JPY Pump Failing As Momos Refuse To “Fight The Fed”, Small Caps Slump On Yellen Warning

Everyone knows that you “don’t fight the Fed” – and sure enough, traders are selling momo, social media, and biotech stocks, sending the Russell 2000 ands Nasdaq to the lows of the day. Despite the best efforts of USDJPY momentum igniters – which has now shifted to tracking Treasury yields, pushing them modestly hgher. No bounce at all in broad US equity markets (though we expect the spin to be a rotation from growth to value once again very soon). Gold jumped on the dovishness but fell back to unch as did the USD.

 

 

with the momos in trouble…

 

Stocks are ignoring JPY’s best efforts to pump asset highers… sending Yields higher…




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Yellen’s “Irrational Exuberance” Moment Arrives As She Pops Momo, Biotech, Social Media Bubble

On one hand Janet Yellen, Series 7, 63-certified, and a consummate expert on equity valuation said the following soothing words about market values:

While prices of real estate, equities, and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk.

On the other, and sadly for holders of biotech and social media stocks, Yellen appears to have just burst that particular bubble.

Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of “reach for yield” behavior by some investors….

 

… signs of risk-taking have increased in some asset classes. Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms. Beyond equities, risk spreads for corporate bonds have narrowed and yields have reached all-time lows. Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened. For example, average debt-to-earnings multiples have risen, and the share rated B or below has moved up further for leveraged loans.

Call it Yellen’s “irrational exuberance” moment. Also call it a warning.

Oops




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Janet Yellen Testifies About The Fed’s Dovish Future – Live Feed

Fed Chair Janet Yellen will provide Congress with an update on the state of the economy, how rosy the future is, why she needs to keep rates lower for longer, and that there are no bubbles (oh apart from in bonds which everyone should sell because we need the collateral). These are her first comments since the FOMC press conference in mid-June and stocks have soared since then (as bond yields have tumbled) and she will have to tread a fine line between exuberant over headline job improvements and the need to keep over-inflated bubbles pumped full of cheap/free money for longer

Live Feed

 

Altnernate Live Feed




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How The World Feels About Pervasive US Surveillance And Spying: One Curious Finding

Perhaps the only thing more surprising that someone actually needed a poll to “discover” how the world feels regarding the NSA constant snooping of every form of electronic communication, is that a majority of the respondents in India, Nigeria and the Phillippines actually approve of having zero privacy. Oh, and the United States too.

As for the 10% of Russians who said “approve“, we assume they were either seriously drunk or even more seriously hung over when responding to the poll.

Source: Pew




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Meanwhile In Europe: Juncker Approved, Hague Out, Lord Hill To Brussels: What Does It Mean?

From OpenEurope

Juncker approved, Hague out, Lord Hill to Brussels: what does it mean?

This morning and last night saw three developments with importance for the UK’s Europe debate:

  • William Hague resigned as Foreign Secretary, replaced by Phillip Hammond, with the Cabinet becoming more Eurosceptic overall,
  • In nominating Lord Hill – the current leader of House of Lords – as the UK’s European Commissioner, Number 10 prioritised a ‘fixer’ and avoiding by-election over sending a heavy-hitter,
  • MEPs approved Jean-Claude Juncker as European Commission President by 422 votes to 250, marking the starting point of a more politicised European Commission.

What does this mean?

The reshuffle: The Cabinet has clearly taken a more Eurosceptic turn. In Philip Hammond, the UK has a Foreign Secretary who has said he would vote to leave the EU if it does not reform. In itself this is not a radical position; the logic of the Conservative position has always been that advocating an ‘in’ vote is dependent on achieving reform and Cameron himself has said a UK exit would be “imaginable”. However, the key question is the threshold for staying in – how much needs to change for a Tory government to advocate an ‘In’ vote – and although Hammond has not set out his own red lines, he undoubtedly has a higher threshold than Hague.

In that sense, Hammond’s appointment sends a clear message both at home and abroad – reform is not just desirable but fundamental to the UK’s EU membership. On one hand, Hammond’s appointment may make it harder to meet the threshold , but the flip-side is that any ‘In’ endorsement by Hammond would carry more weight than one by Hague. However, it’s far from clear that Hammond will stay on as Foreign Secretary after the elections in any case so this is very much about pre-election position.  

In terms of the broader picture, the centre of gravity around the cabinet table has shifted in a more Eurosceptic direction. Ken Clarke – the last heavy hitting pro-integration Tory – loses his position as Cabinet Minister without portfolio, Michael Fallon has been promoted to Defence Secretary, while Dominic Grieve – a staunch defender of the European Convention on Human Rights – has been replaced as Attorney General by Jeremy Wright. The latter move in particular suggests that the Conservatives could be gearing up to withdraw from the European Convention on Human Rights. However, the enforced departure of Environment Secretary Owen Paterson has slightly counter-balanced this shift.  

Lord Hill’s nomination: David Cameron has clearly let other considerations trump sending the highest profile candidate to Brussels. In particular, the Tory leadership was absolutely adamant it had to avoid a by-election for fear of losing political momentum ahead of the general election. Therefore, it had a very small pool to choose from, with the fundamental problem being that the Tories have not been a party of government for some time, meaning they did not have many heavy hitters floating around outside the Commons. Lord Hill is clearly an experienced political operator who is highly rated amongst colleagues and has considerable PR skills. He has also worked at the heart of government, including as Chief of Staff to John Major, during which he was involved in negotiating the Maastricht Treaty. Still, Cameron is in a similar position to where Gordon Brown was in 2009, when Brown appointed Catherine Ashton – who also was the leader of the House of Lords and unknown outside Westminster. What’s different is that Number 10 has prioritised what it calls a ‘fixer’ who can work the corridors in Brussels, seeing that as the best way to get the Commission onside in crucial areas such as rules on access to benefits for EU migrants and trade liberalisation. This was something that Gordon Brown clearly neglected and, to be fair, something sorely needed. If Number 10 is right, the nomination could still prove a success – but it will no doubt be heavily criticised until then.  

Will Lord Hill get a top job?

The chances of the UK securing one of the key portfolios in the next European Commission – internal market, competition or trade – have worsened but have not been completely squashed. First, in a Commission filled with former and even current foreign ministers and prime ministers, Lord Hill will struggle to compete on merit. Secondly, his CV doesn’t easily lend itself to one of these portfolios. He founded and sold a PR firm and has experience from across governmental departments but no clear ‘economic portfolio’ type experience.  Thirdly, he is not a woman, which would have been one way for the UK to massively boost its chances for a good job. Having said, it’s too early to jump to conclusions, not least since several portfolios – included internal market – are expected to be broken up, making the job allocation unusually unpredictable. (Further Reading on the Open Europe blog: Who is Lord Hill?)

Juncker’s approval: MEPs today voted by 422 votes to 250, with 47 absentions to approve Juncker as the next European Commission President. With the backing of both MEPs and EU leaders, the debate moves on the other top jobs with the European Council President – who will preside over potential EU-UK renegotiations – a key position. The vote – via a secret ballot – was in many ways a formality but the relatively wide margin in favour of Juncker will likely reinforce his perceived mandate to make the European Commission, as he put it, “very political”. Today marks the starting point of that.




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June Retail Sales Miss Across The Board, May Revised Higher

Following disappointing retail sales number for both April and May, or two thirds of Q2, there was hope that June would finally be the month retail sales would soar. Alas, that would not be the case, following the release of the latest retail sales data by the Department of Commerce which reported that in June retail sales rose just 0.2%, well below the 0.6% expected and matching the lowest end of the forecast expectations (from 0.2% to 1.1%).

Misses were also reported for retail sales ex-autos (0.4%, Exp. 0.5%) and ex-autos and gas (0.4%, Exp. 0.5%). Perhaps the only saving grace was the upward revision of May data from 0.3% to 0.5% for the headline number and from 0.0% to 0.3% for the ex-autos and gas. If anything, however, today’s retail sales increase which was the slowest in 5 months confirms that the trend we warned about in April, namely that the US consumer tapped out in March to fund that month’s mad spending spree, and the spending trend has been deteriorating ever since.

There was some good news in today’s report which was the retail sales control group, which rose 0.6% compared to estimates of 0.5%, and the May revision of 0.0% to 0.2% means that GDP beancounters will likely end up adding a few basis points to their Q2 GDP estimate even as consumers enter Q3 in the weakest shape they have been since the polar vortex.

Finally, the breakdown of retail sales by business was rather paradoxical: because while automakers reported yet another surge in June car sales, retail sales for the category showed a -0.3% decline. The other big drop? Building materials and garden equipment supply dealers which slid -1.0%. Hardly a positive for that other key component to US GDP – housing.




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The Middle East Is “Fixed” – WTI Crude Drops Below $100 For First Time Since May

We can hear the headlines now… thin of the tax cuts, think of the improved discretionary spending, see Iraq was a storm in a teacup… WTI Crude’s drop back below $100 provdes so much great news for the world that many perhaps are missing that the world and his brother were long black gold into this and this squeeze appears anything but reflective of the rising tensions… (or is it due to tumbling demand?) Russia won’t be happy – time to escalate.

 




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Empire Fed Soars To 4-Year Highs But Outlook Collapses Most In 3 Years To 13-Month Lows

The exuberant reaction in stocks at the Empire Fed’s 3rd beat in a row soaring to its highest since April 2010 is perhaps missing a much more critical point – looking forward, survey respondents are their least positive about future business conditions in 13 months. This is the biggest MoM drop in over 3 years with a big drop in new orders expected along with less employees (the worst in 2014) and notably lower capex.

 

 

But then there’s this – the future…

 

with the employment outlook worst in 2014

 

Charts: Bloomberg




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Portugal Contagion Spreads: Espirito Santo To Default On Portugal Telecom Loan, Business Lending Drops Most On Record

Despite reassurances from US asset-gatherers and TV ‘personalities’ that Portugal must be fixed (because US equities are up), it is anything but. Today’s triple whammy from the ‘recovered’ Portugal starts with Banco Espirito Santo bonds and stocks hitting new record lows (down over 10% more on the day). The contagion has rippled across to Rioforte, which controls Grupo Espirito Santo’s non-financial arm – and is likely to default on a EUR 847 million payment to Portugal Telecom. And just to add further salt to that wound, Portuguese business lending in May collapsed at a record pace (down 8.23%). But apart from that, yeash Portugal is all fixed and their sovereign bonds are worth every penny…

 

Step 1 – Banco Espirito Santo bonds and stocks continue to collapse…

 

Step 2 – The Contagion spreads to the rest of Portugal…

  • Rioforte, which controls Grupo Espirito Santo’s non-financial arm, is likely to default on 847m-euro payment due to be made to PT today, Folha de S.Paulo reports, without saying where it got the information.
  • Payment is part of 897m-euro debt to PT
  • Negotiations are still underway
  • Rioforte has been trying to sell assets over last few days to enable it to make the payment
  • Co. has potential to raise 300m euros from sales of assets, including Tivoli hotel chain
  • Rioforte, PT seek solution to enable loan payment, without changing terms of merger w/Oi
    Zero

 

Step 3 – Credit Creation is collapsing as business lending plunges by its most on record…

 

*  *  *

But apart from that Portugal is fixed




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Goldman Is Baaack: Slide In Trading Volume Offset By Second Highest “Prop” Trading Revenue Since Lehman

Moments ago Goldman Sachs surprised Wall Street by trouncing expectations of a $3.09 EPS print with a beat over $1, printing at $4.10, coupled with a surge in revenue which declined from Q1’s $9.3 billion by far less than consensus (Est. $7.98 billion) had expected, printing at $9.125 billion. What drove this? Clearly not a pick up in trading volumes: FICC declined 10% Y/Y and 22% from a quarter ago, while total Institutional Client Services dropped 11% Y/Y. Investment Banking did pick up modestly, up 15% from last year’s $1.552 billion to $1.781 billion but this too did not explain the difference. The answer: Goldman’s prop trading group is baaaaack.

With total revenue for the “Investment and Lending” group, aka “Prop”, this was a whopping 46% surge in revenue Y/Y and up 36% from past quarter. In fact, Q2’s prop trading revenue was the highest since Q1 of 2011! Putting this in context: the Goldman prop trading revenue in Q2 was the second highest since Lehman, lower only than the $2.705 billion in Q1 2011. Rest in piece Volcker Rule.

Surely, the fact that Goldman repurchased $1.25 billion of its stock didn’t hurt the bottom line either.

As a result, average Goldman comp rose from $376,840 to $385,988: the highest since Q2 2013.

A great job well done, FDIC-insured hedge fund traders!




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