to raise cash before any money can be redeemed.
The last property crash in the UK in 2007 was preceded by a wave of similar forced gatings by funds struggling to meet investor demands for cash, which led to firesales of property that added to the pressure on an already falling market.
Building co's got hammered on Brexit T+1 and recovered. ETFs have had the same knee jerk reaction. There are two drivers to a market .. supply and demand. Demand is 2 fold. The speculative and the physical. Man buying ETF that buys a chunk of an office block ve business buys or rents said office block from ETF owner. At the moment we have not seen any change in behaviour of the people renting office space. So far its just speculative. If spec sell but renters arent leaving then the yield on the property increases. There isn't a lending crisis and there isn't a leverage crisis to stop new investors taking some of that higher yield. Except unless they too think people are going to stop renting office space. This all cycles back to the belief that the economy is going to collapse before it has collapsed. Dumping commercial property on a speculative basis through ETFs is part of the fear whipping.
ReplyLet's just wait for the data. If Osborne really does cut corp tax to 15% and BoE will keep throwing money at the problem then in GBP terms commercial property could keep looking pretty good.
Beginner - The basic truth is we cant all retire together. Someone has to do the work. SO by definition the value of investements will still level out to a gradient of winners and losers. We cant all be winners and retire to Hawaii and think someone esle is going to serve us our pina coladas.
Reply