Morning Update

There's quite a bit to wrap our heads around this morning, almost all of it we have warned about in the last month and a lot of it just last night. Where to start?

First the Carry Trades as they may have a significant impact on the market. In last night's Daily Wrap, I warned of the JPY single currency positive divergence and said,

"All of the carry trades (JPY-based) stalled out today as well, and most are sitting in near perfect symmetrical triangles, we know what that generally means so watch the EUR/JPY especially for a possible head fake move, after that if it is a head fake move, that would have severe implications for the carry trades and thus for the Yen as an unwind would be highly likely."

Take a look at the Yen, the divergence was posted last yesterday, but I did think it would take a bit longer to develop.

 This is the single currency Yen positive divergence, it looks like the carry trades may be about to be covered.

Last night I warned of the symmetrical triangles in most carry pairs and "You know what that means", which means a head fake breakout to the upside followed by a rapid downside move.

Take a look at the USD/JP overnight and today...

 This was one of the less symmetrical triangles, but still a bull pennant type of pattern, there was an upside breakout at which point BAC this morning closed their long! The result?

This is the USD/JPY this morning.

Here's a wider view of the pair. Target according to BAC, 96-97 through the psychological 100, what happens at the BOJ at that point may just start the Chinese/Japanese conflict for real, especially with China's possible banking sector implosion-more on that.

I can''t say this is responsible for the Nikkei, but I warned about the Nikkei last night as well,

"While the Nikkei has a sloppy in line 1-5 min 3C chart, where it really counts and accrues, the 15  min chart, also seems to agree with the Yen or at least be aware of it."

And I showed this negative divegrence in the Nikkei 225 futures as of last night

15 min leading negative. I'm not sure we've seen the last of this and there's more going on in Asia, but...

The Nikkei id down -.40% which is far batter than some other Asian averages.

I think my warning last night about watching the Yen and the carry pairs is something we really better watch the next few days, if what I suspect is right, then BAC is just the first to come out an admit they just unwound their carry trade and that doesn't have good implications for the US stock market.

I also have been warning and keeping an eye on the Chinese liquidity situation/inflation situation in which the PBoC is either withholding reverse repos that are regularly scheduled Tuesday/Thursday or as we just saw, they injected $300 bn Yuan through 7-day reverse repos the last 3-days as the interbank liquidity surged, then dropped -2% on the injections and then promptly surged to 9% which is the highest seen since the June (near) interbank liquidity crash/money markets.

Things are heating up which means watch for headlines this weekend of military hostilities between Japan and China or intense rhetoric over the barren rocky islands. The Shanghai Comp was down 1% and down for the 9th day in a row ! The situation with interbank liquidity is always hectic at year's end because of legal needs that need to be in place, but this has smelled like something else for months and back to June.

The EU was downgraded overnight by the S&P from AAa to AA+ so the love is being spread everywhere.

Finally the final US Q3 GDP came in blowing away consensus us 3.6 and prior of 3.6 for a final print of 4.1, very handy for the F_E_D to cut another $10bn next meeting. That means from the 1st Q3 GDP estimate to the final, there has been a discrepancy and gain of 45%. Seems a bit out of whack, no?

So although it's volatile Quad Witching and year end window dressing, there are some very serious events not on the horizon, but in port right now, beware and keep an eye on these, all of them.

So lets see what the market looks like as am trade burns off.