The Catalyst That Could Unleash A "Violent Rally In Risk" Today

On Friday, RBC sent out a summary of how "Markets Are Paralyzed With Uncertainty" as the "Spook Story" of spiking yield curves appears to have arrived seemingly out of nowhere, bringing with it the fear that an inflationary impulse may finally be coming, leading to the worst S&P selloff since Brexit. Today, he provides a just a useful "big picture" update on a market that has been VaR shocked, and is urgenly waiting for more information from the aforementioned Lael Brainard speech due just after 1pm Eastern. As he puts it, "the standard (and now at least semi-annual) VaR-shock episode kinda / sorta continues, as mechanical deleveraging from the systematic quant community continues in equities and fixed-income markets, largely off of the recent reversal in the long, end of global rates and their curves, thus, we’re simply experiencing a re-positioning shift."
The RBC strategist further notes that, as expected, "a few diff open-end risk-parity strategies I watch saw 3SD moves Friday, which is totally reasonable considering their holdings and leverage (one particular risk-parity fund’s holding list is a “who’s who” of beatdowns: long US 10Y note, Gilt fut, midterm euro-OAT, S&P eminis, gold futs, jpn 10y bond, euro-BTP future, Euro-Bund buture, Aust 10Y bond fut. Look at the comedy below which is the panic exodus from you EU fixed-income proxy mega-long, German Bund future." As an example of the dramatic unwind in flows, he points out the 5 sigma move in German 10Y bunds, which over the past 3 sessions have seen the largest move in at least 10 years...

That said, while futures dropped as low at 2,100 overnight, they were supported by the critical psychological support level, and have sharply rebounded since then in what has been a largely one-way morning session. As McElligott notes, "the pace of the declines has slowed meaningfully (or even outright reversed) from Friday’s “freefall,” but as we’ve experience during prior “forced selling” episodes, there are typically multiple days of said deleveraging flows involved in order to appropriately rebalance exposures. The other angle worth mentioning too is that per Friday’s flows and convos so far today, the fundamental active community did very little ‘moving’ to chase themselves into knots, which is a ‘good look’ being that Spooz have already bounced 25 handles off the earlier panic lows, which I’d say is a pure function of seeing negligible ‘follow-through’ / further selling in US rates today (although curves still steepening)."

# Then there have been the Fed speakers: "Thus far, Fed speakers (Lockhart and Kashkari) are seemingly voicing some reticence on a September hike (pretty dovish Q&A with Lockhart), with ALL eyes as Brainard (dove) later at 1:15pm EST, as the conspiracy theory is that she was to be rolled-out to make an assessment that September could be an appropriate time for a hike, which would stand in stark contrast with her outlook and history, and thus would theoretically close the probability gap that block the Fed’s desire to hike (FFF and OIS implying “just” a 26% likelihood of Sep hike) if they so choose."
And for those, seeking a continuation of Friday's selloff, here is a word of caution from the RBC cross-asset expert: "My purely speculative view, after years of seeing the Fed operate within this “reflexivity conundrum”, is that the markets have already spoken (meaning already financially tightened enough) to a point where the Fed ONCE AGAIN has to back away from their “hiking threat.” Back to “none and done,” which will likely merit a pretty violent rally in risk and reversal in rates."
In other words, as we said earlier today, following Friday's sharp selloff, the Fed's best laid rate hike plans may have just crashed and burned spectacularly, and what stocks are now pricing in is the latest Yellen relent in a "none and done" world. This means that if contrary to expectations, Brainard offers no tightening bias in her speech, stocks may will explode to the upside, and wipe out most if not all of Friday's losses, once again slamming momentum chasers who had been expecting the start of a sharp leg lower in stocks as a result of the Friday shift in sentiment. Meanwhile, selloff or not, rally or re-drift lower, the RBC trader gives some delightful examples of just how broken the markets have truly become. A lot of goofiness has “gotten us” to this point in modern markets, a place where now at least semi-annually we suffer-through one of these approximately three-to-five day long “unwind spasms.” The current terrible brew is largely based-upon some mix of the following:

• The growth of risk-parity, vol targeting and CTA (trend-following) strategies and their AUM (either RP or systematic funds occupy SIX of the top nine slots as world’s largest hedge fund managers, with those six funds alone managing $386.4B between them. Estimates of aggregate AUM in risk-parity funds alone sits ~$400B, as we see today an incredibly / ironically-timed headline noting that the world’s largest RP manager’s newest hybrid fund has taken-in $22.5 since last year / $11B in ‘16. 
• The aforementioned systematic universe, as well as an expansive list of ‘fundamental” funds with “risk mitigating overlays”, utilize measures of market volatility to allocate the inherent leverage component contained within each (controlling sizing and asset allocation). So when you get an inflection in volatility off of that “more frequently occurring than modeled” left tail, you get a drunken-sailor re-allocation / re-positioning with very heavy-handed rading, against the underlying managed world that has only “slowed down” their trading / turnover, as you’ve essentially been “paying away performance” to over-trade markets, ESPECIALLY during a “macro drawdown” period.
• Synthetically repressed cross-asset volatility, as central banks currently are buying nearly $2T of assets annually, outsizing major developed mkt bond issuance en masse. in turn, this crushes real rates & rate volatility /credit spreads & credit volatility, which then feeds into extraordinarily low equities vol (both as a macro factor input for equities, in addition to the “debt for buyback” virtuous cycle as low rates incentivize corp mgmt teams to bring debt in order to fund stock repurchasesàcreating an EPS uplift through shrinking the float of shares).
• Thus, “Max positioning length” has been accumulated in both fixed-income and equities from many strategies on account of said historically-low trailing volatility. This too has affected the traditional active community via concepts like “TINA” (“there is no alternative”), which has made even fundamental managers turn “trend followers” as “stocks and bonds just keep going up.”
• This “stocks and bonds just keep going up” dynamic = historically rich valuations by almost any metric, while cross-asset valuation metrics like the “equity risk premium” become completely bastardized due to the yield compression seen in fixed-income markets over the past years of central bank NIRP and QE / bond buying policy. Bonds are simply in another planet…again, how do you contextualize bond valuation in a world where central banks buy bonds with negative yields?
• Within equities, the valuation perversion becomes especially acute in the irony of all ironies—stocks and sectors that have historically “low volatility,” i.e. bond proxies like dividend yield plays / utes / telcos / staples / REITs. As such (and as chronicled since start of the year in “RBC Big Picture”), we’ve seen retail pile-into these “low vol” / “anti-beta” / “quality” products (11 of the top 30 ETF inflows YTD in “low vol” / divy yield / defensive sectors, totaling ~$29B of new AUM YTD btwn them), which are all based on the same “yield compression” environment. So this ‘easy access’ to the smart beta “bond proxy / low vol” theme only further richens the valuation of the underlying equities.

At this poit McElligott is happy to highlight who, and how, has gotten us into this predicament, in case it remains unclear to anyone: The Central Bank volatility suppression then too has created massive convexity in the system, as yield has become so difficult to find across asset classes (read: financial repression), shorting front-month volatility has become a popular source of alpha. This is clearly exhibited by the tremendous scale of VIX ETNs which allow “vol tourists” easy-access to a vehicle to piggyback said recently winning strategy of “shorting vol.” And it’s not just VIX ETNs, but what about the previously discussed pension fund “vol selling” fad to generate income? Nice.
# CFTC DATA FROM FRIDAY SHOWS LARGEST NET SHORT POSITION IN VIX, EVER...

# CONVEXITY AS AN EQUITIES SIGNAL...

McElligott then laments the artificial world, or universe, created by central bankers, "a universe too where the entire buyside is managed from the same generic risk management models, especially as hedge funds have become 2/3’s institutionalized from an AUM perspective. VaR models are the real MVPs nowadays, because they have most everybody hitting “liquidate” at the same time." What has helped “light the match?” The slightest hint that the post-crisis QE / monetary policy regime could be changed, namely
1) speculation that the BoJ could potentially look to steepen the JGB curve (kicked-off by BoJ’s Sakurai two Friday’s ago)
2) the ECB pausing on the widely-anticipated extension of their own bond buying last week, and
3) a Fed which is seeming trying to “force-through” a September hike.
In addition, an ill-timed swan-dive in US (e.g. ISM & NFP misses) and global economic data trajectory (Citi Econ Surprise Index for G10 economies currently negative for the first time since June) has added to the “policy error” fears, exposing the positioning-imbalance. Finally, an equally unfortunately-timed “maximum supply” environment in US fixed-income market since returning from Labor Day weekend, with potential of upwards of $200B of paper coming this week alone btwn UST bills, coupons and IG. Let’s see how today’s avalanche of supply gets digested before we make any rage calls on the direct of rates from here.
# His conclusion: There’s that. “That” is our reality: robots dictating to 30 yr olds who’ve never seen anything but ZIRP / NIRP thanks to central bankers who (through political pressure) are completely unwilling to see markets do what they are supposed to do, discover price. Thus, leveraged-carry strategies which for 99% of the year make money in this CB monpol bizarro world then see multiple years-worth of coupon smoked into nothing as what should be idiosyncratic “butterfly flapping its wings” events spills-over, correlations go to 1, and books are purged.
Or, as we added sarcastically, "HEALTHY, VIBRANT MARKETS." Alas, in this world "healthy, vibrant markets" may never again come back at least until central banks lose control, which however won't happen today, and certainly not after the speech of 4-time Clinton donor, Lael Brainard, so unless there is indeed a major surprise forthcoming, prepare for what may be the latest Fed relents, one which leads to a "violent rally in risk and reversal in rates." And with that, we sit back and await Lael Brainard's speech in just two hours....

Oil Fills "Huge Inventory Draw" Gap, Now What?

OPEC over-supply, China interference, global growth lagging, glut growing, one-off inventory draws. Algos are panic-buying oil futures since the US equity market opened, but have just filled the gap from last week's DOE data spike, now what?

Another Problem Emerges For The Bond Market: 10 Year Repo "Failing" Again

As if the US Treasury market did not have enough things to worry about after Friday's sharp selloff and steepening of the yield curve, ahead of today's 10Y auction there is another problem facing the bond markets: a fresh episode of substantial collateral scarcity, manifesting itself in another round of "near fails" repo rates for benchmark US paper.

As Stone McCarthy reports this morning, the 10-year note is trading at -270 basis points this morning, after trading at -270 basis points at the end of last week. Though issues often trade special, there is a limit to how low they can trade. Or rather, there should be. The dynamic fails charge is the rate paid by the party who fails to meet delivery for a repo transaction. The fails charge is either 0%, or 3% minus the lower end of the target fed funds rate (whichever is higher). With the low end of the target fed funds rate at 25 basis points right now, the fail rate is currently 275 basis points, which should serve as a floor for how low repo rates can go. Currently, it is serving as a floor for the 10-year note repo...

As SMRA adds, with the 10-year note repo trading at -270 basis points this morning, we can expect a decent amount of volatility today. In March, the 10-year note did trade below the fails rate for nearly a week. Should it fall further from its current rate, even slightly, it will become less costly for a counterparty to fail to deliver 10-year notes than to try and obtain it through the repo market. This means fails, and fails on the 10-year note in particular, will likely see a noticeable jump, much like the one in March.

Ironically, it also means that as the Fed contemplates tightening the bond market with another rate hike, the most likely outcome would be to exacerbate the scarcity in the market even more, particularly if we get the traditional uber-flattening response to another Fed hike, driven by a puke in risk assets and a rush into "safer", long-dated bonds. How the Fed will extricate itself from this latest predicament where it is damned if it hikes, and damned if it doesn't, remains to be seen. The good news is that the spike in 10Y negative repo rates, and thus collateral shortage, traditionaly only takes place ahead of the respective 10Y auction. If and when shortages extend well beyond the settlement date, that is when it will be time for Yellen to panic.

Crude Slides To $44 Handle On OPEC Supply Concerns, Fears China Could De-Rail The Russia/Saudi Oil Deal?

China, the world’s largest oil consumer, has been increasing oil imports and feasting on the low crude oil prices. Could Russia and Saudi Arabia’s plan to stabilize crude oil prices cut into China’s oil hoarding plans? Chinese oil imports have increased to 32.85 million tons in August, the second highest figure after the record 33.19 million tons import figures of Dec 2015. It’s a 7% increase over the same period last year, a 6% increase over July. The Asian giant imports 66% of its crude oil requirements.

“Chinese oil majors are no longer under orders to increase domestic production, as they were doing so at a loss,” said Adam Ritchie, executive general manager for supply at Caltex Australia Ltd. “China’s change to let economics decide between imports and domestic production is a big change,” reports Bloomberg. Russia and Saudi Arabia, the two largest suppliers, have been battling it out to increase their market share in China. While Russia has increased its market share in China from 12.6 percent last year to 13.6 percent this year, Saudi’s have seen their share dip from 15.1 percent to 14 percent during the same period. “There’s a market-share battle going on mainly among the Middle East producers and Russia,” Olivier Jakob, managing director of Petromatrix, said by phone from Zug, Switzerland. “Rivals are making a big push into China,” reports Bloomberg. An agreement between both the competing producer nations reduces the bargaining power of the Chinese refiners, who had started to choose the spot sales offered by Russia against the long-term contracts policy of Saudi Arabia. Nevertheless, the Chinese can breathe easy, because like many other experts globally, even the Chinese analysts are not confident that the deal between Saudi Arabia and Russia will result in any substantive action.
"It will be very difficult to implement this agreement, as the volume for each exporter country is different. Many countries - producers of oil and gas rely on exports, so they are unlikely to agree to the terms of the agreement," a senior consultant for Sinopec Yang Qixi said. However, Saudi Arabia’s Minister of Energy, Industry and Mineral Resources Khalid Al-Falih is optimistic that other large oil producers will join forces with Russia and Saudi Arabia to take appropriate steps to stabilize the markets. "We are optimistic that Algiers meeting will provide a forum, and pre-Algiers that consultations which will take place bilaterally and in groups will bring us to Algiers with some sort of coordinated decisions. But the two countries agree that even if there is no consensus, we will be willing to take joint action when necessary," said Al-Falih. Along with this, China and the U.S. announced their formal joining of the Paris agreement. China has to wean the economy away from the use of fossil fuels if it expects to achieve its target of carbon emissions by 2030. In order to realize this shift, China will have to make an initial investment of $5.2 trillion in lean energy technologies, which will lead to $8.3 trillion in savings by 2050, according to a study Reinventing fire: China. Hence, as a major importer of oil, China will want the recently announced cooperation between Saudi Arabia and Russia to fail so prices will remain low. If that happens, China can postpone investments into fossil fuels and divert that money towards clean technology, which will help it to reduce its carbon footprint.
In addition to China's efforts, the rise in rig count and OPEC concerns over additional supply are weighing heavy on crude after its spike on "one-off" inventory draw data. OPEC flipped its forecasts for rival supplies in 2017, predicting increase in output from outside group instead of decline. "It’s just a continuation of what already started on Friday,” says Carsten Fritsch, commodity analyst at Commerzbank. “We ran at resistance at the top end of the trading range and now we are testing the lower end.” Says rising rig counts added to downward momentum of prices, market remains oversupplied. Rigs targeting crude in U.S. rose for 2nd week to 414, highest since Feb, according to Baker Hughes data on Friday. Production from outside OPEC will grow by 200k b/d next year, according to the group, which mo. ago projected drop of 150k b/d.
*) And it appears traders are getting the message...

Fed's Lockhart Non-Committal On Rate Hike In September

First out of the gate among the Fed speakers today (before they go dark) is Dennis Lockhart (non-voter) commenting positively on the economy and jobs, shrugging off the recently terrible ISM data stating "I believe the economy is sustaining sufficient momentum to substantially achieve the committee's monetary policy objectives in an acceptable medium-term time horizon," but questioned inflation still running below mandate.

• LOCKHART: `PUZZLING' TIGHTER LABOR MKT NOT YET LED TO INFLATION
• LOCKHART: DOESN'T CONSIDER ANY ASSET MKT IN BUBBLE TERRITORY
• FED'S LOCKHART SAYS WE'RE MONITORING COMMERCIAL REAL ESTATE
• FED'S LOCKHART: COMMERCIAL REAL ESTATE VALUES EXTREMELY ROBUST
• LOCKHART SAYS PROSPECTS FOR NEGATIVE RATES IN U.S. VERY REMOTE

Lockhart is one of three Fed speakers Monday before the committee heads into the quiet period leading up to the meeting. Minneapolis Fed President Neel Kashkari, who is not a voter this year, will speak at 1 p.m. ET in St. Paul, Minnesota and Fed Governor Lael Brainard, who is a voter, will speak at 1:15 p.m. ET in Chicago.
*) As MNI details; "Notwithstanding a few recent weak monthly reports, from the Institute for Supply Management, for example, I am satisfied at this point that conditions warrant that serious discussion," Lockhart said in a speech prepared for the National Association for Business Economics. "I believe the economy is sustaining sufficient momentum to substantially achieve the committee's monetary policy objectives in an acceptable medium-term time horizon," continued Lockhart, who doesn't vote on the committee until 2018, but is largely seen as a centrist on the committee. Lockhart's views in this speech are largely in line with interviews he gave late last month on the sidelines of the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming. He described the economy Monday as "expanding at a moderate pace fueled mostly by growth of consumer activity." Business investment spending "remains subdued," he added, though "jobs growth remains on a positive trend."
*) Lockhart, like many of his FOMC colleagues expects a slowdown as the economy approaches full employment, but just when that slowdown is expected is up for debate.For nbow rate hike odds in September remain below pre-Brexit levels...

We see Fischer, George, Mester, and Rosengren as 'likely' to push for a rate hike; Yellen, Dudley, and Bullard on the fence; Tarullo and Brainard are unlikely to push for a rate hike and Powell's view is unknown. But Lockhart went on to note...

*) "The 12-month trend in payroll jobs growth has slowed a bit from its peak in the beginning of 2015," he said, "and I think it's reasonable to expect some further slowing in jobs growth as the economy approaches full employment." He said the August number of 151,000 job gains was "comfortably above the various estimates of 'break even,' the number needed to hold the unemployment rates constant. Underlying inflation continues to run about 0.5% points below target," he said, though "Wage pressures are accelerating and broadening out as we approach full employment." Given this progress on the Fed's dually mandated goals, Lockhart said he will head into the next few FOMC meetings asking "what is the right policy setting given an outlook of getting to full employment and price stability relatively soon, in the next couple of years? If 1.6% inflation and 4.9% unemployment were all you knew about the economy, would you consider a policy setting one tick above the zero lower bound still appropriate?" He concludes by saying "I think circumstances call for a lively discussion next week."

*) Looks like the perfect time for a rate hike...

"Friday 'Shock' Larger Than Brexit For Quants": BofA Expects $52 Billion In Near-Term Selling Pressure

It all started with a note by JPM's Marko Kolanovic last Wednesday, in which he warned that the period of market calm is ending, and volatility was about to surge, which in a reflexive fashion would lead to accelerated selling by quant, systematic and risk-parity funds as a result of near-record leverage. While a driver of the recent market stability the "relatively stable macro data and a seasonal decline in trading activity" he explained that "a significant driver of the volatility collapse was derivatives hedging effects, also known as pinning", as well as the near all-time high leverage for Volatility Targeting and Risk Parity strategies. "This is all about to change as a number of important catalysts materialize this month (ECB, BOJ, Fed meetings), seasonals push market volatility higher, and leverage in systematic strategies and option positioning provide fuel for volatility."
*) For those who missed his must-read note, which predicted the Friday plunge with uncanny precision, this is what he said: As market volatility plummeted, investors added to option protection and moved (struck) it closer to current price level. The market would need to move only 1-2% lower for option hedging to push volatility higher (as opposed to suppressing it, which was the case past 2 months). Given the low levels of volatility, leverage in systematic strategies such as Volatility Targeting and Risk Parity is now near all-time highs. The same is true for CTA funds who run near-record levels of equity exposure. Our estimate of equity exposure for these strategies is shown in Figure 1...

Record leverage in these strategies and option hedging could push the market lower and volatility higher, if there is an initial catalyst to increase volatility. In fact, we may not even need a specific catalyst, apart from the seasonal increase in market volatility which is typical for September and October. Figure 2 above shows that equity volatility tends to increase by ~20-30% in September and October (September also tends to be the worst performing month, with an average -1% return). This seasonality is also present after removing prominent outliers (e.g. 2001, 2008, 2011, and 2015). When it comes to deleveraging of systematic strategies, even this seasonal increase in realized volatility would produce outflows of ~$100bn, which could push the market lower.
*) So, following Friday's broad-based deleveraging across all quant, and certainly risk-party funds, the topic of forced selling has dominated sellside research, with BofA releasing a report overnight according to which "multi-asset vol controlled portfolios that use a systematic approach similar to our models may be subject to $12bn in global equity selling pressure in the coming days ahead. Likewise, we estimate about $40bn in global equity selling pressure via CTAs in the near term. Between the two, we could see ~$52bn in near-term selling pressure, half of which may be through US markets. Global equity selling pressure via CTAs could also increase as European and Asian markets had closed before a large portion of the move lower in US equities on Friday."

Even more interesting is BofA's comparison of what happened today with the post-Brexit selloff: according to BofA Friday was worse, as the notional volume traded in S&P500 E-mini futures alone was $516bn. "While the current selling pressure we estimate from quant funds is only ~10% of the volume traded, the key question is if this is just the beginning of more volatility that ultimately puts more selling pressure on the market. In comparison with past shocks, during Brexit our models estimated ~$50bn of selling but only from CTAs and over a ten-day period in August-2015, ~$115bn from CTAs and ~70bn from multiasset risk-parity like funds. Importantly, in a fragile market with low conviction, the risk is that negative price action alone drives further selling." So far this is precisely what is going on.

*) Here is the full note by BofA's Chintan Kotecha and team, which if correct, means even more pain for stocks in the coming days.
# Record lull in volatility finally breaks as shock risk runs high; Through Thursday Sep 8th, the S&P500 recorded its longest stretch (42 trading days) in history (since 1928) of trading within a range of 1.77%. Friday, this lull was broken as the S&P fell 2.45%, its largest daily move since Brexit. However, unlike the Brexit selloff, Treasuries also fell, causing a greater jump in multi-asset portfolio volatility. As we have highlighted, markets remain vulnerable to a shock as the recent low vol has pushed up leverage and long positioning across a range of investment strategies.
# Low vol + rising equity = elevated leverage & positioning; In our weekly report two weeks ago, we noted the degree to which low volatility and rising equities could potentially be increasing leverage and long positioning from certain quantitative based funds. Specifically, our models showed leverage levels across multiasset & other portfolios that target fixed volatility may have been at their max limits. As well, our bottom-up CTA model suggested that positioning in global equities via trend following managed futures funds could be at its highest levels since 2015. For both classes of funds, the theoretical risk of deleveraging can be highest when vol spikes up from low levels and when assets had been trending higher, much like environment prior to Friday. In addition, BofAML US quant strategy has recently noted that a number of long-only and hedge fund positioning metrics are back to 2015 or higher levels.
# Declining equity/bond diversification leading to higher vol; Three-month correlation between the S&P500 and 10-Year US Treasury bond prices set its YTD low on the Monday post-Brexit at -0.66. As a result, risk parity-style portfolios likely fared well through Brexit as sharp moves lower in global equities were diversified by the strong performance in bonds. In the almost three months since then, the correlation of daily moves between the two increased to -0.08 and over the last month alone, the correlation has turned positive to 0.27. Increasing correlation implies less diversification for risk parity-style portfolios and could be a precursor to higher vol.
# Friday's shock alone likely larger than Brexit for quant funds. As a result of Friday’s decline, we estimate multi-asset vol controlled portfolios that use a systematic approach similar to our models may be subject to $12bn in global equity selling pressure in the coming days ahead. Likewise, we estimate about $40bn in global equity selling pressure via CTAs in the near term. Between the two, we could see ~$52bn in near-term selling pressure, half of which may be through US markets. Global equity selling pressure via CTAs could also increase as European and Asian markets had closed before a large portion of the move lower in US equities on Friday...

While not dominant driver of flows; still key to watch. For perspective, on Friday, the notional volume traded in S&P500 E-mini futures alone was $516bn. While the current selling pressure we estimate from quant funds is only ~10% of the volume traded, the key question is if this is just the beginning of more volatility that ultimately puts more selling pressure on the market. In comparison with past shocks, during Brexit our models estimated ~$50bn of selling but only from CTAs and over a ten-day period in August-2015, ~$115bn from CTAs and ~70bn from multiasset risk-parity like funds. Importantly, in a fragile market with low conviction, the risk is that negative price action alone drives further selling...

Things To Ponder

Selloff gathers pace as stimulus pullback fears deepen (Reuters)

Clinton's bout of pneumonia raises worries for Democrats (Reuters)

Google's Self-Driving Car Project Is Losing Out to Rivals (BBG)

OPEC sees more oil supply from rivals, implying larger 2017 surplus (Reuters)

Oil falls as U.S. drills more (Reuters)

"Global Market Rout"; Bond Selloff Snowballs Into Stock Liquidations On "Stimulus Pullback" Fears

While there is not much to add to our previous market wrap from earlier this morning, now that traders in the US are arriving at their desks, the selloff appears to be accelerating and as Bloomberg notes, "a selloff in fixed income is starting to snowball into a global market rout"driven by what Reuters dubbed "growing concerns that global central banks' commitment to the post-crisis orthodoxy of super-low interest rates and asset purchase programs may be waning." It appears Kuroda broke markets once again, the reason being the central bank insistence to steepen yield curves to avoid suffocating banks and pension funds, while keeping the broader easing theme on hold even as it means trillions in longer-dated bonds now find themselves in limbo as frontrunning central bank purchases is no longer possible. So what do traders do?
Why they sell of course. As Bloomberg also adds, "shares in Europe and Asia dropped the most since the aftermath of the U.K. Brexit vote in June, and U.S. stock-index futures fell as concern spread that central banks are preparing to wean markets off unprecedented stimulus. Treasuries extended their slide into a fourth day as the U.S. prepared to sell three- and 10-year notes, and the yield on benchmark German bunds reached the highest since Britain’s decision to exit the European Union was confirmed. Oil sank toward $45 a barrel as nickel tumbled the most in four weeks. The yen advanced and the won slid. Samsung Electronics Co. tumbled after airlines and regulators warned against the use of its Note 7 smartphones." Come to think of it, it really is starting to look like a bloodbath, especially considering the dominant color in the following market summary table...

 
Last week we first warned that the incipient selloff in long-dated bonds, which the market had ignored for months, would spill over into all global markets and products, and sure enough that is precisely what is taking today, continuing Friday's sell off. Starting with a tumble in longer-dated government bonds, "financial markets have been jolted out of a period of calm by an uptick in concern over the outlook for central bank policies. Lael Brainard, a member of the Federal Reserve’s board of governors, speaks Monday in Chicago, days after Fed Bank of Boston President Eric Rosengren said the economy could overheat." Not helping risk sentiment, the ECB last week played down the prospect of further stimulus and Bank of England Governor Mark Carney said the chances of a U.K. recession had fallen. With the the Bank of Japan set to unveil the results of a comprehensive policy review at its its Sept. 20-21 meeting, traders are on tenterhooks especially after a Friday Reuters report that the BOJ is now actively considering steepening the JGB yield curve. “It was only a matter of time for this selloff,” said Bankhaus Lampe, Germany. “We had seen post Brexit a really notable rebound in markets even if fundamentals hadn’t improved accordingly. I expect some more downside going forward. There’s also the risk of the Fed meeting coming up.” As a result, the MSCI All-Country World Index of shares fell for a third day, dropping 0.8 percent in early Europe trading. All major western-European stock markets dropped as the Stoxx Europe 600 Index lost 1.7 percent. The VStoxx Index tracking euro-area equity volatility headed for its biggest jump since January, signaling a return of instability after an extended period of stable prices. Miners posted the worst performance of the 19 industry groups on the Stoxx 600 today as commodity prices retreated.
Energy companies slid as oil extended declines after U.S. producers increased drilling. Linde AG tumbled 8.4 percent after saying it terminated talks for a combination with Praxair Inc. EON SE slid 15 percent after spinning off its Uniper SE unit. RWE AG fell 3.1 percent after confirming plans for an initial public offering of Innogy SE shares in the fourth quarter. SVG Capital Plc jumped 15 percent after HarbourVest Global Private Equity Ltd. offered to buy it for about 1 billion pounds ($1.3 billion) in cash. Emerging Markets allowed no safe haven today, and the MSCI Emerging Markets Index slid 2.3%, the most since the June 24 Brexit vote. The gauge has tumbled 4.2% in two days, poised for a one-month low. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong sank 4 percent, the most in seven months, and South Korea’s Kospi lost 2.3 percent.
Samsung plunged 7 percent after U.S. regulators joined the company in cautioning users to power down their Note 7s and refrain from charging them. Aviation authorities and airlines have called on passengers to stop using the gadgets during flights. The company announced a recall of millions of big-screen smartphones on Sept. 2 after about three dozen of them were found to have batteries that caught fire or exploded. S&P 500 Index futures slipped 0.7%, and were aggressively propped up by the key support level of 2,100. Crude oil was down 1.7%, flirting with $45, after Friday's Baker Hughes report that U.S. active rigs rose once again, while bets on falling prices also increased. OPEC’s monthly market report due at 6:45am ET. But the asset class currently in the driver's seat remain bonds, where the selloff at the long end continues. Germany’s 10-year yield climbed four basis points, or 0.04 percentage point, to 0.05 percent, and touched the highest level since June 24. Spanish bonds with a similar maturity dropped a fourth day, pushing the yield to the most in seven weeks.
Yields on 10Y Treasuries rose two basis points to 1.69 percent, before sales of a combined $44 billion of three- and 10-year notes. The three-year noes being sold later on Monday yielded 0.95 percent, an increase of 10 basis points compared with the previous auction on Aug. 9. Brainard, seen as a leading opponent of rate increases for much of the past year, is the last scheduled Fed speaker before the self-imposed blackout period running up to the Sept. 20-21 policy meeting. Any hawkish shift in her rhetoric may stoke volatility in financial markets, which on Friday put the probability of a hike in borrowing costs this month at 30 percent. Ten-year yields in Australia surged nine basis points to 2.05 percent, after gaining 10 basis points on Friday, and that for New Zealand debt with a similar due date jumped 11 basis points to 2.47 percent. Japanese government bonds with maturities of less than a decade advanced and longer-dated securities declined. The moves follow a Reuters report on Friday that said the Bank of Japan was studying options to steepen the nation’s yield curve. The cost of insuring corporate debt against default jumped the most since late June. The Markit iTraxx Europe Index of credit-default swaps on highly rated companies climbed four basis points to 72 basis points. A measure of swaps on junk-rated corporate issuers rose 16 basis points to 332 basis points. Both gauges are at the highest in about two months.
◦S&P 500 futures down 0.6% to 2104
*) Global Headline News;
◦Global Stocks Sink With Bonds, Commodities as Fed Angst Builds: Fed’s Brainard is among officials due to speak on Monday
◦Linde, Praxair Agree to Terminate Discussions on Merger: Deal would’ve created world’s biggest industrial gas supplier
◦HP Inc. Buying Samsung’s Printer Business for $1.05b: HP seeking to become a bigger player in copiers and printers
◦North Korea Seen Ready to Conduct New Nuclear Test at ‘Any Time’: ‘High’ probability next detonation could come this year
◦Clinton, Suffering From Pneumonia, Cancels Trip to California: Incident fuels speculation about Clinton’s health
◦Perrigo Targeted by Activist Starboard With New 4.6% Stake: Activist critical of missteps since drugmaker rebuffed Mylan
◦Starbucks New Tea Line Chases China’s $9.5b Tea Market: Launches tea products in Asia-Pacific after U.S. growth
# Looking at regional markets, we start in Asia where stocks traded negative across the board following Friday's US sell-off, where all 3 major indices slumped over 2% following hawkish Fed rhetoric and weakness in commodities. ASX 200 (-2.2%) printed fresh 2-month lows, weighed on by commodity weakness in which WTI crude futures declined over 3%, while a firmer JPY dampened hopes of a rebound in Nikkei 225 (-1.7%). KOSPI (-2.3%) fell below 2,000 amid continued geopolitical concerns and losses in Samsung Electronics. Shanghai Comp (-1.9%) and Hang Seng (-XX%) conformed to the widespread negative tone in the region, with the latter suffering from an increase in Hong Kong money market rates after the 3-month HI BOR gained the most since February amid speculation that the PBoC could be intervening in the CNH to prevent CNY depreciation ahead of the first Special Drawing Rights (SDR) operation at the start of next month. 10yr JGBs fluctuated with early support seen as the downbeat tone across equity markets increased demand for safety, however, prices then reversed aggressively in late trade following the BoJ's buying operations which was for a relatively reserved amount.
*) Top Asian News;
◦Traders Most Bearish on Yuan in Four Months as Loan Rates Surge: Bonds extend drop as 10-year yield rises to 7-week high
◦China Proposes Tighter Bond Market Leverage Rules After Defaults: An investor’s repo holdings can’t exceed 70% of bond holdings
◦Bond Rout in Japan Will Pass, Says Analyst Who Picked Rally: Falling liquidity exposes market to spike in yields, Sano says
◦Ex-SAC Trader Said to Shut Hedge Fund Backed by Alibaba Founders: Pinyin is led by Bazarian, who worked at SAC for 10 years
◦Samsung Drops After Warnings to Stop Using Note 7 Phones: Global aviation authorities warn against use while on planes
# Friday's selloff in the US remains at the forefront of traders' minds today, with the downside filtering through to Europe, with all major European indices in the red (Euro Stoxx: -2.3%). In terms of a sector breakdown, all sectors reside in negative territory, with financials and materials among the worst performers. E.on (-12.5%) remain the worst performer, given that today sees the first day of trade for Uniper, combined with reports of higher liabilities for nuclear waste storage. Also of note, Linde (-8%) are among the worst performers after their merger with Praxair fell through. Fixed income markets have also continued their decline, with Bund yields soaring further into positive territory, with the US weighed on by a significant quantity of supply, in the form of USD 24b1n 3yr notes and USD 20b1n 10yr note auctions.
*) Top European News;
◦Deutsche Bank CEO Says Asset Management Is ‘Essential Part’; Cryan tells staff not to become distracted by ‘speculation’
◦Basel Capital Revamp Endorsed Without Assurance Sought by Europe: Basel aims to finish capital framework revision this yr
◦HarbourVest Offers to Buy SVG Capital for About $1.3b: SVG shareholders will receive 650p in cash for each share they hold
◦Carney to Assess Post-Brexit Strength as BOE Rate Seen Unchanged: BOE will announce policy decision on Thursday
◦EON Loosens Grip on Old Power Plants as Uniper Starts Trading: Uniper starts trading at EU10.015/share in Frankfurt
◦AB Foods Drops as Primark’s Summer Slowdown Prompts Selloff: Primark’s same-store sales declined about 2% in 4Q
◦Schaeuble Goes Global to Crack Financial Transaction Tax Dilemma: Austria’s Schelling says decision needed in October
◦Volkswagen Eyes Bond Sale as Carmaker Seeks to Move Past Scandal: Has ‘pretty good handle’ on scandal’s financial risk
# In FX, the Bloomberg Dollar Spot Index fluctuated near a one-week high before Brainard’s speech, with regional Fed chiefs for Atlanta and Minneapolis also lined up to speak on Monday. The yen appreciated 0.6 percent versus the greenback. There’s “growing caution over a rate hike as the day of the Fed’s decision draws closer,” said Masashi Murata, a currency strategist at Brown Brothers Harriman & Co. in Tokyo. “Markets had been too confident that a hike wouldn’t happen. But global economies are not in a critical phase, so there’s a limit to selling on risk aversion. Money will eventually seek yields and underpin high-yielding currencies.” The won slumped 1.4 percent, the worst performance among major currencies, after Yonhap News reported that U.S. and South Korean intelligence authorities see a high chance that North Korea will conduct an additional nuclear weapons test after holding one on Friday. The MSCI Emerging Markets Currency Index slid 0.4 percent, leaving it down 1.3 percent over two days.
# In commodities, the Bloomberg Commodity Index fell 0.6 percent, after sliding 1.3 percent on Friday. Crude oil sank 1.6 percent to $45.14 a barrel in New York after American producers increased drilling, adding to a glut. U.S. rigs targeting crude rose to the highest since February, according to data from Baker Hughes Inc. Nickel slid 3.4 percent in London, dropping for the first time in eight days, while tin tumbled by the most since May. Gold rose 0.1 percent, after retreating 1.6 percent over the last three sessions. Iron ore fell in China to the lowest since June amid speculation the nation’s policy makers will tighten property curbs and so cool demand for steel. Steps should be taken to restrain bubble-like expansion in the housing market, Ma Jun, chief economist of the PBOC’s research bureau, said in an interview with China Business News. Wheat in Chicago fell 0.7 percent to about $4 a bushel, approaching a decade-low of $3.8675 reached on Aug. 31. Money managers have their biggest-ever bet on price declines and a global stockpile estimate by the U.S. Department of Agriculture is forecast to still be at a record high after the figure is updated on Monday.
# On today's calendar, with the FOMC blackout period taking effect from Tuesday the Fedspeak is frontloaded to today. Lockhart will speak at 1.05pm BST, Kashkari at 6pm BST and perhaps most significantly the uber dovish Brainard is scheduled to speak at 1.15pm Chicago time.
*) Bulletin Headline Summary from RanSquawk and Bloomberg;
◦Friday's selloff in the US remains at the forefront of traders' minds today, with the downside filtering through to Europe ◦Commodity currencies vs the JPY have been the primary target for risk sellers, and this has eventually weighed on USD/JPY which is now eyeing another test below 102.00
◦Looking ahead, highlights include comments from Fed's Lockhart and Brainard
◦Treasuries slightly lower in overnight in overnight trading with global equities drop amid concern that central banks are preparing to wean markets off unprecedented stimulus. Week’s auctions begin with two events at 1pm ET with $24b 3Y notes, WI 0.945%; sold at 0.85% in August and $20b 10Y notes (re-opening), WI 1.675%; last sold at 1.503% in August, 72.2% awarded to indirect bidders was among highest on record;
◦Fed’s Brainard will begin speaking at 1:15pm ET in Chicago
◦The plunge in euro-area government bonds that has driven German yields to their highest level since the U.K.’s Brexit vote is unlikely to escalate into a full-blown rout, according to Charles Diebel, head of rates at Aviva Investors
◦The U.S. government should consider fiscal and regulatory reforms to boost economic growth because the scope for low interest rates alone to do so is limited, said Federal Reserve Bank of Minneapolis President Neel Kashkari
◦ABN Amro Group will cut as many as 1,375 jobs through 2020 as the Dutch lender begins to implement a 200 million euro ($225 million) cost-cutting plan announced last month
◦Money managers increased wagers on falling oil prices by the most in three months as a meeting between Russia and Saudi Arabia ended without specific measures to support prices
◦Oil extended declines following the biggest drop in more than a month after U.S. producers increased drilling as the market contends with an overhang of crude and fuel inventories
◦The central bank governors overseeing the Basel Committee on Banking Supervision backed the “broad direction” of the regulator’s bank capital-rule revamp, while stopping short of providing assurances sought by Europe on the overhaul’s impact
◦China should take steps to restrain bubble-like expansion in housing markets and tame excessive financial inflows into property, according to Ma Jun, chief economist of the People’s Bank of China’s research bureau
◦China has proposed measures to tighten leverage rules in the onshore bond market, highlighting concern that investors’ borrowings are overextended after a series of defaults
◦Democratic presidential nominee Hillary Clinton canceled a two-day trip to California after her campaign disclosed Sunday that she’s suffering from pneumonia. The cancellation followed Clinton’s abrupt departure from a Sept. 11 commemoration....

CBS; August Bankruptcies Lowest In Eight Years

The number of bankruptcies in the Netherlands last month hit its lowest point in eight years, according to national statistics office, the CBS nieuws. In August, 282 companies failed, which was 88 fewer than in July and the lowest monthly total since October 2008. Bankruptcies have shown a pattern of general decline since a peak in May 2013, and the first eight months of 2016 had almost a fifth fewer than the same period last year. Most companies that went out of business in August, the CBS said on Friday, were traders and financial services....

Temperature Records Set To Tumble As Heatwave Hits Holland

The temperature is set to hit 30 degrees in southern parts of the country on Monday despite a misty start in some places, weather bureaus said. Tuesday and Wednesday are set to be even warmer and the heatwave could carry over to Thursday, according to weather forecaster Weerplaza. ‘If we look back over the past 100 years, I expect weather records to tumble on a daily basis,’ Weerplaza spokesman Michiel Severin told broadcaster NOS. The current September record temperature dates from 1919 when the temperature hit 29.6 degrees. The KNMI is also forecasting record temperatures but says there is likely to be rain on Friday and at the weekend, when temperatures will be back to a more seasonal 20 degrees....

AEX Index Update

Jim Quinn; The Greater Depression, "Cinderella Man"

In Part One of this article I made a fact based case that most Americans are experiencing an economic depression on par with the Great Depression of the 1930’s. In Part Two I will compare and contrast two very different men who raised the spirits of the common man during difficult economic times. As we approach the perilous portion of this Fourth Turning, it will take more than hope to get us through to the other side...

*) Cinderella Man; Likening Braddock to Trump might seem far-fetched, until you think about parallels between the economic conditions during the 1930’s and today, along with the deepening mood of crisis, despair and anger at the establishment. Braddock’s career coincided with the last Fourth Turning. James J. Braddock was born in 1905, to Irish immigrant parents Joseph Braddock and Elizabeth O’Toole Braddock in a tiny apartment on West 48th Street in New York City. His life personified that of a GI Generation hero. One of seven children, Jimmy enjoyed playing marbles, baseball and hanging around the old swimming hole on the edge of the Hudson River as a youngster. He discovered his passion for boxing as a teenager.

Braddock refined his skills as an amateur fighter and in 1926 entered the professional boxing circuit in the light heavyweight division. Braddock overwhelmed the competition, knocking out multiple opponents in the early rounds of most fights. As a top light heavyweight, he stood over six feet two inches, but seldom weighed over 180 pounds. But his powerful right hand was no match for opponents that weighed close to 220 pounds. His star was ascending. He earned a shot at the title in 1929. On the evening of July 18th 1929, Braddock entered the ring at Yankee Stadium to face Tommy Loughran for the coveted light heavyweight championship. Loghran avoided Braddock’s deadly right hand for 15 rounds and won by decision. Less than two months later the stock market crashed and the country plunged into the Great Depression. As thousands of banks failed and unemployment swept over the land like a plague, Braddock, like so many other millions of Americans lost everything. He labored to win fights so he could put food on the table for his wife and three young children...

His career hit the skids as he lost sixteen of twenty-two fights and shattered his right hand landing a punch. As his boxing career spiraled downward, like the economy, he ended up working on the docks as a longshoreman. When even that job couldn’t feed his family, Jim swallowed his pride, hung up his boxing gloves and filed for government relief to help support his family. The strength, spirit and tenacity that had made him a contender were drained from his demeanor. He became just another down on his luck palooka struggling to survive during the Great Depression. Thanks to a last-minute cancellation by another boxer, Braddock’s longtime manager and friend, Joe Gould, offered him a chance to fill in for just one night and earn cash. The fight was against the number-two contender in the world, Corn Griffin, on the undercard of the heavyweight championship fight between Max Baer and Primo Carnera. Braddock stunned the boxing experts and fans with a third-round knockout of his formidable opponent. He believed that while his right hand was broken, he became more proficient with his left hand, improving his boxing ability. Over the next nine months he upset John Henry Lewis and Art Lasky to become an unlikely contender for the heavyweight title of the world.

Braddock remembered the humiliation of having to accept government relief money and paid it all back with the prize money he earned from his fights. He also made frequent donations to various Catholic Worker Houses, including feeding homeless guests with his family. He never forgot where he came from.
He was one of the common men. When his rags to riches story got out, renowned sportswriter Damon Runyon dubbed him “The Cinderella Man“, and before long Braddock came to represent the hopes and aspirations of the American public struggling during the Great Depression. The year was 1935, with the majority of Americans still facing a bleak daily existence. Max Baer, the heavyweight champion, had a reputation as a destructive puncher and possibly the hardest hitter of all time. He had killed a man in the ring in 1930. On the evening of June 13th 1935 at Madison Square Garden Braddock, an 8 to 1 underdog, entered the ring to face Baer. Jim knew he could beat Baer if he stayed away from his hammering right hand, and that’s just what he did. In an amazing feat of courage and determination, Braddock won the 15 round decision to become the new heavyweight champion of the world. It was considered one of the greatest upsets in boxing history. The “Cinderella Man” had fulfilled the dreams and hopes of the common people, giving them a reason to battle on through those tough times...

Damon Runyan described the event in newspapers across the country the next morning:
# Coming into the ring on the short end of the unheard-of price of 8 to 1 with even money he does not come out for the tenth round, and with his chances so little regarded that the crowd does not half fill the “graveyard of champions,” Braddock fights from the opening bell with the desperation of a man leading a forlorn hope. Brought back from Hasbeenville by the magic wave of the wand of sheer chance, after being such a down-and-outer that he had to go on relief in his home State of New Jersey at $24 per month to provide food for his wife and three children, James J. Braddock at 29 years of age suddenly finds himself occupying the pinnacle of the pugilistic heap, with an utterly new life before him. At the close of the fight, while the fighters are awaiting the announcement of the decision, the crowd begins filing out, knowing beforehand what the verdict will be, and so ends the fistic fairy tale, as all fairy tales should end, with the poor abused hero finding his pumpkins of failure turned into prancing white steeds of glittering success and his feet incased in the glass slippers of happiness, if you can follow all this twisted metaphor. Anyway, so ends the strange story of James J. Braddock “the Cinderella Man” of Fistiana. And you cannot match his story anywhere in the realm of the most fantastic fiction.
Braddock lost his heavyweight title two years later in an 8 round KO to “The Brown Bomber”, Joe Louis. He retired after a final win over Tommy Farr in 1938. The beacon of hope for millions had done his part to revive the spirits of a country in crisis. And in true GI Generation fashion, at the age of 37, Jim and his manager both enlisted in the U.S. Army in 1942 where they became 1^st Lieutenants. Upon his return, he helped construct the Verrazano Bridge, raising his family, and living out his life as a business owner, happily married to his wife Mae until the day he died in 1974. He was the epitome of everything noble, good, honorable and proud about this country.
*) Trump, The Anti-Cinderella Man; It may seem like a reach to equate Donald Trump to James J. Braddock, but it really isn’t about the specific person. It’s about the mood of the country during tragically grim economic times and how average middle class (or former middle class) working Americans respond to the message and actions of celebrities they choose to follow or emulate. Their life stories couldn’t be more divergent. Braddock was born into poverty, had to work like a dog to gain a higher stature in life, always maintained a soft spoken humble nature, evoked sympathy and admiration for his rags to riches story, and ultimately inspired generations of Americans to experience a sense of redemption during the Great Depression through his boxing feats. Braddock was a man for his times. Donald Trump was born into wealth. He was born on third base, thinking he hit a triple. His is a story of riches to greater riches. His real estate developer father left him $100 million and the family business. To his credit, he turned the $100 million into billions. He’s been a deal maker and risk taker his entire life. He’s had spectacular successes and miserable failures. He has an ego the size of the Empire State Building. There isn’t a humble bone in his body. He’s brash, boisterous and prone to making outrageous declarations. His personality is more on par with Muhammed Ali’s among boxing legends. His is not a Cinderella story like Braddock’s. He is the anti-Cinderella man. Over the last year he has become the great last hope of the downtrodden middle class, as they struggle through their very own Greater Depression.
This unlikely billionaire champion of the silent majority has defied all odds to become the Republican nominee for president, despite the scorn and ridicule of the GOP establishment, neo-cons, political pundits and both the right and left wing corporate media. He defeated more than a dozen GOP establishment lackeys who spent far more on their campaigns than he, with the largest primary vote tally in GOP history. Just as Braddock was considered washed up and a has been after losing sixteen of twenty two fights, Trump was considered a washed up reality TV parody of himself until he announced his intention to run for president. I, among millions of others, scoffed at him and thought it was nothing more than a publicity stunt to generate some new TV program. The press scoffed at the comeback of Braddock after he was given a new lease on life. Every time he prepared to fight a supposedly more talented opponent the odds makers and “experts” in the media expected him to get knocked out. But no one ever knocked him out and he defied the odds to earn a shot at the heavyweight championship of the world. The GOP establishment had crowned Jeb Bush the champion of their party, but Trump KO’d him in the 2^nd round. He methodically knocked out the rest of his opponents on the way to the coming heavyweight championship fight in November against the hand-picked heavyweight contender of the political establishment, Wall Street, the fallacious corporate media and the military industrial complex.
Max Baer was a monster of a man and a killer in the ring. He looked down upon his opponent as out of his league. His smug know it all demeanor was evident to all. He was not loved by the common man. He was respected for his pugilistic talents, but he didn’t inspire the crowds to root for him. He brimmed with over-confidence and took his opponent lightly. He underestimated the amount of fight still left in Braddock. The “experts” all but guaranteed an overwhelming victory for Baer, likely a knockout in the 1^st or 2^nd round. Hillary Clinton is the ultimate Washington establishment insider, with a reputation as a killer. She’s been hand-picked to continue the policies put in place by the establishment to benefit the establishment. She is loved by no one. She inspires adoration from no one. She can barely fill an auditorium without paying people to attend. She never mingles with the peasants. She collects hundreds of millions from her Hollywood elite friends, Wall Street titans, Soros, Buffett, the House of Saud and the rest of the billionaire oligarch class. She stays above the fray, letting her handlers set the agenda and telling her what to do and say. She sees blacks, Hispanics, and the working poor as voting blocs, not as real human beings deserving of respect. Her thirst for power and control is sociopathic as she will stop at nothing to quench that thirst by being elevated to the throne of the presidency. And she’ll hit below the belt to achieve that victory. She openly despises and denigrates her opponent. She believes she is intellectually and morally superior to Trump and believed the political pundit “experts” who declared she would win in a landslide. Overconfidence, hubris and believing the press clippings from an overwhelmingly liberal media are coming home to roost with two months to go until the election. In the Baer, Braddock fight of the century, Baer came out firing looking for the knockout punch in the early rounds.
But Braddock took his best shots and kept plugging away. Hillary and her corner men have spent over $120 million on negatives ads to Trump’s $20 million in the early rounds. Her 10% post-convention lead has dwindled to zero as Trump has taken her best punches and is still standing. As the bout entered the middle rounds Braddock took control and Baer began to tire. Braddock dominated the late stages of the fight and won in a unanimous decision as the crowd went wild and average Americans around country glued to their radios reveled in jubilation as one of their own became champion. As Hillary’s lies, deleted emails, selling influence through her crooked Clinton Foundation, smashing blackberries with hammers, and brain damage weigh her down, Trump keeps firing punches. Her stamina is in question. Other than CNN (Clinton News Network) and the rest of the Hillary cheerleading press, a large swath of the American people are questioning her honesty, competency, and health. The demoralized and subjugated silent majority are hopeful Trump can deliver them from a political establishment that threw them under the bus thirty years ago. We’ve entered the late rounds and Trump shows no signs of tiring or allowing Hillary to land any knockout blows.The odds maker “experts” like Nate Silver (who was 90% sure Trump wouldn’t win the GOP nomination) still have Hillary winning in a landslide. The candidate of the ruling class, who pledges to maintain the status quo, is not the change agent of the masses. A victory by Hillary would be a victory for Wall Street, billionaire oligarchs, neo-con warmongers, propaganda media outlets, and corporate cronyism.
A Trump victory would boost the morale of a middle class that has been abused, denigrated, belittled, ignored, and taken advantage of by the ruling class for decades. The hopes and dreams of millions are riding on a victory by the anti-Cinderella man. His popularity rides on a sea of rightful resentment, anger, and fury at how the average American has been screwed by the ruling class (both parties) for decades. I have no illusions Donald Trump can single handedly reverse decades of bad policies, bad choices, bad government, bad politicians, and shamefully horrendous Federal Reserve monetary policies designed to impoverish millions through man made inflation and debt issuance. His election would be the upset of the century and spit in the eye of the establishment. It would lift the spirits of disillusioned, angry Americans experiencing depressionary economic conditions who want to take this country back from the vested interests. James J. Braddock lifted the morale of a nation in the midst of a Great Depression, but he lost the championship two years later as the Great Depression eventually led to the bloodiest conflict in word history. If Trump can win an upset victory in November, the initial surge of confidence and anticipation of game changing policy changes will shortly be replaced by the left hook of reality. Trump will likely be thwarted at every turn by the corrupt members of both parties. Debt will continue to pile up at a $1 trillion per year rate. Trump’s volatile nature will inflame passions both domestically and abroad. His election would not change the nature of politics in Washington, but could be the push which brings this teetering welfare/warfare empire of debt crashing down. The destruction of the existing social order is the only chance for real change and Donald Trump is the only person who could trigger that change. His pugilistic demeanor may come in handy as our country confronts the final bloody stages of this Fourth Turning.
The climax year of the American Revolution happened in 1781. Almost like clockwork, the Civil War climax year of 1863 followed 82 years later. The Great Depression/World War II climax year of 1944 followed 81 years later. This would put the climax year of our current Fourth Turning around 2025, at the end of an eight year presidency of Clinton or Trump (both Prophet Generation leaders). The years leading toward the climax of a Fourth Turning have always been chaotic, dangerous and bloody. The core elements of debt, civic decay, and global disorder will accelerate the chain of events leading to the climax, whatever it may be. No matter who is elected in November, the next eight years will try men’s souls and the outcome for our country could be glory or destruction. The technology exists to extinguish all life on the planet and human nature does not change. All it would take would be human malevolence, disastrous decision making by flawed leaders, and some bad luck to destroy the world. Who do you trust to lead during the most dangerous period of this Fourth Turning? Our choices do matter.
*) Imagine some national (and probably global) volcanic eruption, initially flowing along channels of distress that were created during the Unraveling era and further widened by the catalyst. Trying to foresee where the eruption will go once it bursts free of the channels is like trying to predict the exact fault line of an earthquake. All you know in advance is something about the molten ingredients of the climax, which could include the following:

• Economic distress, with public debt in default, entitlement trust funds in bankruptcy, mounting poverty and unemployment, trade wars, collapsing financial markets, and hyperinflation (or deflation)
• Social distress, with violence fueled by class, race, nativism, or religion and abetted by armed gangs, underground militias, and mercenaries hired by walled communities
• Political distress, with institutional collapse, open tax revolts, one-party hegemony, major constitutional change, secessionism, authoritarianism, and altered national borders
• Military distress, with war against terrorists or foreign regimes equipped with weapons of mass destruction”

Uitstaande AEX Positie Doorgerold

*) Uitstaande AEX Positie doorgerold
*) Gesloten; 1 AEX Nov PutSpread 450 (18,00) / -430 (9,80) a 8,20 (aankoop13,55)
*) Gekocht; 1 AEX Nov Call 445 a 12,00
*) Geschreven; 1 AEX Nov Call 465 a 4,00
*) Totale Aankoopprijs CallSpread 710 Euro (Gesloten PutSpread 800 Euro)
*) Dus nu uitstaan; 1 AEX Nov CallSpread 445 / -460 a 12,65

AsiaPac Stocks Plunge Most In 8 Months As China Money Market Turmoil Accelerates

Hong Kong Interbank borrowing rates spiked to 6-month highs as a combination of central-planning-inspired liquidity restriction and global 'risk-off' strikes. 3M HIBOR spiked 95bps to 4.21% - its highest in 6 months. Chinese stocks are feeling the pain, tumbling most in 3 months. Having reached historical lows in volatility, it appears 'pent-up' anxiety is coming back with fury. The broad-based MSCI Asia APEX 50 index is down 3.5%, the most in 8 months...

And Chinese stocks are displeased...

India is down most in a month...

And Indonesia is down most in 7 months...

"It's probably nothing"....

South Korea Announces 'Massive Punishment, Retaliation And Decapitation' For North Korea

South Korea has announced the "Korea Massive Punishment and Retaliation" (KMPR) plan to annihilate Pyongyang, the capital city of North Korea, through intensive bombing. The KMPR would be triggered in case the North shows any signs of a nuclear attack. According to a government official: "Every Pyongyang district, particularly where the North Korean leadership is possibly hidden, will be completely destroyed by ballistic missiles and high-explosive shells as soon as the North shows any signs of using a nuclear weapon. In other words, the North’s capital city will be reduced to ashes and removed from the map." Yonhap News (Seoul)
The attack would be conducted with conventional weapons, as South Korea has no nuclear weapons, although some Seoul officials have been calling for a nuclear development program in the South. Of note is that the KMPR threat is of a pre-emptive attack. That is, the South would not wait for a nuclear attack. Instead, the KMPR attack would be launched "if signs of the impending use of nuclear weapons are detected or in the event of a war." In the KMPR scenario, South Korea will deploy its Hyunmoo 2A and Hyunmoo 2B ballistic missiles, with a range of between 300 and 500 kilometers as well as the Hyunmoo-3 cruise missiles with a range of 1000 kilometers. "The KMPR is the ultimate operation concept the military can have in the absence of its own nuclear weapons," according to a government official. The threat is also highly personal in that the North Korean child dictator Kim Jong-un will be specifically targeted with "decapitation strikes" on the North Korean leadership.... Korea Times and Japan Times

After North Korea's 5th Nuclear Test On Friday, A 6th May Be Imminent

North Korea on Friday set off its most powerful nuclear bomb to date. Earlier in the week, North Korea test-launched three ballistic missiles, and country officials are claiming that North Korea is almost ready to launch nuclear missiles. The nuclear test was condemned by political leaders around the world. China, North Korea's supposed ally, also protested North Korea's "disregard" for international stability. It's believed that China's fear is of a destabilized North Korean government, although China would take advantage of that situation by moving its military quickly to take control of the North. On Sunday, unnamed South Korean government sources said that another nuclear test may be imminent: "Indications have been gathered that the North has completed preparations to conduct a nuclear test at any time in the third tunnel that has not been used previously." Yonhap (Seoul, 9-Sept) and National Post (9-Sep)
After Friday's test, the US threatened to launch additional sanctions against North Korea unilaterally, without seeking permission from the UN Security Council. However, North Korea mocked the threat in its state-run media: "The group of Obama's running around and talking about meaningless sanctions until today is highly laughable, when their 'strategic patience' policy is completely worn out and they are close to packing up to move out. As we've made clear, measures to strengthen the national nuclear power in quality and quantity will continue to protect our dignity and right to live from augmented threats of nuclear war from the United States." Years of international sanctions targeting North Korea have had no effect.... Reuters and Straits Times

Samsung Sheds $20BN Of Market Cap In 2 Days After Recalling Exploding Phones

Turns out spontaneous pocket explosions are not a desirable feature for smartphone consumers, just ask Samsung. The company was forced to recall 2.5mm phones last week after reports surfaced of the device exploding during or after charging. That doesn't look healthy.
# Get your exciting Samsung Galaxy Note7 “Pocket Bomb” here #samsung #explode #notegate https://t.co/j91ErOsxU6 — Robert Follis (@robfol) September 2, 2016

Meanwhile Samsung shareholders have suffered the biggest 2-day price drop since Lehman, with the stock shedding nearly $20 billion in market cap. The recall is expected to cost $1BN but the brand value destruction is obviously much higher with Apple simply having to make phones that don't spontaneously combust to win over consumers...

Meanwhile the FAA has warned airline passengers not to turn on or charge Galaxy Note 7 devices on board aircraft and not to stow them in any checked baggage....

Is A VaR Shock Just Starting?

Last Thursday, when the S&P was once again surging to within a fraction of taking out its all time high, we warned readers to "Brace For "VaR Shock", How The Bank Of Japan May Be About To Unleash A Global Selloff." Of particular interest was whether 10Y JGB yields would soar, now that the market was questioning the BOJ's resolve to keep longer rates under control, leading to a risk-contagion scenario like the one seen in 2003, when Japanese bond yields exploded. We then said that "what that selloff, in a time of soaring cross-asset correlations, record quant leverage and virtually non-existent market liquidity, would mean for equities, we don't know, but thanks to Haruhiko "Peter Pan" Kuroda, we will soon find out"...

Well, the timing of the post could not have been better, because we got our answer the very next day when, just as predicted here on Thursday, as a result of crashing bond MTMs, the very definition of a VaR shock - global stocks suffered their first aggressive global selloff in months, the biggest one in fact since Brexit, as trader attention, which has been ignoring pretty much every development and key news update over the past two months assuming instead that central banks "have it covered", finally focused on the sharp selloff in long-dated global bonds leading to cross-asset liquidation and sharp quant deleveraging, as we predicted just hours earlier.

Friday's selloff, incidentally, also took place just two days after JPM's head quant, Marko "Gandalf" Kolanovic issued a new stark warning: "Volatility Is About To Surge", due to catalysts which included this month's central bank (ECB, BOJ, Fed) meetings, seasonals pushing market volatility higher, and leverage in systematic strategies and option positioning provide fuel for volatility. We bring this up just to silence all those peanut gallery complainers that Kolanovic "has no idea what he is talking about"...

But while Kolanovic's arguments confirm that our prediction of an imminent VaR shock is correct, another influential JPM analyst, Nick Panigirtzoglou, author of JPM's Flows and Liquidity weekly snapshot, is just fractionally more optimistic and says that while a VaR shock is a distinct possibility, he notes that "not all conditions underpinning VaR shocks are currently in place in either equity or bond markets." We disagree, but that's what makes a market. As such, we present his thoughts on the matter, and let readers decide just where in the imminent VaR shock continuum we find ourselves.
Here is Panigirtzoglou's attempt to mitigate some of the long, long overdue fears of a risk off response to another round of central bank mistakes, and his take on whether September 2016 is set to be this year's major "tantrum" event which first sweep Japanese and European bonds, and then quickly spreads across the global impacting all asset classes.

Market volatility declined further over the past month raising more concerns about complacency. Are investors too complacent currently? Are current market conditions inducive to a VaR shock? And VaR shocks do not necessarily need a fundamental trigger such as policy changes or political events. Examples of fundamental or policy triggered VaR shocks were the taper tantrum of May 2013, the Chinese devaluation of August 2015 and more recently the Brexit vote. VaR shocks can simply occur if, for example, investor positions normalize from previous extreme levels. Examples of such non-fundamental VaR episodes were those that took place in April 2013 in the JGB market or in April 2015 in the Bund market.

So, according to the Greek JPM analyst (not to be confused with his nemesis on this issue, the Croatian one), how likely are such shocks in the current conjuncture? According to JPM, there are certain conditions underpinning the emergence of VaR shocks:
1) Low volatility. Low market volatility induces investors, most of whom employ some type of volatility-based risk management framework, to increase the notional size of their positions as volatility collapses. The same investors are forced to cut their positions when hit by a shock, triggering self- reinforcing volatility-induced position shedding. Examples of VaR sensitive investors are hedge funds such as risk parity funds, asset managers, banks that set limits against potential losses in their trading operations by calculating Value-at-Risk metrics. Historical return distributions and historical market volatility measures are typically used in VaR calculations given the difficulty in forecasting volatility. This in turn induces these investors to raise the size of their trading positions in a low realized volatility environment, making them vulnerable to a subsequent volatility shock.
2) The market to be “trading long”. VaR shocks tend to materialize following an overhang of extreme long equity or duration exposures. How elevated are investor positions currently? The equity betas we regularly update in Charts A20 and A21 show a rather mixed picture. While systematic hedge funds such as risk parity funds and CTAs have high equity exposures currently, discretionary managers such as Discretionary Macro and Equity Long/Short hedge funds appear to have reduced their equity exposures recently. So not all hedge fund sectors are high in terms of their equity exposures.
The picture is also mixed in the bond space. For example in our European client survey, while Euro area single currency investors have still pretty high duration exposure at 0.36 years, multi-currency investors are close to neutral. Both of these position indicators were very elevated at the beginning of 2015, just before the April 2015 Bund VaR shock. By taking into account both the blue and the black line in Figure 2 the picture we are getting is of less extreme positioning in Euro area bonds than in April 2015...

We mentioned banks as typical VaR investors. Are US banks too long duration? The Fed's H.8 release provides some guidance on this for US banks. Each week, the Fed reports the net unrealized gain on banks’ available for sale securities. This is by no means a complete measure of banks’ duration exposure. It does not include held to maturity portfolios (albeit these are much smaller than AFS portfolios), and importantly does not include the impact of any swap hedges. That said, we can infer banks’ duration exposure by relating week-to-week changes in unrealized gains to week-to week changes in the yield of our UST 10y yield. Figure 4 shows this beta, estimated over a rolling 3-month window to smooth through the noise in the estimate. It suggests that banks would make MTM losses on their available for sale portfolios of around $15bn for each 1% increase in the 10y yield. Abstracting from the volatility post last August’s episode, the current reading is rather negative US banks are rather long duration, albeit not far from the middle of its historical range...

An alternative way of gauging positions is to look at the response of equity and bond markets to economic news. This is shown in Figure 5 and Figure 6 which look at the behavior of equity prices and bond yields to economic surprises. An environment where long equity positions are heavy should see equities responding by more to negative economic news than to positive news. That is, the beta of equity prices to negative news should be higher than their beta to positive news. An environment where long bond duration positions are heavy should see bond yields responding by more to positive economic news than to negative news. That is, the beta of bond yields to positive news should be higher than their beta to negative news. The bond market is currently trading close to “neutral” according to this indicator, in contrast to the overhang of long positions seen in April/May 2015 during the “Bund VaR shock”. Similarly, the equity market is trading close to “neutral”, in contrast to the overhang of long positions seen in May this year and December last year. Taking together, the above indicators do not currently point to overstretched equity or duration positions...

 

3) Stretched valuations. Admittedly this is a harder to assess metric especially on an absolute basis. On a relative basis valuations for JGBs or Bunds looked very expensive during the April 2013 and April 2015 VaR episodes, respectively. One simple way of illustrating this is via a bivariate regression of the 5y5y forward swap rate in Japan or the Euro area on its US counterpart and on the 2y spot rate differential vs. the US. This is shown in Figure 7. The residuals were very negative i.e. valuations were very expensive, for Japanese rates in April 2013 and for Euro area rates in April 2015. According to Figure 7 these residuals look a lot more “normal” i.e. close to zero, currently. In the equity space, a simple visual inspection of 12m forward PE multiples shown in Figure 8 suggests that the previous relative expensiveness of European and Japanese equity markets, the equity markets that corrected the most since August 2015, has more than unwound. In all, not all conditions appear currently in place for a VaR shock as low market volatilities are combined with rather mixed investors positions and valuation signals...

Regarding market volatilities it is also important to remember that while vol is low, it is not cheap. In fact the opposite is true. Volatility is rather expensive as we highlighted in this month's Cross Asset Volatility Strategy publication (Sep 8th). Implied volatilities have indeed declined to levels last seen n August 2015, before the equity market correction. However, realized volatilities have declined even more sharply. This is also shown in Figure 9 which constructs a cross asset 1- month Realized vol metric based on the same indices and weights as the ones used for our Implied volatility metric. This Realized vol metric currently stands at the lowest level since October 2014! The greater fall in realized vs. implied volatilities means that vol risk premia increased sharply over the past month making vol even more expensive as an asset class. The ratio between our cross-asset Implied and Realized vol metrics stands at well above one, at 1.3x currently. In other words there are hefty risk premia embedded in option markets that are more indicative of skepticism rather than complacency. And this particularly true with retail investors who continue to pour money into VIX ETFs (Figure 10), despite the very negative carry. As a result of the extreme steepness in the VIX futures curve, popular VIX ETFs are currently losing around 10% per month due to negative roll. If no shocks materialize over the coming months, it is likely that negative-carry long- VIX positions are taken off, exerting downward pressure on the steepness of the VIX curve, from currently “bubble” like levels...

And there you have it: on one hand JPMorgan expects a major selloff, potentially as much as 20% should central banks not come to stocks' bailout this time; on the other hand you have JPM, via Panigirtzoglou, explaining that the "other" JPM guy is wrong, and that the conditions for a VaR shock are only modest embedded right now. Which, of course, is good news if only for the bears out there: after all if everyone was expecting an aggressive continuation of Friday's plunge, it would be assured that that would not happen. However, now that JPM's Greek fund flow expert has inject a trace of doubt that the VaR shock may happen, the contrarian selloff may well continue. Luckily, there will be a quick and easy way to find out of Panigirtzoglou is wrong: keep an eye on JGB trading overnight. If we the banchmark bond's yield surges, and if the Nikkei is getting whacked, the answer will be obvious: major quant and CTA funds are now deleveraging and until they are finished, there will be no rebound for the market for the time being. In fact, if central banks really think they can extricate themselves from micro managing the market and the economy (with only failure to show for it), then the next leg lower in the S&P500 could make on dizzy.
In the end, it will all be about what Kuroda, central bank governor of the country that has almost all negative yielding paper in the world, with does and says in the next few hours because if the BOJ reveals yet one more disappointing surprise, all bets may just be off. As to where the 10Y JGB ends up trading, we don't know, however we do know that a lot of investors will be crushed if the "frontrun the BOJ" trade no longer works; in that case the TINA option, or there is no alterative to holding stocks, will promptly be replaced with a "lack of alternative" to holding cash. At least, until, such time as the Ken Rogoff proposal to ban cash is fully implemented and the next and final leg of the monetary policy cycle arrives, the one which ends in hyperinflation and the collapose of the global reserve-based system....