The Morning Snapshot

Sentiment Higher as Concerns Ease

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Risk assets are moving higher, with stocks and sovereign bonds moving higher overnight, while the U.S. dollar is mixed versus its major peers with modest prices changes across the board. Concern about Chinese interbank liquidity is abating, with overnight Shibor down to 5.5% from the high of 13.44% on June 20, after the PBoC said it will safeguard money market stability. Anxiety over China’s economic growth is still weighing on markets, with industrial metals moving lower overnight; front-month copper futures are lower by -1.1%. S&P 500 futures are trading higher by +0.5%, joining euro-area stocks, with the Euro Stoxx 50 climbing +2.25% on the day. U.S. Treasury yields are lower by -4bps to 2.57%, while across the pond most sovereign spreads to the German Bund are narrowing.

Today is mostly risk-on, but this market observer is not sleeping better at night just because the PBoC says it will “safeguard” money markets; investors must continue to weigh the real global economic picture.

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The Selling Continues

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Widespread risk aversion is driving the dollar, euro, and yen higher versus most of their major peers, with stocks and sovereign bonds falling across the world. Chinese equities officially entered a bear market amid a cash squeeze that Moody’s says could weigh on smaller banks’ financial strength. Benchmark money-market rates in the country are lower for a second consecutive day, extending a retreat from record highs, as the PBoC begins targeted fund injections. Domestically, stocks opened down as much as -1% while 10yr Treasury yields soared +9bps overnight to 2.62%, near Aug. 2011 highs. All ten sectors of the S&P 500 are in the red, with materials and energy leading the way lower. Commodities are behaving as expected in typical risk-off conditions, with oil and copper down -0.4% and -2.4% respectively.

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Bloodbath, or Overdue Correction?

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Risk-assets were decimated yesterday. Almost every major asset class experienced a 1.5-3 standard deviation move lower, most on heavy volume due to an addiction to stimulus. Near session close, basically the only green across the blotter was the USD (obviously, classic risk-off trade), the VIX (even more obviously), OJ futures, and coffee. The S&P 500 tanked -2.5%, the most in over two years, and closed below 1,600 for the first time since 5/3. VIX cash closed above 20 for the first time this year. Gold plummeted down -7.11% to $1,276, while copper and crude oil both fell nearly -3%. Treasuries took the biggest hit on Wednesday, but yields continued to advance across the curve yesterday. Twos rose +1.63bps to 0.3227%, tens +5.9bps to 2.4117%, and thirties overtook the Sept. high of 3.5% rising +10bps.

The ‘bloodbath’ (or a much overdue correction, depending on how you look at it) comes after Bernanke reiterated Wednesday a statement that was first given during his May 22 testimony before congress. He essentially told markets that tapering of bond purchases was possible this year IF economic conditions were to warrant it. No one can know exactly how Ben thought the market would react, but this market observer thinks he had to have known it could turn ugly, although he and the FOMC really only reiterated prior statements. QE is data dependent, that is, the Fed has the option of lowering OR raising its current $85B of purchases per month. We know that. And now, although I think the reaction is overdone, I do believe the market has failed to price in the true state of the global economy – I just don’t think it’s going to start on Monday.

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