Month: February 2018

Authored by Charles Hugh Smith via OfTwoMinds blog,

Hello reverse wealth effect.

There’s a place for fancy technical interpretations, but sometimes a basic chart tells us quite a lot. Here is a basic chart of the Dow Jones Industrial Average, the DJIA. It displays basic information: price candlesticks, volume, the 50-week and 200-week moving averages, RSI (relative strength), MACD (moving average convergence-divergence), stochastics and the MACD histogram. These kinds of charts are free (in this case, from StockCharts.com).

This is an ugly chart.It’s ugly because the decline to date is still far above support levels (the 50-week and 200-week moving averages) and the indicators have only just started registering sell signals. This means that price will have to decline a lot more to test previous support and send the indicators to levels that signal reasonably low-risk entries.

In other words, there’s nothing suggesting this is a buying opportunity in this chart. Rather, it suggests a decline of another couple thousand points would be perfectly normal in a weekly chart with a big fat MACD sell cross and sinking RSI and stochastics.

Even a decline of 6,000 points to 18,900 would be technically very typical of an over-stretched asset snapping back to long-term support.

Buying the dip is a good way to experience churning whipsaws. Up 350 points, then down 450. Nice if you can second-guess the trading bots, not so nice if you assume every dip should be bought because the market always rallies from every dip. Maybe, maybe not.

Something changed, and no, it isn’t just the easy-money sell-volatility trade blew up. All the other easy-money sure-thing momentum plays are now in doubt: the buy the FAANG stocks sure-thing, the buy the DJIA sure-thing, the buy the New Nifty 50 (Boeing et al.) sure-thing, the buy emerging bonds, stocks and and FX sure-thing, the buy bonds because interest rates will continue drifting lower forever sure-thing, the buy utilities sure-thing (the 15% drop since December 1 put a dent in that sure-thing), the buy REITs sure-thing, and so on.

If the momo trends that enabled every trading bot to make money by buying the dip and selling volatility go away, how will everyone make money? The short answer is that it suddenly becomes much more difficult to make money and keep it.

God forbid that money managers and punters would have to actually do their homework and pick stocks based on fundamentals. And what happens when those fundamentals start deteriorating as “growth” slides into “stagnation”?

Hello reverse wealth effect. As everyone feels poorer (because their phantom “wealth” evaporated), then they’re less inclined to borrow and blow tons of money that’s not actually theirs.

In the meantime, check out the cool correlation of bat guano, the yen pushed forward 6 months, lumber futures, the Big Mac Index, and the LIBOR/bitcoin pair… the quatloo is a screaming buy.

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Two days after Greece shelved plans to price its 7 year bond offering on Tuesday due to market conditions (not in Greece, mind you, but in the US where the VIX ETF industry had just gone bananas), on Thursday the thrice bailed out nation once again kicked off its long-awaited sale of a seven-year bond, and moments ago priced the more than twice oversubscribed offering some 25bps lower than initial price talk.

The eurobond offering, which was marketed with a 3.75% yield, just priced at 3.5% and was sized at €3 billion, or less than half the peak orderbook of €6.8 billion according to the lead managers.

Here are the final terms, via Bloomberg:

• Greece EU3b 7Y 3.5%; Guidance was 3.5%-3.625% vs IPT 3.75% area.
• Orderbook above EU6b (incl. EU320m JLM interest); orders peaked at more than EU6.8b: Leads
• Issuer: Hellenic Republic Government International Bond (GREECE)
• Issuer Ratings: Caa2/B/B-
• Format: Reg S CAT1, dematerialized, registered
• Size: EUR Benchmark
• Maturity: 7Y (Feb. 15, 2025)
• Coupon: Fixed, annual, act/act
• Joint bookrunners will be paid a fee in connection to the transaction
• Settlement: Feb. 15, 2018
• ISIN: GR0118017657
• Listing: Athens
• Law: English
• Bookrunners: Barclays, BNP, Citi (B&D), JPM, Nomura

After the third Greek bailout in the summer of 2015, the country’s July 2017 debt sale marked its first international bond issue since 2014, after a bout of brinkmanship over its 2015 bailout led it to be shunned by investors. Of course, with Greece offering some of the juiciest yields, backstopped by tens of billions of bonds held by the ECB, it was only a matter of time before investors came crawling back, begging for a piece of the action.

Incidentally, with the Greek 10Y trading at 3.786%, it is now less than 90bps away from the US 10Y Treasury at 2.878%, and at this rate, it is likely that the two may cross in the next few months.

 

 

 

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Seriously…

Dow futures are now down almost 200 points from their pre-market highs as the XIV ramp into the open fades…

 

And Nasdaq’s (green below) panic-bid evaporates as Dow (blue) and S&P (red) tumble…

 

Did the bond yield spike spook stocks? Or was it simply pure manipulation into the bell?

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The past week has seen US equities spooked as 10Y yields spike above 2.85%…

10Y yields just lurched even higher, near cycle highs…

As a reminder, the ‘good’ news of a budget deal and no government shutdown, means higher deficits and more Treasury supply, and with The Fed out of the bond-buying game, the search for the marginal buyer continues to push rates higher.

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The great Volmageddon shock of February 5 may have come and gone -or is at least dormant for now in the aftermath of the great VIX ETP extinection event – but that does not mean it won’t come back: in fact as Goldman’s new head quant wrote overnight, the bank’s clients had just one recurring question in recent days: “do i have to worry about another volatility spike.”

While Goldman answered in the context of the vol complex, where things have certainly eased down substantially since the record Vega prints from last week…

… there is another, potentially far more violent storm brewing, and it has little to do with equities.

In a note from BofA’s X-asset hedging team published overnight, the bank’s strategist Jason Galazidis writes that while the muted cross-asset risk shows the equity shock was largely technical, there is one indicator that may confirm it is not only returning, but is set to spread to all asset classes.

Here is BofA’s framing of the narrative that has been on everyone’s lips for the past two days.

The sell-off in global equities and in particular US large-caps precipitated an unprecedented jump in S&P implied vol. Notably, the 8% decline in the S&P from late Jan to 6-Feb has already registered as the 10th largest drawdown since 2006. As an indication of how concentrated the shock was to US large caps, S&P puts were by far the best performer and are now the most expensive hedge across the 34 assets in our screen (Chart 1). We would not expect this to persist as markets calm.

To be sure, cross asset vols and credit spreads have not been immune to the repricing of equity risk, but as we pointed out over the past few days, these reactions have so far been less severe: meanwhile, global equity volatility is currently well above long-term median levels for the first time since the Nov-16 US elections.

In contrast, BofA notes, other broad asset risk measures are comfortably below median with commodity, rates and credit actually hovering near their 1st decile since May-07.

In other words, contagion has thus far been relatively limited, again pointing to a technically driven shock which is likely to fade absent cross asset spillover.

Which brings us to the punchline: with the great equity volquake come and – for now – gone, what one indicator should traders watch to determine if a new market shock is imminent? Here is Bank of America’s answer:

We continue to believe that watching rates vol is particularly important to gauge the potential for this to escalate further.

If BofA is right, this may be a problem, because as the following chart of X-asset vols for all 4 main asset classes (Equities, rates, FX and commodities) shows, while equity vol is declining, rates vol is creeping steadily higher.

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The man who claimed he once peered into Russian President Vladimir Putin’s soul is now saying there’s “pretty clear evidence that the Russians meddled” in the 2016 American presidential election.

Though he didn’t mention President Donald Trump by name, Bush criticized his push to tighten border controls and rein in legal immigration while warming relations with Russia – which recently inspired Trump to effectively cancel sanctions against Russia that had been authorized by Congress last summer, CNN reported

“There’s pretty clear evidence that the Russians meddled,” Bush said during a talk in Abu Dhabi, the capital of the United Arab Emirates. “Whether they affected the outcome is another question.”

Bush also said that “it’s problematic that a foreign nation is involved in our election system. Our democracy is only as good as people trust the results.” Bush’s remarks followed reports from the US official in charge of protecting American elections from hacking, who said the Russians successfully penetrated the voter registration rolls of several US states prior to the 2016 presidential election.

Trump and his administration are still fending off allegations of collusion as Special Counsel Bob Mueller pushes for an interview with the president in his probe into Russian meddling and collusion – and Trump’s lawyers have reportedly advised him not to agree to an interview.

“He’s got a chip on his shoulder,” Bush said of Putin.

“The reason he does is because of the demise of the Soviet Union troubles him. Therefore, much of his moves (are) to regain Soviet hegemony.”

Bush also stressed the need to back NATO and the US’s other alliances, implicitly criticizing Trump, who has repeatedly threatened to withdraw funding from NATO unless its other members pick up the slack and offer more funding.

Putin “is pushing, constantly pushing, probing weaknesses,” Bush said. “That’s why NATO is very important,” adding that the US needs to reform its immigration laws – one cornerstone of his “compassionate conservative” philosophy that he ran on in 2000.

Back in 2008, Bush became the first sitting president to visit the UAE. He spoke Thursday at a summit in Abu Dhabi organized by the Milken Institute, an economic think tank based in California.

He made his comments during a conversation with former “junk bond king” Michael Milken, who pleaded guilty to securities-law violations in 1990 and served 22 months in prison on a 10 year sentence. He also paid a $200 million fine and accepted a lifetime ban from the securities industry. Since then, he has reinvented himself as a philanthropist.

Bush broke is yearslong public silence last year to deliver a speech in New York where he critcized President Trump for his “hateful” rhetoric. Of course, the president didn’t make any friends in the Bush family when he famously labeled Bush’s brother “low energy” Jeb Bush.

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