If we accept that Central Bank policy has been the driving force behind the US stock market and world market recovery (to one degree or another), what is different about China than the US and what is the leading indication? I've been putting the pieces together, building the case, lets try to put what we have all on the same page. Lets explore...
What is happening in the world that we know for sure creates inflation? Central Bank easing and in the Asian theater, the biggest debaser of currency and threat to Chinese inflation is Japan, however they aren't the only threat. Last night Soc. Gen. released a note called, "A Strong Case for Easing Korean Monetary Policy".
If this all seems a little far removed from analysis of the Stock Market, let me just try to make this more to the point. When every major developed country either voluntarily enters the currency war or is forced to, the results are the same, currency valuations fall in an effort to maintain competitive exports relative to other counties' currency valuations, in brief, a sort of trade war. This creates more currency which as we saw during the F_E_D's QE2, drove commodity prices through the roof until just about every sector was feeling a margin squeeze due to rising input costs, now imagine this on a never ending global scale. Emerging economies were expected to do well during that period, they didn't for 1 reason, the US was exporting inflation as all of the newly created money was invested in Emerging Markets which drove their inflation up. Now imagine all G20 countries are engaged in this behavior, however China is doing the exact opposite as they have been doing with repos and draining money out of their economy to try to control already high inflation in property values and soon food prices, guess which country becomes a magnet for all of this newly created hot money? If you said China, now you know why I have been posting about thousands of dead pigs in Chinese rivers (which if it turns out to be a real viral problem and gets out of hand, will drive food inflation and political instability) and other stories related to China.
While we are on the dead pigs floating in a river in China as someone who raises pigs doesn't want to be identified (ask yourself why?), apparently this story is turning for the worse in a country that is known to manipulate the press to control these stories. More dead pig carcasses have been found in a second Chinese river. It seems highly decomposed pigs where found in the Hubei river as the number of dead pigs in the Huangpu river have crossed over 6000 as of yesterday. For anyone else this is just an interesting side story, but we have to consider that food inflation in China accounts for the highest component of CPI food inflation in the entire world as Chinese pig production is higher than the rest of the entire world combined, so if this is beyond a local problem and becomes an epidemic, the already crippling Chinese inflation will soar, which will drive growth and stock prices down. Or how about this, as traders, we get paid to think out of the box, to see what the crowd misses; what if the pig problem isn't really an epidemic, but the Chinese people who are highly distrustful of the government controlled press don't accept the answers being given and decide they don't trust pork anymore and stop consuming it? The effect is the same!
China knows they have become the magnet for all of this newly created money and no matter how much they drain, they can't offset the rising tide of newly created currency being invested in China that continues to grow due to "Competitive Currency Devaluations", sound like anything China is worried about, anything they have been talking about as recently as last night?
If the currency war, which has seemingly already started with full G-20 cooperation and Shinzo Abe is one of the main perpetuators as he tries to pull Japan out of 20 years of deflation, gets worse, it causes Chinese inflation which they can't afford as they are already fighting it via repos. Understand this, the PBoC has already accepted China will have to accept lower growth rates to combat inflation, Zhou used the very words "HIGH ALERT" with regard to inflation jut last night- this is NOT the normal language the PBoC chief uses as he tries not to rock the market. If the currency wars go nuclear, China will have to drop a bigger bomb which is lower growth, we could follow that all the way to negative growth if we enter the extreme and this is what the stock market is apparently starting to discount-first in Asia, but there are signs already in the US.
Lets consider Europe for a moment, even if we look at last night's data release-Eurozone Industrial Production for January missed horribly at -0.4 on consensus on -0.1 which is down from December's revised 0.9 which means recession in Europe is growing worse.
Italy (which is a huge story in its own right via elections alone) saw a very disappointing bond auction overnight. Germany's Commerzbank said it would raise $2.5 bn eur. that will be used to repay funds sending the stock down somewhere around 10% during the European session. That's last night's EU news alone. However the real story there is the elections, it seems the Goldman Sachs plant, Mario Monti is out of a job. Did it really take a stand-up comedian named Bepe Grillo who essentially won the Italian elections to tell us, Mario Monti is "a bankruptcy trustee on behalf of the banks" and that Italy will be booted out of the Euro as soon as EU banks recoup their money, Grillo's idea, hold a referendum vote as to whether Italy should stay in the Euro and basically get the bankers before the bankers get them, it worked pretty well in Iceland under slightly different circumstances, but the gist was the same-"Get the bankers". In his interview from which the above tidbits were gleaned, he also astutely asked the question which I have been saying all along (more on that after), "We must still ask: What happened to Europe? Why do we have no common information policy, no joint tax policy, no common policy of immigration? Why has only Germany been enriched?" As to what I've been saying, The Euro exists for one reason, to create a free trade zone for the largest manufacturer and exporter in Europe who apparently has the most sway in the EU as well over policy and bailouts as we have seen, Germany.
Lets go to the US where we are in a "Jobless recovery" and if you understand how the BLS counts jobs you will understand this is a jobless recovery (I may post more on this subject-US jobs data specifically) and if you understand our last GDP print was barely revised from a negative print to a barely positive one simply to avoid the possibility of the "R" word being used on a possible second negative GDP print in which the "R" word, recession, would be used, then ask yourself, could our markets be frothy or bubbly considering this chart?
I'm not arguing March has seen some demand in transports, compare IYT (Transports) to the Baltic Drys Index (daily shipping rates for dry goods-ex petroleum, etc.
Perhaps I've digressed a bit too far from the Daily Wrap.
Getting back on subject... As posted last night with the negative 3C divergence in futures, they fell all night initial this morning's 8:30 release of US Retail sales which beat on a "Seasonally Adjusted basis" and beat big, but remove the seasonal adjustment (as we have talked about so many times over the last year as the ultimate form of outright data manipulation) and Retail Sales for February actually posted a sequential decline, the first since 2010 and only through the subterfuge of seasonal adjustments did a decline actually turn in to a beat of consensus, briefly sending futures surging...
Another interesting thing happened today, this time in Euro/FX land due to weak Italian bond auctions and some undesirable news out of Germany with regard to Germany's second largest bank in need of raising $2.5bn in capital.
The effect on the market as we are well aware of the correlation?
Except the disconnect between the pair and the SPX grew...
What else happened in leading indicators?
Unlike yesterday's VERY algo driven day, the CONTES model for ES dropped out with ES, although there were some notable pushes at the EOD to keep the Dow in the green and the S&P which was quickly losing it toward the EOD until about 3 p.m. as it is still about 11 points short of making a headline new high.
Also around 3 p.m.
The formerly leading and now lagging High Yield Corp. Credit and Junk Credit...
Longer term, as we already know...
Where monkey-hammered around 3:00 p.m. as the SPX had been falling...
Junk Credit was ambivalent at best intraday, again until the SPX needed a little help, again note the close in credit as the SPX started to lose the 3 pm rally.
FCT which is disconnected and has a little more of a sense of self-preservation wasn't caught up in this non-sense.
Yields, which typically act in a leading capacity as a magnet for stocks actually fell right at 1 p.m. as the myth of the rotation from bonds to stocks was proven wrong again (if there's any rotation its from money markets and and savings accounts to bonds and that has slowed) at the 1 p.m. 10 year note auction.
Here's the 3C chart for TLT-the flight to safety trade...
***I'm not even sure how to take this as I've never seen it before, but the P_O_M_O operation today by the F_E_D, which Bernie swore under oath, would not monetize the debt, did exactly that, but strangely they took down a 30 year issue (identified as CUSIP 912810QZ4) that isn't even available until the Treasury's auction tomorrow of 29 year and 11 month issues, which strangely includes the CUSIO identified as 912810QZ4, the same one the F_E_D bought today, apparently before it was even for sale?
Strangely commodities didn't play along with the SPX today...
The Carry trade didn't help the market's today, in fact one would think they'd be down looking at the carry trade in FX...
Volume was the lowest of the year today (ex President's day), yet Transports (IYT +1.53% and DJ-20 +1.63%) somehow managed a strong day while the Dow-30 was up a titillating +0.04%-Seriously?
In any case, beyond the usual shenanigans here and there and some oddities pointed out above, today looks like another-MISSION-KEEP THE DOW GREEN, LIFT THE SPX TO HEADLINE HIGHS AND THE WORST PART OF WHAT I'D CALL A DISMAL PERFORMANCE BY THE INVISIBLE HAND IS THE SPX NEW HIGHS ARE ONLY ABOUT A HALF A PERCENT AWAY, THEY CAN'T MAKE THAT BY MONKEY HAMMERING THE VIX TO 8 YEAR LOWS?
There was no perceptible Dominant Price/Volume Relationship today. As far as Breadth Indications, they have been weak on days the market is up recently and weak overall for the year and beyond.
Breadth REALLY Stinks
So, the Dow has 16 year best closing performance with gains of +.05 and +.04%, but still head line grabbing, while nearly every measure of market breadth falls apart.
OK, moving forward, lets take a look at what's going on tonight.
The Australian dollar surged on Thursday as startlingly strong jobs data led themarket to almost abandon any chance of further rate cuts, sending bonds yields flying to the highest since April last year. In looking at the single AUD futures, I'm going to say the $AUD is going to slide a bit off what looks to be a bit of an over-extended knee-jerk reaction.
In Equity Index Futures overnight...It looks like there's some strength building heading in to the European open. I'm guessing there's some strength developing too for the SPX new highs judging by the short term NASDAQ futures, however the longer term charts look like none of it will hold, if we confirm tomorrow in regular hours, we sell strength hard, that GOOG trade will probably be looking good.
I know this is a lot to digest, but I hope you can take it in, I think there's some important stuff here.
See you in a bit