Tuesday, February 2, 2016

Welcome to February.......

Escape velocity has failed...

Which raises the question: escape from what, exactly? Answer: the implacable limits of life on earth. Reality!

So now, that dynamic duo, Nature and Reality, the actual owners of the planet, have showed up to read the riot act to the renters throwing a wild party. "This sucker is going down," and they are sure to win big by betting on the obvious. 

Trouble is, this sucker could go down so much further than they imagined, that whatever fortunes they gain from its descent will be foiled by the destruction of the very economic system needed for them to enjoy their gains.

This is Central banks Thelma and Louise moment. Pedal to the metal, they drive into the abyss of history holding hands. Remember, audiences loved that!

When banking systems go down, governments usually follow, and when governments go down, societies often unravel.

Welcome to February.......

Punxsutawney Phil Does Not see shadow, signifying an early spring.

Stocks finished Monday little changed after opening in the red on the first day of a busy week for markets and the economy.

  • Dow: 16,449, -17, (-0.2%)
  • S&P 500: 1,939, -1, (-0.04%)
  • Nasdaq: 4,620, +6, (+0.1%)

It certainly does feel like groundhog day today because while last week's near record oil surge is long forgotten, today's continued decline in crude, which has seen Brent and WTI both tumble by over 3% has once again pushed global stocks and US equity futures lower overnight.

Compounding the bad commodity news was BP's results, which posted a loss of $6.5 billion: the biggest in its history: 2015 was even worse for the London-based company than its 2010 Deepwater Horizon catastrophe.

People are very spooked about what they can't see, and at the moment they can't see where global growth will come from.

In what appears to be a surprising swing (given recent momentum) and with 85% of the votes accounted for in the Republican vote, Texas Senator Cruz looks set to beat Donald Trump after accumulating 28% of votes to Trump's 24%. Significant also is the performance of third placed Senator Rubio, who has won 23% of votes which appears to be more than expected. Meanwhile it's a closely fought contest for the Democrats with Clinton leading Sanders by less than 1%. The third Democratic who had been in the race, O'Malley, has dropped out.

One can debate the impact the result of last night's Iowa primary but In a market like this, less certainty around the U.S. election cycle will add further nerves. The last thing investors need is more background noise.

It's still a very volatile market, and while central banks have become relatively more accommodating, this stance doesn't remove the concern of a global economic slowdown, with the weakness in China. China's animal spirits are clearing fading, and as reported overnight, margin debt in China's stock market shrank to the lowest level since December 2014, a sign that the stock market bubble has not only burst but is not coming back.

J.P. Morgan Says Window To Buy Has Closed: "Start Fading The Bounce Within Days"

"We originally looked for up to half of past losses to be recovered. We believe that we are perhaps 2/3rds of the way through the bounce, and would look to start fading it within days. We stick to the overriding view that one should use any strength as an opportunity to reduce equity allocation."

Equity markets could be down this year irrespective of the US growth trajectory.

And, what JPM did not add, is that there are increasingly louder rumblings that China may launch a major Yuan devaluation at the Shanghai G-20 meeting at the end of February. If that happens, replace "could" with "will" above as China unleashes a massive deflationary and capital flight wave around the globe, which will drag risk assets lower.

Rally Hobbled As Ugly China Reality Replaces Japan NIRP Euphoria; Oil Rebound Fizzles

It didn't take much to fizzle Friday's Japan NIRP-driven euphoria, when first ugly Chinese manufacturing (and service) PMI data reminded the world just what the bull in the China shop is leading to a 1.8% Shanghai drop on the first day of February.

Finally throw in some very cautious words by the sellside what Japan's act of NIRP desperation means, and it becomes clear why stocks on both sides of the pond are down.

The global economy is decelerating and the disinflationary impulse is gathering steam.

January marked a rather inauspicious start to the new year with wild swings in Chinese markets fueling volatility across the globe and crude carnage taking its toll on investors' collective psyche.

Rates Are "Screaming" That Investors Are In Panic Mode, Trader Warns

The largest asset shift so far in 2016 has been in core sovereign bonds.

Friday's surprise move to negative rates by Japan may have provided the ceremonial flourish, sending Japanese yields to record lows. But that's far less noteable than moves elsewhere. Japan's two-year rate has dropped 14 basis points this year, which is dwarfed by other sovereigns.

Mario Draghi's commitment that the European Central Bank will soon ease further has seen German two-year yields also hit record negative levels; the drop there has been 14 basis points as well.

However, both pale in comparison to what is happening in the equivalent paper in the U.S. and U.K. The former has seen a 28 basis point plunge, while U.K. two-year yields are currently trading at the lowest level in over a year after plummeting 32 basis points.

A year ago, we were debating whether the U.K. might even raise rates before the U.S. -– now markets are indicating the Bank of England's next move is more likely to be a cut.

Rates are either screaming out that the deflation battle is far from over or they're implying that investors are so worried about 2016 that they'd prefer to pay the German government 0.5% per year to keep their cash "safe." In other words they see deflation in financial assets, if not in consumer prices.

With that in mind, Brent crude's rebound of more than 30% from the January 20 intraday low, prompts two thoughts:

The first is that the risk of headline consumer-price deflation is much less than it was two weeks ago, which suggests that fear is indeed the dominant driver of rates markets.

The second is that when one of the world's key economic inputs, oil prices, can rally 30% but still be down on the month, then investors may have a valid reason to be scared. !!!!!!

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