Scotiabank Warns “Treasuries Will Have A Difficult Time Going Down A Lot In The Near-Term”

Via Guy Haselmann of Scotiabank,

Good Morning,

I went to a meeting last night hosted by the University of Chicago called “Economic Outlook 2014”.   The panelists leading the discussion were Austan Goolsbee, Randall Kroszner, and Carl Tannebaum.   I will not go into the obvious, or things discussed in my notes, but rather a few things that I learned.

First some background.  Internally we have been forced to discussed pressures in Emerging Markets.   The challenges are great – yet many countries until recently have had isolated troubles.  Capital outflows, current account deficits and sinking currencies are one of the common themes.  The questions for us – i.e. players in the Treasury Market – is how will those stresses effect Treasury prices or impact the Fed who is expected to taper by $10BB at each meeting in 2014.  

On the one hand and in a stable state, tapering should lead to a gradual ‘normalization’ of yield levels – which mean that the 10 year should (assuming no crisis) ‘gradually’ trades toward nominal GDP minus some liquidity premium.   However, I’ve mentioned in earlier notes that should concerns build that global growth and inflationary expectations begin to drop too much (either due to Fed Taper or Geo-events), then Treasury values will recalibrate and yields could drop precipitously 2.5%.  If things got really bad, yields could fall quite a bit further.  We don’t seem to be in this latter position – quite yet.

While the situations in Turkey, Ukraine, South Africa, Brazil, Argentina, India, Indonesia, Thailand, Syria, etc. are signification to those countries, their problems for the most part have until recently been contained.  However, pressures are building and many of their central banks have been forced to raise rates meaningfully to combat capital outflow, and currency drops that have aggressively spiked domestic inflation rates.  It is assumed that hiking rates to fight inflation will build their credibility.  However, these large rate hikes will cause domestic growth damage: combined with the drop in their currencies, markets are beginning to lower expectations for demand coming out of these countries….less demand, then less growth and downward price pressures.

The biggest issue of all, but unfortunately the most uncertain as well, is with the Chinese Trust products.   As I mentioned, $660 Billion of this product comes due this year.  Investors who had purchased them in the past now know that they are indeed NOT a guaranteed product.   Rates in China will have to rise to compensate the newly found investor caution toward these products.  In turn, growth will slow as credit will slow; and employment will slow and wages with it.  

Slowing demand from China will further hurt EM suppliers of materials, thus fueling EM challenges.  The result is causing global growth and inflation expectations to fall.  China is best positioned to limit the damage.  Yet, are they willing to write a check for all these products many of whom could default?  China has a closed capital account and many ways to deal with problems.  But they could lose control of the process – Beijing’s number one fear is social unrest that could grow.

Back to the U of C meeting last night.   Carl Tannebaum  made an interesting point last night.  He said the US fiscal deficit is falling far faster than anyone had forecast and there are many perplexing reasons why this is the case.  The main reason, according to the CBO, is that Health Care costs are dropping much more than anyone expected.  This is the result of generic drugs, better medical device efficiencies and a few other less dramatic reasons.   The point here is that this is causing downward pressure on inflation and a material fiscal deficit drop.  Both of these factors in the short-term are positive for Treasury PRICES.  In fact, Carl said that the drop in HC costs is so dramatic that should it be maintained for the balance of the year, that the Deficit Reduction would equate to 90% of what Simpson- Bowles was meant to accomplish.

As far as the Fed,  I believe there is an infinitesimal chance that the Fed pauses from tapering today.  The greatest outcome – a very high probability – is that they taper by another $10BB.  However, there is a small chance that they announce a $10 BB taper for February and another $10BB taper for March.   This is because the next Fed meeting is not until March 19th.   The chances of this occurring is quite small particularly after the lousy employment report earlier this month and yesterday’s lousy durables report.  However, maybe they can blame those on the weather.

There are many members who would like to exit as soon as possible, so a monthly $10bb is possibly.  

On the other hand (again), the markets might interpret  this as an acceleration in the pace, so the market could then price in an earlier hike in rates.  This is because the Fed has tied the first hike to a 6-month (or so) period after QE ends (i.e. earlier end to QE, earlier hike).   The market in this scenario – and because of the current global situation – might have a perverse reaction in that risk assets might get smoked, and growth and inflation expectations might fall even further, and so after a brief dip in Treasuries, they would surge higher in price.

In the meantime, Treasuries will have a difficult time going down a lot in the near term; such would need both the EM situation and equity market heaviness to stabilize.


    



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Video of the Week: Negative Divergences and the Big Picture

Negative divergence bars have become a powerful tool in my arsenal. There are some significant set ups in several key charts. Watch the Video of the Week to find out more!

TacticalBeta has strategies on gold, Treasury bonds and equities.  100% FREE!


    



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Market Idiocy Full Frontal: Round Three

First there was TWTRQ – the ticker for Tweeter Home Entertainement (which exploded 650% higher when the TWTR IPO was announced); then came NEST – the ticker for Nestor Inc. (which exploded 4900% higher when Google announced its acquisition of the thermostat maker Nest); and , drum roll please… today (just as we warned last night) the market's sheer idiocy is exposed once again in the form a 900% gain in the ticker symbol MYRA – the ticker for Myriad Emtertainments (following the President's unveiling of his MyRA savings plan last night)… we have no comment…

 

Today's epic rally… (as $120 investment)

 

and our warning last night…

One final point: in the aftermath of the demonstration that the market is run by absolute idiots, courtesy of TWTRQ and NEST, we fully expect that tomorrow Myriad Entertainment & Resorts, stock ticker MYRA, trading at a lofty price of $0.00, will soar tomorrow to, what else, Obama's target price of $10.10.


    



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All Fayette students home by 6:45 p.m. Tuesday; all county roads passable but dangerous

“Our Public Safety and Emergency Management folks did a great job coordinating this effort and our response. I’m told that all Fayette roads, though dangerous, are passable except Kite Lake Trail,” Fayette County Administrator Rapson reported to the Fayette County commissioners via email at 1 p.m. Jan. 29.

“State DOT has one truck operating on state highways; our Road Department is monitoring county roads; EOC remains up and operational; Piedmont Fayette has its command center open and functioning; Fire and EMS is running below average call volume at this time as a result of low traffic volumes,” Rapson said.

“Sunlight is helping roads considerably but we’re saving remaining salt for evening and tomorrow morning,” Rapson said.

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Atlanta image taking a beating in the 2014 Icecapades

How bad is it? It’s so bad that even folks up north are watching the news, shaking their heads, and saying “Bless Their Heart.”

Here in the Atlanta area, there’s a different kind of blessing going on, as reporters are channeling the rage of those who were stuck spending the night in schools, on school buses stranded in the road, and commuters who faced times upwards of 7 to 10 and even 12 (twelve!) hours home if not more. The reporters are unleashing on Gov. Nathan Deal, who made the unfortunate remark that this snowstorm was “unexpected.”

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Which Way Wednesday – FOMC Edition

By Phil of Phil’s Stock World

So much for Obama boosting the markets.  

The WSJ has a cool toy for comparing Obama’s speech to past ones and even other Presidents, so I won’t get into much of the content here (highlight video).  

As was expected, the President said he will use executive power to implement his economic agenda to help address the ever-widening gap between rich and poor in America, announcing a dozen proposals, including raising the minimum wage to $10.10 an hour for Federal contract workers, presumably setting an example for private enterprise to follow.  

The reality is, there’s not all that much Obama can do without Congress and it’s the Democrats’ objective to make that clear to the people between now and November, when the bottom 99% get to decide who will be in that Congress for the last two years of Obama’s term. 

“President Obama has this fantasy that he can just use his pen to write laws,” said Rep. Steve Scalise (R., La.), chairman of the conservative Republican Study Committee. “We don’t have a monarchy in this country—there’s an executive branch and the legislative branch, and the president has to work with Congress to get things done.”

Sorry, that quote should have gone with a musical queue.  

Turkey goosed the markets last night, with a SHOCKING rate hike on one-week Interbank Rates, from 4.5% all the way to 10% as that country attempts to get its plummeting currency and runaway inflation under control.  That boosted the overnight rate from 8% to 12%!     

So far, the Fed and the ECB have been fairly successful in exporting all the inflation – mainly to third-world countries but the BRICs are feeling the pressure as well as G20 fringe economies like Turkey and Indonesia and their Central Banks are hiking rates in an attempt to keep things under control while our own Central Banksters keep screwing over the bottom 90% by pretending inflation doesn’t exist.  

“In the last quarter my sales have dropped by a third, while the costs have risen 20%,” said Sinan Oncel, owner of Twigy, a popular footwear chain with 19 stores in Turkey. “We don’t know what will happen next. We don’t know what the next political move will be and it’s worrying.”

Argentina’s central bank has also pushed up rates in recent days, and in South Africa, which faces a similar mix of weakening growth and high inflation, rate setters were under pressure to follow suit at their meeting Wednesday.  On Monday, the Bank of Russia shifted the ruble’s trading band higher, in response to selling pressure on the Russian currency.

The Argentine central bank, which lacks independence, this week is offering 25.89% on peso-denominated notes due in three months, a six percentage-point increase from the auction a week earlier.  Despite the move, however, most economists say interest rates remain negative in Argentina and that the bank will need to push rates above 30% to have an impact on inflation, which is estimated at between 25% and 30%.

Now, back to our markets.  Not much to report. In yesterday’s live Webcast, we predicted that we’d get to our weak bounce lines of Dow 15,940, S&P 1,794, Nasdaq 4,100, NYSE 10,080 and Rusell 1,138 and that we would likely fail them and head lower.  

 

 

As you can see from our Big Chart (above), the last-minute pump took us almost exactly to our expected levels and, despite an overnight head-fake, courtesy of Tukey’s Central Bank, it looks like we’re back on track to continue the downtrend we expected.  That’s why we didn’t change out positions in yesterday’s rally–saved by simply following the 5% Rule™:  

Our 5% rule is fairly simple.  We expect major market moves to trigger in 5% blocks.  Why is this? Because all the clever programmers and all the captains of industry and all their little consultants all get together to design the ultimate trading system but they all end up rounding off here and rounding off there and, ultimately, the decision to push the button comes down to a person (or, even worse, a group) who then end up being affected by psychological resistance points as well as the usual mob psychology that dominates the markets.  The reason Goldman’s trade-bot is able to convert winning days 93% of the time is they are NOT trying to do any of these things – they are simply inserting themselves in the middle of a transaction to swipe pennies – that’s not trading but it sure is profitable! 

 

MOST market participants actually buy stocks and they try to buy low and sell high and they have profit targets and stop losses, etc.  Over 1/2 the funds playing the market rely on various TA methods for entry and exit points and many funds use Fibonacci series in their calculations so it all becomes a self-fulfilling prophesy.  We take advantage of that by effectively averaging out the results which gives us a general rule that stocks tend to move in 5% incriments before a 20% retrace (keeping in mind that Fibonacci looks for 23.6% so it’s an “about” number). 

 

I already called for an oil (/CL) short at $97.50 in early morning Member Chat and oil is already falling (8:48 am) and gold is jumping back up towards $1,270, which means silver will test $20 again but this time it should make it over so I like /SI, now $19.83 with a stop at $19.79. Be careful as it’s a whopping $50 per penny per contract! 

The Dollar is 80.76 so game off if it fails 80.75, but panic is back in the air ahead of the Fed, which might taper another $10Bn a month (less FREE MONEY). $10 out of $75 is 13.3% while $10 out of $85 was 11.7% so the tapering is harsher with each consecutive round.  

We’re going to put on some bullish covers ahead of the Fed because they MIGHT hold off on tapering and, in fact, it’s very possible that this little downturn is nothing more than a temper-tantrum by the Banksters trying to stop the Fed from taking away their FREE MONEY in the first place. Cerainly the timing is suspicious.  

I put up a bunch of inflation-fighting bullish hedges last week. Our 5% Rule has prevented us from pulling the trigger so far but, today, ahead of the Fed, I think we’ll review them in Member Chat and take a stab at one or two to lock in the gains in our fairly bearish Short-Term Portfolio.  

It’s going to be a very volatile day but, if the Fed doesn’t “save us” this afternoon – I don’t know what will.  

Click on this link to try Phil’s Stock World FREE! 


    



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"A Funny Old World" – The EM Carry Trade Collapse 'Deja Vu, All Over Again' From Citigroup

Spot the similarities.

From CitiFX Technicals: It’s a funny old World

  • 1989-1991: Housing and savings and loan crisis: Fed eases aggressively as economy enters deep recession
  • 1992-1994: Existing financial architecture in Europe (ERM) blows apart
  • 1995-1998: European convergence trade in both FX and Bond spreads keeps European currencies relatively stable vis a vis the USD with a good rally in 1998.By 1996 BUBA has lowered the discount rate to 2.5% while US rates remain well below the pre-crisis highs of 9.75% in 1989.
  • The carry trade and capital flow into emerging markets (Asia in particular) is center stage
  • March 1997: In a seemingly “innocuous” move the Fed “tinkers” by raising rates 25 basis points.
  • April 1997: Japan raises its consumption tax as USDJPY has rallied from a post Kobe Earthquake low of 79.7 to 127.50 . USDJPY collapse to 111 by June
  • June 1997-Jan 1998: Severe reaction in Asian currencies as “hot money flees”
  • August-October 1998: Russia defaults, Long term capital folds and the Fed eases aggressively as the Equity market drops 22% (S&P)

History may not repeat…..but it sure RHYMES


    



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“A Funny Old World” – The EM Carry Trade Collapse ‘Deja Vu, All Over Again’ From Citigroup

Spot the similarities.

From CitiFX Technicals: It’s a funny old World

  • 1989-1991: Housing and savings and loan crisis: Fed eases aggressively as economy enters deep recession
  • 1992-1994: Existing financial architecture in Europe (ERM) blows apart
  • 1995-1998: European convergence trade in both FX and Bond spreads keeps European currencies relatively stable vis a vis the USD with a good rally in 1998.By 1996 BUBA has lowered the discount rate to 2.5% while US rates remain well below the pre-crisis highs of 9.75% in 1989.
  • The carry trade and capital flow into emerging markets (Asia in particular) is center stage
  • March 1997: In a seemingly “innocuous” move the Fed “tinkers” by raising rates 25 basis points.
  • April 1997: Japan raises its consumption tax as USDJPY has rallied from a post Kobe Earthquake low of 79.7 to 127.50 . USDJPY collapse to 111 by June
  • June 1997-Jan 1998: Severe reaction in Asian currencies as “hot money flees”
  • August-October 1998: Russia defaults, Long term capital folds and the Fed eases aggressively as the Equity market drops 22% (S&P)

History may not repeat…..but it sure RHYMES


    



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Russia Ruble Collapse Escalates To Record Low

With all eyes on Russia over the next month as the Sochi Winter Olympics ramps up, we are sure having the market’s attention on a collapsing currency is not what Putin had in mind before he dropped $50 billion to make it snow. While the Ruble remains just above record lows against the USD, Bloomberg reports that it has dropped to a record low against the central bank’s dollar-euro basket. Russia’s finance minister proclaimed today (Erdogan style?) that Bank Rossii should not raise rates (which has been unchanged at 5.5% for the last 15 months). Russian CDS is widening (193bps at 4 month highs) but not cratering like other EM currencies but MICEX (stocks) have had their longest losing streak since April.

 

 

As Bloomberg adds,

The ruble depreciated 1.2 percent to 40.9632 versus the central bank’s dollar-euro basket by 6:01 p.m. in Moscow. A weaker ruble encourages Russians to withdraw and convert local- currency deposits, Sberbank’s main source of funding, while hurting retailers by making imports more expensive in ruble-denominated prices.

 

Investors are scared of the ruble devaluation,” Sergey Vakhrameev, an analyst in Moscow at AnkorInvest LLC, which manages about $30 million in assets, said by phone. “During strong devaluations, stock markets fall, investors become scared of indexes in countries where the devaluation isn’t controlled.”

Of course, this will only make the bank run problems worse…


    

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