Recap 2014-07-17: Market Take


We got several tape bombs today, which was cited as the reason the S&P sold off more than 1% for the first time since April 10th. As regular readers know, I’ve been expecting a moderate correction. My take is simply that the market had become dominated by short term, weak hands, and that the news today were simply a trigger that set off sell orders that had been held back. These corrections usually take a while to play out, so it’s probably prudent to watch for a bit. Via @ukarlewitz:

Market chatter has been around the Fed of late. Two points that I saw today were interesting:

  • Blackrock’s Fink noted that QE intensity has actually increased this year despite tapering due to reduced bond supply.
  • WSJ discusses recent data showing how China has increased its buying of US TSYs this year at the fastest pace on record. One main motivation of the stepped up purchases has been China’s desire to weaken its yuan. Chart below via RBS, h/t/ @Callum_Thomas

It’s probably reasonably safe to say that the consensus view is that the Fed is behind the curve, and is risking an inflation overshoot. We’ll see if that is correct in time, but it’s worth noting the factors above, at least with respect to price action extending out to the belly of the curve. I’ve been more bearish at the front end of the curve rather than the belly because I think there is a fair bit of uncertainty regarding not only the timing, but also the pace of hikes as well as the terminal rate. The front end is mainly an expression on the first of those three variables, which I am a bit more confident on. I’ve heard various theories regarding what the Fed could do after the first hike, including hiking faster, stopping at 2% and other views in between. My take is that the Fed itself is quite uncertain. What will be the coefficients on the Phillips Curve be this cycle, given the persistent underemployment, and weak commodity price pressures? It will be some time before we can get to a reasonable level of confidence on that answer, IMO. Anyway, that’s why being short the front end seems better than the belly to me, in addition to better carry, better positioning backdrop, and exposure to the factors noted above.

GS: While banks should then be happy to borrow below IOER and earn a riskless profit, there are costs of expanding balance sheets to execute such a trade. One key cost has been the FDIC’s assessment on assets less equity, which affects domestic institutions but not foreign institutions. This is an important reason why foreign banks are the largest borrowers in the fed funds market, according to the Federal Reserve Bank of New York. Indeed, as shown in Exhibit 2, foreign banks have disproportionately accommodated the increase in the amount of excess reserves created by the Fed’s QE purchases. As noted by our Banking research analysts, past and upcoming leverage and liquidity regulations such as the Supplementary Leverage Ratio (SLR) may act to drive a further wedge between theoretical arbitrage relationships and observed market rates, by increasing the cost of bank balance sheet.

Interesting chart from Trulia: Homeownership rates by age cohort. Note that the ownership rate for every cohort except the 65+ is at the lowest level since at least 1982.

This is interesting, though not surprising:

A new study from Princeton researcher, Brooke Macnamara, and her colleagues declares that golden 10,000-hour rule is, in fact, a myth. Their meta-analysis of 88 deliberate practice studies suggests that “the amount of practice accumulated over time does not seem to play a huge role in accounting for individual differences in skill or performance in domains including music, games, sports, professions and education,” PrincetonUniversity writes. In music, deliberate practice accounts for a 21 percent difference in individual performance; in sports, the researchers conclude, it accounts for just 18 percent.


  • A Malaysia Airlines flight with nearly 300 people aboard crashed over eastern Ukraine near the Russian border on Thursday, the Ukraine government and a regional European aviation official reported, and the Interfax news agency said it had been shot down by Ukrainian separatists. This was confirmed by the Pentagon later in the day.
  • Israel started its ground invasion of Gaza
  • US Jobless Claims was stable at 302K vs 310k prev
  • US Housing Starts dropped 9.3% MoM vs +1.9% exp and -6.5% prev
  • Philly Fed jumped to 23.9 vs 16 exp and 17.8 prev
  • Eurozone banks will have just two weeks to raise capital in October if stress tests uncover shortfalls, according to the ECB. – FT
  • Microsoft announced 18k job cuts.
  • Blackstone is buying a loan portfolio worth EU6.39B from Spanish lender Catalunya Banc. h/t Jordan
  • Japan: Bank loan officers reported sustained solidness in corporate demand and plunge in household demand in 2Q
  • BBG: Last year, the Nasdaq was infected by a worm that had the potential to do physical damage, like Stuxnet. The attack had two zero-day vulnerabilities in combination. The NSA had seen a version of the malware before, designed and built by the Federal Security Service of the Russian Federation. Later in the investigation, some U.S. officials questioned whether the NSA had pushed the evidence too far. Malware often changes hands — it’s sold, stolen, or shared. And the technical differences between attack code and something less destructive can be surprisingly small.
    As the probe deepened inside Nasdaq’s headquarters and its data center, investigators had to reconstruct the path of world- class hackers whose job depended on being untraceable. What the investigators found inside Nasdaq shocked them, according to both law enforcement officials and private contractors hired by the company to aid in the investigation. Agents found the tracks of several different groups operating freely, some of which may have been in the exchange’s networks for years, including criminal hackers and Chinese cyberspies. Basic records of the daily activity occurring on the company’s servers, which would have helped investigators trace the hackers’ movements, were almost nonexistent. Investigators also discovered that the website run by OneLibertyPlaza’s building management company had been laced with a Russian-made exploit kit known as Blackhole, infecting tenants who visited the page to pay bills or do other maintenance.
    As investigators followed the new leads, more teams fanned out across the country. The Treasury Department’s Office of Critical Infrastructure Protection and Compliance Policy drew up a list of 10 major banks and U.S. stock exchanges that might be targets for a broader campaign. Not all the companies agreed to cooperate with the investigation. In those that did, agents began scouring computer logs and examining servers, aided by the companies’ security teams. The agents found little evidence of a broader attack. What they did find were systematic security failures riddling some of the most important U.S. financial institutions. It turned out that many on the list were vulnerable to the same attack that struck Nasdaq. They were spared only because the hackers hadn’t bothered to try.
    By mid-2011, investigators began to conclude that the Russians weren’t trying to sabotage Nasdaq. They wanted to clone it, either to incorporate its technology directly into their exchange or as a model to learn from. And they dispatched an elite team of cyberspies to get it.


  • Fri: Canada CPI, UMichigan Confidence
  • Mon: NZ Credit Card Spending
  • Tue: US CPI, FHFA House Prices, Existing home Sales, AU CPI
  • Wed: BoE Minutes, EU Consumer Confidence, RBNZ, NZ Trade Balance, Japan Trade Balance, PMI, China HSBC Mfg PMI
  • Thu: EU PMI, UK Retail Sales, Italy Consumer Confidence, US Jobless Claims, US Markit Mfg PMI, New Home Sales, Japan CPI, NZ Business Confidence

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