Today has so far been the kind of day one can call the “filler between yesterday and tomorrow,” with hardly any developments of interest in the news flow as we await the latest ad hoc news out of Europe in the weeks ahead and see how the US equity market greets the latest earnings season.
In the markets, the lack of volatility saw the USD dribbling to the weak side as AUD/USD probed 1.0250 resistance and EUR/USD poked around at 1.2900 before losing steam again.
With the relatively market quiet, I would again note a few important things about the backdrop here. As I pointed out a couple of weeks ago, Hussman of Hussman funds fame has pointed out recently some extreme readings in the direction of the US stock market (up) relative to underlying economic conditions (down), suggesting that this market is extremely complacent in continuing to bid up risk assets in the eternal belief in the magic of QE.
Or is it simply that no asset manager feels comfortable putting money anywhere but commodities and especially equities because the long term picture for bonds is so obviously scary? Understandable, but it’s all more than a bit Ponzi-esque in its implications when unde crlying fundamentals are not supportive.
As well, a ZeroHedge post points out that companies are holding the most cash ever as they can’t find a place to put it that will grow their business (why not give it back to shareholders….).
While on the topic of eternal QE, I came across an ftalphaville post that referred to a recent piece issued by Artemis Capital Management on the nature of volatility when Central Banks have essentially outlawed market reality. It’s very interesting, if a bit deep, and highlights the irony of a system that is increasingly fragile even as implied volatility scrapes bottom. This is a general subject that I have expressed frustration with before as we must all be saddened when markets don’t function freely and we can’t get a market clearing event that will allow the economy to begin rebalancing and healing again.
So as long as Bernanke and his copycats around the world are pulling the levers at the worlds’ central banks, we can expect the “desert of reality” to continue. (Note the Bloomberg story today that discusses one of the best performing hedge funds of late in the US. Its strategy has basically been founded on having a strong belief in the intervention in the mortgage bond and property market from Obama and the Fed.)
And who knows, perhaps Bernanke’s days at the helm of the Fed are more numbered than we might have thought just a couple of weeks ago. The presidential debates in the US have given Romney incredible momentum – for good reason, too – I was shocked at how tired and uninspiring Obama appeared at the first debate. The vice presidents will debate in the late US hours tomorrow. If Romney wins (still not favoured scenario – but far more favoured than just days ago) it would likely mean no reappointment for Bernanke, who could exit at the beginning of 2013. This would be a massive development.
Japan continues sabre rattling
After the recent statements by the economy minister on giving the BoJ more powers to intervene on the JPY by possibly changing the law to allow it to purchase foreign assets, today saw Prime Minister Noda out verbally intervening on the JPY and saying that Japan would keep an eye on “excessive or disorderly moves” in the JPY and complaining that it’s recent strength is not in line with fundamentals.
This is all leading up to this weekend’s G7 meeting, where Japan may seek for “permission” to throw a few trillion JPY at the market in the weeks ahead. This could make for treacherous short-term action, so let’s all stay on our toes. Implied vols in USD/JPY have fallen to lows not seen 2006-07. It used to be that the market figured vols should only be low on USD/JPY when the pair was trading at a relative high, as a weak JPY was associated back then with the carry trade and high complacency and generally strong risk appetite across markets.
Now the “carry trade” is less about carry and more about relative QE-based devaluation, and the US Fed has had far more success in weakening its currency on that account. As Japan is a self-funding country, it’s not surprising to see the official focus on the purchase of foreign assets as a possible route for future intervention. Still, it is very interesting to note the very low (cheap already or will central banks continue to find success in “outlawing” systemic risk?).
Looking ahead...
Chart: EUR/USD
The EUR/USD chart is an excellent metaphor for what is going on across markets: we have moved sharply lower within the range as risk appetite has looked wobbly over the last couple of days, but we are still in the range until proven otherwise, with otherwise meaning the 1.2800 level in EUR/USD and the 1.0150 level in AUD/USD, for example.
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Look out for the Australian employment report out tonight – the average employment figures have been heading the wrong way for months, not that this will help us predict tonight’s specific number, but I suspect Aussie unemployment is headed higher in the months to come. A good number might provide a nice rally for bears to sell into (as long as we remain below 1.0325) while an ugly number might underline the 1.0250 resistance area.
Economic Data Highlights
- Australia October Westpac Consumer Confidence out at 99.2 vs. 98.2 in September
- Sweden August Industrial Production out at +0.4% MoM and +3.2% YoY vs. -0.9%/+1.5% expected, respectively and vs. -0.9% YoY in July
- Sweden August Industrial Orders out at -1.4% MoM and -6.5% YoY vs. -5.4% YoY in July
- Norway September CPI out at +0.9% MoM and +0.5% YoY as expected and vs. +0.5% YoY in August
- US Fed’s Beige Book (1800)
- US Fed’s Kocherlakota to Speak (1845)
- US Fed’s Tarullo to Speak (2030)
- US Weekly API Crude Oil and Product Inventories (2030)
- US Fed’s Fisher to Speak (2045)
- New Zealand September Business PMI (2130)
- Japan BoJ Minutes from Sep. meeting (2350)
- New Zealand October ANZ Consumer Confidence (0000)
- Australia September Employment Change/Unemployment Rate (0030)
- Japan September Consumer Confidence (0500)