Market Briefing for Wednesday, July 13

Euphoria tempered should be a focus by more analysts and pundits, given not only what lies ahead, but a sober assessment of why things are going as they are including the kid-glove treatment seen with respect to Brexit; China; and even the banks that have been challenged of late. HSBC too; not just Deutsche Bank (DB).

Markets are largely being driven by momentum, not valuations. Furthermore, as we called for the big 'brick-wall' shakeout as the year began; we can see (below) how money came out of the market. This triggered the persistent ensuing thrusts to the upside, 'even as' most all reports of hedge fund activity or so-called 'wealth management' high-net-worth accounts showed on-balance liquidations.

The mystery of this was suspected to be sovereign buying or yield-chasing flows primarily from abroad. Apparently it's been more than that as the accompanying charts show; regarding central bank liquidity withdrawals or recently injections. In fact, this most-recent surge in net global central bank asset purchases takes that to their highest levels since 2013; and may also not be particularly sustainable.
 

As to Brexit; realization that the EU needs the UK at least as much as the inverse is something I've contended all along since identifying both the purge and surge that followed (albeit this was taken to absurd extremes on Bernanke/Kuroda's BoJ / Fed meet, which is presumed to have been an endorsement for massive newer stimulus from Tokyo, which the BoJ does say is forthcoming... and further risks a debt embrace that might ultimately prove unrecoverable for Tokyo.. we'll see).

As to slightly modified ruminated stances in Europe; there is no reason to revise my views before traveling abroad, that in the fullness of time one may reasonably expect military and economic ties to be preserved (modified) despite bravado talk suggesting otherwise, lest the UK accept immigration policies.

Chancellor Merkel's admission just yesterday, of terrorist penetration within refugees flows, is a step in this direction. Perhaps it paves the way to acknowledge Britain has a point wishing to move in the direction of the Australian 'point-based' system to determine immigration; and compels Germany to move away from a mindless (if compassionate based on residual guilt policies) open-door approach.

Today the EU also says that Austria's plans to regulate their refugee admissions, contrary to the quota system Brussels demands, is not permitted. Vienna says it will do what is in their best interest. All of this reawakens historical cultural as well as sovereign issues that have been intentionally subordinated to the EU for years now; and that's 'complicated'. That word was used repeatedly in discussions I've had (surprisingly) with not less than several old and new acquaintances traveling on this short journey.

Their lack of perspective as to how it sorts out, is particularly noteworthy since at least two are current United Nations staff; one a retired UNESCO staffer; a third is presently a Luxembourg diplomat; while yet-another is an Amsterdam official. I think it was coincidental we all found ourselves in a long dinner and coffee chat; but perhaps noteworthy that there was a) no consensus on how Brexit turns-out other than their agreeing that 'perhaps' (one of my favorite words) trade persists as it simply must; b) the repeated references to 'dangers' of a Trump Presidency, with a tendency to pretend Europe was 'above' such politics, quickly descending into a debate between these Europeans (with me just grinning) about populism, and how it presents itself differently within various nations (with the Dutch chap a bit glib about how harmonious their society is contrasted to some neighbors); as well as c) a reasonable consensus that Europe is awakening to common needs and threats, with some expression about even Russia grasping this better.  

In sum: the markets (both in Europe but more explosively in the U.S.); persist in a move into higher-levels, 'as if' earnings will miraculously improve moe rapidly than is remotely probable, while interest rates continue descending, also 'as if' it's going to continue to attract funds from Europe or Asia for some versus no return.

Here in Europe there is essentially a grudging recognition that the elitist views of the past generation are giving-way to a sobering confrontation with bureaucratic presumptions about the EU itself; as no longer able to truly usurp sovereignty or adjust to local differences; particularly as relates to peripheral Europe.

Today I'm in Cadiz; with Rota (and the Spanish / US / NATO base) in the distance teaming with US and Spanish warships and Marines (quick reaction forces as in fact began being forward-deployed here even before Russia occupied Crimea). I would say the economy here too is improved contrasted to two years ago; though by no means as vibrant as Barcelona (nor would it in the best of times).

Overnight we passed through the Straits of Gibraltar. Even in the darkness, the high ground of the 'Rock' as well as the opposite heights of Morocco near Rabat, remind us of the strategic importance of this area (and of course Rota / Cadiz are located within a day's sailing of Libya should any intervention become necessary) given the nearby 'conflict zones' (to put it mildly). The 'risk' proximity to Europe is felt at the same time everything is quite routine and normal from a tourist's view.

Not to be overlooked today: China came-forth stating that U.S. intentions are no more than containing China to preserve US interests in the Asia-Pacific region and its global hegemony. This is nonsense; as China's claims were never clearly denoted (in terms of specific delineation of claims); they acknowledge nothing as regards Filipino, Vietnamese or Japanese territorial claims, and are now officially dismissing the Hague's decision as a 'farce', while saying China today is nothing like China of 100 years ago. Well of course; neither is Britain's control of the sea. However; Chinese expansionism is obvious and they pretend fully justified. This is not an irrelevant issue the way it's moving; bothering Tokyo more than the U.S. while Washington must provide treaty support to it's Asian allies.

 

 
Bottom line:

Very much remains in a 'state of flux' except for the pretend thrust of the U.S. markets; dragging other Indexes into new 2016 high territory. It's not a sustainable move in our view; though we'd like it to hang in a bit longer. Events as are unfolding in the world make that questionable; as this is so stretched.

Overwhelming central bank liquidity

Movements are distorting both downside and upside moves this year; with virtually zero responses related to fundamental or even technical factors. That's why it's not merely a question of views; bullish or bearish; but rather of monitoring the fund flows which have destabilized normalcy in markets; as we've seen in both directions.

Near-term catalysts (or exogenous events aside); this in itself has been monetary authorities injecting themselves into the fray; even reflecting trends opposed to globalization; whereby the loss of confidence in central bank omnipotence may oddly enough compel the central banks of various powers to engage in activities of this sort; in some cases to compliment competitive devaluations.

More another time; but for now presume these are temporary expedients or thus influences or markets, which is why even the bulls are exasperated trying to find a growth or earnings explanation for either the preceding early-year shakeout or this move. They are hard-pressed because this is about 'control' not value; and is likely a temporary move; perhaps one that actually ends quite badly.