Markest closed at fresh highs, on improving trading volume. Right now, those smart shorts are once again getting rather nervous. With the extended Santa rally, market risks taking out many shorts if we start trading above these levels. New year, and many are already underperforming due to this most bullish start since 1987. Just imagine what would happen if we got that QE (again)?
Looking beyond the intraday charts over Eurostoxx futures, one needs to figure out how Europe can restore competitiveness. Although by now everybody knows Europe is in a delicate situation, below are some insights by BOFA’s Levy. From Vox;
The need for troubled Eurozone nations to rein in unsustainable government finances is clear (see, for instance, Wyplosz 2011 on this site). But it is now also widely acknowledged that they must also address their lack of competitiveness, which drains economic performance, undercuts finances, and strains the fabric holding the EU together.
- Since unification, unit labour costs – wage compensation adjusted for labour productivity – in troubled Eurozone nations have risen dramatically faster than in Germany and other high-performing nations. The sources of these unit-labour-cost divergences are very instructive.
- Contrary to the common view, the largest source of diverging labour competitiveness in many Eurozone nations has been wage increases that exceeded productivity gains.
The policy implications are clear. Realigning real wages with productivity in Greece, Italy, Portugal, and other EU nations is as important, if not more important, than required fiscal austerity. However, this will be easier said than done.
Germany’s labour policies and its trends in wages and productivity following unification provide a viable roadmap for troubled EU nations, but the political and social obstacles are daunting.
- Since 2000, productivity-adjusted wages have increased only 5% in Germany (they actually declined from 2000-2008).
- In other European nations, meanwhile, wages have increased by between 25% and 35% (see Figure 1).
With equities grinding higher yet another day, and volume trend continues, markets seem sadly enough “disturbingly” broken. Good time to review what PIMCO thinks about the Economic outlook. From Pimco.
- We expect emerging Asia growth below the market consensus due to its less aggressive policy responses compared to 2008-2009.
- The Asia-Pacific region is less affected than others by eurozone turmoil but contagion is still a risk through direct trade and the regional production chains that characterize Asia’s export-oriented economies.
- In this environment, we favor Australian government bonds for their high credit quality, low-beta currencies such as the Chinese yuan, corporate issuers that have delevered, covered bonds and mortgage-backed securities.
HFT still alive and enjoying this no volume melt up market, although we are sold they help increase volume, liquidity and efficiency. AAPL catching the disease.
From Nanex; HFT algorithms have been running wild in Apple (AAPL), causing massive quote message traffic and wreaking havoc on exchange routing software. Today we drilled down into this mountain of data and found clear examples of manipulation. It appears this algorithm sends a flood of orders from multiple exchanges in an effort to overwhelm or confuse other algorithms or human traders. Sometimes this results in crossed quotes from one of the 9 exchanges which then triggers a cascade of trade executions
The NYSE and NYSE-Arca have recently proposed rule changes that would formally make this activity illegal.
A recent article in Reuters indicates the SEC is finally acknowledging the negative impact of this behaviour.
AAPL on January 18, 2012 (1 second intervals). This chart shows 18 minutes of data. The NBBO is the shaded area and colored black to indicate a
normal market (bid < ask), yellow for a locked market (bid = ask), or red for a crossed market (bid > ask). The quote traffic is shown in the bottom panel.
Note the absurdly high rate marked “Not Normal”.
Guest post by Macro Story.
I have not posted a skew chart in quite a while. Admittedly it was getting difficult to draw conclusions from some of the wild price action. That was until the past few days when the skew literally shot out of a cannon. While the vix remains in a descending wedge and narrowing in daily price fluctuations the skew has blown out.
Implied volatility has a theoretical bell curve distribution. At times though investors seek further out of the month versus at the money options which drives up the IV and thus “skews” the distribution. This often precedes a move in the vix where investors are buying speculative, tail risk options which once markets begin to move lower are no longer tail events and begin showing up in at the money options as measured by the vix.
Brazil’s central bank has cut interest rates for the fourth time running as the government seeks to revive an economy that stalled in the second half of last year, says the FT. The 50-basis point cut in the central bank’s benchmark Selic rate to 10.5 per cent comes as Brazil’s development bank, http://ftalphaville.ft.com/thecut/2012/01/19/840161/brazil-cuts-interest-rates-again/
The China Banking Regulatory Commission is weighing a plan to relax capital requirements for lenders, Bloomberg reports, citing four people with knowledge of the matter said. The CBRC is delaying implementing the most stringent capital adequacy ratios and may lower risk weightings for loans to small businessmen and companies, http://ftalphaville.ft.com/thecut/2012/01/19/840131/china-may-ease-bank-capital-rules/
Goldman Sachs has revealed a series of dramatic cost cuts and a 58 per cent drop in fourth-quarter earnings, after grappling with tumultuous trading conditions in the latter part of the year, reports the FT. Like many of its investment banking competitors, http://ftalphaville.ft.com/thecut/2012/01/19/840081/goldman-earnings-down-58-in-fourth-quarter/
The IMF has asked its member countries for an extra $500bn in firepower to combat the world’s spreading fiscal emergencies, which it estimates will generate demand for bail-out loans totalling $1tn over the next two years. The FT, http://ftalphaville.ft.com/thecut/2012/01/19/840071/imf-requests-500bn-for-bail-out-loans-2/
It is no secret, the Fed is the World’s biggest hedge fund, with Bernanke calling the decisions. They don’t pay interest on their leverage, but on the other hand, they earn peanuts compared to the “real” hedge fund managers. From NYT.
The year 2011 is over, and soon we’ll be hearing again about billion-dollar paydays for select hedge fund wizards. If it makes you feel any better, not everyone is sharing in these riches. The people who operate the most successful hedge fund around are receiving a relative pittance. That hedge fund is the Federal Reserve. Last year, the central bank turned over $76.9 billion in profit to the federal government, slightly down from $79.3 billion it provided in 2010. The Fed made this money in interest on a nearly $3 trillion portfolio of securities. This enormous holding was built up largely in the wake of the financial crisis as the Fed bought these securities through two rounds of quantitative easing.