"Liquidation sometimes is orderly, but more frequently degenerates into panic as the realization spreads that there is only so much money, not enough to enable everyone to sell out at the top."
Charles P. Kindleberger, Manias, Panics and Crashes.
Stocks were suddenly
so last year’s investment this week, as bond yields rose into territory that
makes them attractive investments to way over priced stocks. The long overdue
correction started immediately after the usual dress up the month end in
stocks.
Now nervous stock
gamblers are left wondering if it’s still a case of “buy the dips,” or if it’s
a case of “this time it’s different?”
Adding to the stock pedlar’s problems, US stock earnings expectations
are already fully priced in and then some, while America itself is a house
divided like no other time since “Tricky” Dick Nixon was forced out of the
White House in disgrace way back in 1974.
Below, the stock
gamblers conundrum. A correction or the start of a Great Rotation out of
stocks. Perhaps Sunday’s Super Bowl will
decide.
Super Bowl indicator
The
Super Bowl Indicator is a superstition that says that the stock
market's performance in a given year can be predicted based on the outcome
of the Super
Bowl of that year. It was "discovered" by Leonard
Koppett in the '70s when he realized that it had never been wrong, until
that point. This pseudo-macroeconomic concept states that if a team from the American Football Conference (AFC)
wins, then it will be a bear market (or down market), but if a team from the National Football Conference (NFC) or
a team that was in the NFL before the NFL/AFL merger wins, it will be a bull
market (up market).
----
As of January 2017, the indicator has been correct 40 out of 50 times, as
measured by the S&P 500 Index – a success rate of 80%.[1][2]
However, since a particular football league winning a Super Bowl and the US
Stock market have no real connection this is just a coincidence. Therefore,
there is no reason to expect it will work as a predictor of future bull markets
February 2, 2018 / 12:39 PM
Dow sees worst day in two years as bond yields jump
NEW
YORK (Reuters) - Worries about the impact of a tightening job market on the
prospects for inflation and a surge in bond yields sent investors fleeing
equities on Friday, with the Dow Jones Industrials Average swooning almost 666
points, for its biggest daily percentage loss in 20 months.
It was the
biggest daily point fall in the Dow since December 2008 during the financial
crisis.
With
Friday’s rout, Wall Street’s three major indexes logged their biggest weekly
losses in two years, after closing at record highs the previous week. The
S&P 500 and Dow saw their worst weeks since early January 2016 while Nasdaq
had its worst week since early Feb 2016.
“People are
starting to really get increasingly uncomfortable with the rapid rise in
interest rates that we have seen and the uncertainty of how that is actually
going to start to play out relative to competition for stocks,” said Chuck
Carlson, chief executive officer at Horizon Investment Services in Hammond,
Indiana.
Overnight
stock price losses accelerated after the U.S. Labor Department reported
employment grew more than expected in January with the biggest wage gain in
more than 8-1/2 years. The picture of workers commanding higher salaries fueled
expectations that inflation is on the rise, which could prompt the Federal
Reserve to take a more aggressive approach to rate hikes this year.
That caused
the 10-year Treasury yield to surge to 2.8450 percent the highest since Jan.
2014, which could make returns on Treasuries look more attractive relative to
stocks.
More
Traders Are Asking If the Bond and Stock Selloff Is the Start of Something Big
By Lu Wang, Elena Popina, and Sarah Ponczek
Updated on 2 February 2018, 21:54 GMT
They’ve faced threats before: swollen valuations, a stagnating economy,
stretches of declining earnings. Now investors are dealing with a new menace,
and it’s wreaking more havoc than anything in two years.It’s the bond market, where the biggest jump for interest rates since March has bulls questioning the staying power of an equity advance now seven months from being the longest ever. So drastic is the runup in yields that it’s knocking stocks down during a period when analysts are pushing up earnings estimates four times faster than any time since 2012.
Looking
at the week’s drumbeat, you can’t help but wonder, is this the start of
something big? Warnings about valuations have been pouring forth from bears for
so long that barely anyone listens anymore. With the S&P 500 up almost 50
percent in less than two years, some see the end of the blissfully easy money
that equities have spewed out for 13 straight months.
----When Friday’s dust cleared, the S&P 500 was down 2.1 percent on the day to 2,762.13, and 3.9 percent for the week -- the most since January 2016. The Dow Jones Industrial Average fell 665.75 points to 25,520.96, bringing its total points lost over five days to 1,095.75. The Nasdaq 100 Index fell 3.7 percent for the week while the Cboe Volatility Index surged 56 percent.
The most
significant feature of this selloff has been its breadth. While past declines
in the U.S. stock market have been notable for their narrowness -- when one
industry fell, another rose -- this time there’s been no cushion. All 11
industries in the S&P 500 declined in the last week, something that hasn’t
happened since the month of Donald Trump’s election.
Selling has
also been spread among asset classes. A simple comparison that adds up
percentage losses in the SPDR S&P 500 ETF and iShares 20+ Year Treasury
Bond ETF showed a concerted selloff that was the worst since January 2009.
More
February 3, 2018 / 12:01 AM
Fed's Yellen says solid economic growth means more rate hikes ahead
----“The economy is growing at a healthy, solid pace,” Yellen said in an interview with PBS NewsHour on the last day of her four-year term. “The job market is strong and inflation is low ... The Federal Reserve has been on a path of gradual rate increases, and if conditions continue as they have been, that process is likely to continue, and as it does we would expect long rates to move up.”
On Saturday
she hands the reins to President Donald Trump’s pick to replace her, Governor
Jerome Powell. She will stay in Washington as a fellow at the Brookings
Institution, the think tank where former Fed Chair Ben Bernanke also works.
February 2, 2018 / 8:30 PM
Fed's Williams sees three or four rate hikes this year
SAN
FRANCISCO (Reuters) - A pickup in wage growth and inflation are signs of a
healthy economy and at this point are not enough to force the U.S. Federal
Reserve to raise rates much more this year than the three times it has been
signaling, a top policymaker said on Friday.
Faster
economic growth, buoyed by strong financial conditions, global growth and the
Trump administration’s tax cuts, could mean the Fed raises rates three or four
times this year, San Francisco Federal Reserve Bank President John Williams
said.
“Both of
those possibilities are reasonable to think about, at this point, as options,”
he told reporters after a speech here. But he downplayed the likelihood of more
aggressive rate hikes.
More
Risk of market contagion has reached a 6-year high, Deutsche Bank analyst says
Published: Feb 2, 2018 3:22 p.m. ET
Tightly
wound correlations between assets have prevailed in recent trade on Wall
Street, and they are at their highest level since December 2012, according to
Deutsche Bank’s chief strategist, Binky Chadha.
Chadha says
closely bound correlations, meaning that a move in one directly influences a
move in another, reflects market extremes as investors flock into certain
assets.
The Deutsche
Bank analyst says cross-asset correlations are at 90%. A reading of 100%
represents perfect correlation, where assets tend to move in the same direction
at the same time.
----
However, Chadha says a pullback in one asset for idiosyncratic reasons would
likely spill over to the others, given the current level of correlations (see
chart below):
---- The Deutsche Bank analysts says the dollar has the potential to have the biggest cross-asset effect:
| A rise in the dollar has potentially the widest fundamental impact across asset classes. Arguably its depreciation has been an important driver of the run up in oil prices to which breakeven inflation and bond yields have been well correlated. The decline in the dollar and higher oil prices have been a significant positive for equities but in our view not the most important as the drivers of the rebound in earnings have been very broad based (Very Strong Earnings Growth Before Tax Reform, Jan 2017). |
Already, the impact of rising yields is playing out in the market with a 10-year Treasury yield busting through 2.84%, hitting its highest level in about four years and rattling U.S. stocks. Rising yields increase costs for companies and richer yields can undercut appetite for risk assets like stocks.
Chadha points to a number of factors that could set the markets up for a hard fall.
Mutual fund positioning has risen in tandem with the rebound in growth to a 6-year high. Aggregate shorts in cash equities and ETFs, led by cuts in Tech shorts, have for the first time fallen below the elevated range they have been in since the financial crisis. Margin debt in brokerage accounts has risen to extremes while cash balances have fallen below the normal range. |
Next this weekend,
how not to run European banks. Why do these “banks” still have banking
licences? Euros anyone?
George
goes to sleep at a bank from ten to four each day, except Saturdays, when they
wake him up and put him outside at two.
Jerome
K. Jerome. Three Men In A Boat. Real banking.
Deutsche Bank Investors See No Silver Lining After Results Slump
By Steven Arons
2 February 2018, 06:44 GMT Updated
on 2 February 2018, 10:09 GMT
Deutsche
Bank AG investors searching for good news after the bank’s third straight
annual loss found little to give them optimism.The Frankfurt-based lender, which had already guided for a slump, surprised with revenue that fell to the lowest in seven years and declines at businesses from transaction banking to equity derivatives. Even cost control -- a key feature of Chief Executive Officer John Cryan’s tenure -- was worse than expected.
“The
results are disappointing again and we don’t see anything encouraging in them,
reinforcing our doubts in the bank’s strategy and management,” said Michael
Huenseler at Assenagon. “There’s no silver lining.”
Cryan,
who again expressed the bank’s dissatisfaction with the results, is still
holding out hope for a return to growth in 2018, saying that he expects higher
returns with sustained discipline on costs and risks. Client activity picked up
in January and he pointed to good economic growth in all major global markets.
The bank is paying a one-off bonus to its corporate and investment bank as it
seeks to strengthen the business, he said.
Investors were unconvinced by
Cryan’s pledge for growth, which echoed similar predictions by the bank a year
ago. The shares fell as much as 6.4 percent in Frankfurt, the most since July,
and were 5.6 percent lower at 13.9 euros as of 10:51 a.m. local time.
Cryan, 57, is running out of
time to show he can lead Europe’s largest investment bank back to strength,
after more than two years of scaling back risk, improving controls and settling
legacy misconduct cases.
---- “What must
frustrate investors, in the stock in particular, is the lack of positive news,”
said Gildas Surry, a portfolio manager at Axiom Alternative
Investments
in London which manages about $1.3 billion, including Deutsche Bank bonds.
“FICC down, financing down, costs up, loan provisions down.”
More
Deutsche Bank Fined $70 Million for Trying to Rig Benchmark Rate
By David Scheer
2
February 2018, 02:54 GMT
Deutsche
Bank AG
agreed to pay $70 million to settle a U.S. regulator’s claims its traders
sought to manipulate a benchmark for interest-rate derivatives and other
financial instruments.
For years, traders at Deutsche Bank Securities sought to rig the ISDAfix to benefit the firms’ positions on cash-settled options on interest-rate swaps, the Commodity Futures Trading Commission said in a statement late Thursday announcing the settlement. Investigators said the bank’s personnel attempted to steer the rate with a pair of strategies and that abuses occurred from 2007 until May of 2012.
The bank’s staff allegedly knew, and even discussed, that they were breaking the law. At one point, a trader confided to a broker that “a lot of people would actually do jail time” if the government ever caught on, the agency wrote in its statement.
Though arcane, ISDAfix plays an important role in global financial markets, helping determine the value of trillions of dollars of interest-rate swaps and other instruments. Rigging can have far-flung effects, with fluctuations in the benchmark helping to determine the performance of structured notes bought by wealthy individuals and the amounts some states pay on pension annuities.
“There is no room in our markets for manipulation,” the CFTC’s director of enforcement, James McDonald, wrote in the statement. “We will continue to work hard to stamp it out, wherever we find it.”
Deutsche Bank Securities, a subsidiary of the Frankfurt-based firm, settled the agency’s complaint without admitting or denying wrongdoing.
More
Italian Banks Are Dumping Italian Sovereign Debt To The ECB Ahead Of The Election
by Tyler
Durden Fri,
02/02/2018 - 02:45
At the turn of the year, and just over 2 months ahead of the Italian
elections on March 4, we
presented a stunning observation from Citi, one suggesting that even
before any potential political risk emerges in March, private investors had
long ago fallen out of love with Italian BTPs and had taken to the hills.As illustrated in the chart below, just about every other major investor type has become a net seller (to the ECB) or a non-buyer of BTPs over the last couple of years. Said differently, for well over a year, the only marginal buyer of Italian bonds has been the ECB (dark blue).
Then,
overnight, Jefferies was kind enough to collate the latest ECB sovereign debt
flows data, and revealed another stunning finding: one of the biggest sellers
to the ECB has been none other than Italian banks themselves!
Here is Jefferies analyst
David Owen:
The breakdown below shows
significant moves by the banks in all four largest euro area economies.
However, the Italian banks are again in the spotlight; they reduced their
domestic sovereign debt holdings by a hefty €12.6bn in December, and by €40bn
(10.5% of outstanding stock) in Q4 as a whole. There is strong seasonality
in the data, as banks book trading profits and dress-up their balance sheets
for year-end; but even by previous standards, this move in recent months is
unprecedented.
It is indeed, and as a side
note, since the start of European QE, some €100 billion in Italian bonds have
changed ownership: from Italian banks to the European Central Bank .
More
https://www.zerohedge.com/news/2018-02-01/italian-banks-are-rushing-sell-italian-sovereign-bonds-ecb
Finally, in central
banking news, next week’s data might really set the cat loose among the
pigeons.
February 2, 2018 / 12:10 PM
Bank of England at forefront of global rates dilemma
LONDON
(Reuters) - The Bank of England will find itself facing a question next week
that is set to trouble many other central banks this year - does an
unexpectedly strong global economy mean it should press ahead with raising
interest rates?
For the BoE - and its Indian,
Australian and New Zealand counterparts - the answer over the next few days is
likely to be no, as domestic uncertainties for now outweigh the inflationary
pressure of a powerful global upswing.
But the odds of moves further
away from the emergency level stimulus of the financial crisis are shortening.
In government bond markets, yields on 10-year U.S., German and British debt
have leapt by more than 30 basis points since the start of the year and
two-year U.S. yields are their highest since 2008.
BoE Governor Mark Carney takes
centre stage on Thursday, when he will set out the central bank’s thinking on Britain’s
prospects, barely a year before the country is due to leave the European Union.
No economist thinks a BoE rate
hike is coming next week, according to Reuters polls. But markets see a 50
percent chance that there will be another move in May, a relatively quick
follow-up to the BoE rate hike in November, the first for a decade.
---- Politics is also likely to exert its sway over the Reserve Bank of India’s
thinking next week, after an expansionary budget on Thursday which boosted
rural spending and predicted that India would become the world’s
fastest-growing major economy.
A decision to jack up farmers’
production subsidies was especially likely to intensify the RBI’s worries about
above-target inflation, economists said.
Going the other way is Brazil,
which is likely to cut rates on Wednesday as the country slowly pulls out of
more than two years of economic malaise.
UBS has just upgraded its
global growth forecasts to pencil in expansion of 4.1 percent for this year -
which would be the fastest since 2011 - after 3.9 percent growth in 2017.
More evidence of the strength
of the global recovery is likely to come on Monday, with a raft of services
PMIs for advanced economies.
Manufacturing data previously
showed factory activity hitting multi-year highs, and an early version of the
services PMI for the euro zone rose to its highest since 2006.
“The activity data at the
beginning of next week should go some way to confirming that the world economy
started 2018 on the right foot,” HSBC economist James Pomeroy said.
Further confirmation was
likely to come from Chinese trade data and German industrial orders, he added.
More
Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.
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