Dog days of August are barking loudly

Well it’s the last week in August and although the living is easy, there’s little in the way of economic news to move the markets, since everyone is gone.

That’s the way the news business is. Need to find something to report on, so we have  the annual Jackson Hole retreat and a storm-ravaged Houston as the key drivers for the markets today.

While the central bankers met in Jackson Hole, Wyoming, the market reaction Monday morning is muted. Neither Fed chief Janet Yellen and ECB head Mario Draghi gave the markets any tip on what monetary policy will look like in the next 6 months.

The simple answer is they can’t say because they don’t know and if they did say a direction it would be a self-fulfilling reaction once they announced it.

If Yellen said we will pause on rate hikes, then the market takes off again. Something the Fed is concerned about allegedly. The converse to pausing would send markets lower with the debt ceiling concerns greasing the skids, as well.

So no news is no news out of Jackson Hole. And since most trading desks will be manned by black boxes this week and next, look for one step forward and two steps back in stocks.

The possibility of a trillion dollars in damage caused by Hurricane Harvey to the Texas oil industry and infrastructure will be hanging over us for years in the form of higher gas prices.

It hasn’t been addressed yet since its too early, but look for the news today suggesting that the Port of Houston and all along the coast, the oil services industry has been so devastated by the category 4 storm that will not be able to come back online fully for some time to come.

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Bond vigilantes are not going to wait until Labor Day to act

It’s a Friday in July and the commuter parking lots I share with Wall Street and banking executives are pretty much empty.

What this means is I get a front row spot, but it also means the black boxes take on a larger role in today’s trading.

Stocks are down in pre-market slightly as volatility index has a 9 handle, meaning all is quiet, go ahead and take the day off, nothing to see here.

The bond market however, is squeezing even tighter as the 30-year note moves to 2.7 percent handle. This is a more important move for the markets, as Fed chief Janet Yellen and ECB’s Mario Draghi talk about paring down their holdings in US debt securities.

The moves in bonds is negative for all the markets since yields will collapse as prices rise and it will spill over to equities whether through reduced confidence and/or reallocation to cover bond losses.

This is the reason Yellen & Co. fear the bond vigilantes, which want to force the Fed to curtail selling off its balance sheet and continue to roll over profits into buying new issuance.

The timing of this move in the bond markets coincides with the slow season of late July through Labor Day, when everyone comes back from vacation. So to have these moves now, tells us this Fall could be messy in the bond pits.

Just look at the three-month T-bill auctions, which its maturity coincides with the debt-ceiling deadline went upside down this week, suggesting there is growing fear Washington is not getting how shaky these markets are.

Investors flock, while leaders flee

I’m having a difficult time figuring out what the markets see, that I don’t.

Yes we have President-elect Donald Trump coming into office in 6 weeks or so. The perception of regulation easing and increased infrastructure spending have many sectors soaring.

But we have other heads of state running for the exits this week: Italy, New Zealand, Bulgaria governments are in flux over these seemingly separate decisions to leave office early.

We also have the fall out of Brexit, Italeave and as always, Greece to deal with in early 2017.

Change and upheaval are not the things that put the Volatility Index near an all-time low and US indices both broad and narrow are hitting all-time highs.

Perceived regulatory rollback is the driver here in the US, but the demise of the euro could be on the table in early 2017, and that’s not in the market at all.

As I have often said the Dow is not the economy and like now, don’t march in lock step.

With ECB head Mario Draghi giving the market a mixed message this morning with further easing through 2017, but reducing the monthly stipend after March, we see the struggles within Europe.

Next week we have Janet Yellen and the Fed raising rates 25 bps, which could take some of the wind out of the markets, but the year-end window dressing for portfolio managers should stem the downward flow until early 2017. Just the same as last year’s market action.

 

Deutsche Bank's pan-European bail out

As I have been writing about Deutsche Bank since 2012 as an alleged criminal enterprise that had a number of bankers associated with it mysteriously die in suicides, I can’t say I am surprised by the events recently.

And recent market moves on its stocks and bonds show the bank is in bigger trouble than Germany can handle.

  • On Tuesday Deutsche has a market cap of $16B, just above the $14B amount the Justice Department is looking to claw back in fines as a result of peddling fraudulent mortgage paper.
  • And the short interest on the bank is growing. The total number of Deutsche shares out on loan rose from 1.72 per cent of its issued shares to 3.07 per cent over the past week, according to data from Markit, as Deutsche has seen its shares fall 55 per cent in the last year.
  • It’s CoCo bonds — contingent capital bonds — issued earlier this year, to bring in some much-needed capital, are trading well below par. The last price I could find was $0.77 on the dollar in July.

So for German leader Angela Merkel to say Deutsche will not get a government bailout tells me one thing. She is putting the ECB and Mario Draghi on notice that this is their tar baby. You want negative interest rates, which cripple banks, then you bail out Deutsche.

All of Europe will need to prop up this bank, because Germany can’t do it alone, especially with upcoming elections next year.

I would go so far as to say Janet Yellen and the Federal Reserve will be part of the bail out as pressure mounts.

Just like in 2008 when Deutsche was one of the global banking firms getting easy money from the Fed after Lehman Bros.’s collapse.

Overnight lending squeezed by bond vigilantes

Both presidential candidate Hillary Clinton and the markets feel like crap Monday morning.

While the Democratic nominee alleges she has her third different ailment in the last week, the global stock and bond markets can’t  keep anything down and wretched more than 2% losses in Asia and Europe overnight.

Bond yields worldwide have exploded as the sell off continues, with even the 10-year German bund now yielding a positive return.

The why is not that the markets think Yellen & Co. at the Federal Reserve may raise interest rates. No the credit markets have tighten overnight lending already.

The overnight lenders have put the squeeze on creditors, which has a devastating effect on banks such as HSBC, Deutsche Bank and a host of Italian and French banks needing easy credit to continue operating.

The fear of “pulling the punch bowl,” as ex-Fed head Alan Greenspan said, has spooked the bond market to such an extent that this slide in all assets may not be so temporary.

So, does Yellen & Co. come out today with a less hawkish statement on a September 21 rate rise?

If she does send a dovish message to the markets, she will be seen as capitulating to the bond vigilantes and lose what little capital she has with the markets.

I believe Mario Draghi and his European Central Bank will have to blink first by saying it will ramp up bond purchases in the banks to forestall a EU banking crisis predicated on the banks referenced above from cratering.

Be forewarned, I wrote about this happening early last week.