Overnight action failed pretty badly as the ECB's Bank Stress tests came out, it's not immediately clear if it was the results in which Italy's banks performed horribly with their 3rd largest bank, Monte dei Paschi being halted numerous times as well as seeing another short selling ban. Or... or perhaps "And/Or", it's a matter of distrust in the ECB's stress test which was meant to settle the market over European Financial institutions, the problem is the stress test didn't include the most obvious and most likely scenario, a deflationary environment so every question about the health of European banks should they come under heavier stress due to deflation is a total unknown after this year long exercise, in other words, the market doesn't trust the ECB's stress test results which makes them practically worthless.
Not helping the situation...Credibility was strained with glaring inconsistencies and missing information such as the Polish Financial sector who apparently failed to submit data on time, but it gets better... Italy's worst performer, Monte dei Paschi's results were taken down from the ECB's website shortly after going up (today) and had certain results "retouched" with no explanation as to what the issues were, what was changed and why, this of course after the bank was hammered in European trade as mentioned above, limit down numerous times/halted and a short selling ban.
Deutsche Bank who has had numerous legal and regulatory charges and has been watched for the dollar amount was expected by the European Banking Authority to have $470 million Euros in legal fees as reported by the bank itself for the first 6 months of the year, yet the ECB came up with nearly 3 times that amount at $1.4 bn, none of which effected their capital ratio, with the glaring inconsistency between the EBA's number and the ECB's number being the real problem as the ECB says they got their data from DB, while the EBA said they got their data from the ECB!?!?!? Obviously the stress test didn't let the market rest easy, especially since the most likely stress scenario wasn't even part of the test.
Here we see the ECB/Reuter's Government bonds rumor lows and after effects at the lows of the day.
It doesn't appear that POMO today, what is likely the last POMO as QE is expected to be phased out Wednesday at the F_O_M_C policy announcement, had any effect on the market with approx. $1 bn in long dated treasuries.
For its part, VIX continues to ignore the market altogether, it seems as if protection is being bid, whether because of the F_E_D Wednesday or the expected decline from the mid-October rally or both, I suspect they are one in the same to some degree.
VIX futures seem to be under even heavier accumulation as they jumped from a 1 5 min leading positive to a 30 min leading positive and right at the area in which they've been ignoring the market as they "should" be lower.
As for HYG today, it was being accumulated on a short term basis as shown earlier...
I think this tells us something about the current condition of the market if it can't make these gains itself after the last 2 trading week's phenomenal gains, but recent negative divergences and it can't get HYG or VIX to do it for it either...
Some are suggesting the F_E_D is helping the market along or intervening, for instance when the market was getting a bit too hot Bullard makes hawkish comments, when the market is in decline in such a way people can't imagine it rallying, he makes dovish comments and I can see how someone might think this by looking at the chart below...
the problem...
THIS Raises a much larger question, "Is smart money preparing these cycles and when ready, getting help from the PPT (Plunge Protection Team) as a catalyst?" That would suggest a new level of market manipulation using the Plunge Protection Team in a way never envisioned, although we already know QE was a stealth bailout for the banks so is it that much more of a leap to believe they continue to support the floundering banks with antics like this?
I say floundering because as of the last window dressing, the very last day of the quarter, the F_E_D's 1-day reverse repo facility saw over $400 bn in use meaning there's approximately a half trillion dollar shortfall in at least 94 US banks!
I'll keep this in mind and keep an eye on it in the future, although 3C would still be giving us advance notice before any such comments from F_E_D officials if they are in fact moving the market as CORRELATION IS NOT CAUSATION.
In any case, today's dull day continued in internals with light volume and extremely low liquidity which has been a market positive over the last month with high volume days seeing sharp declines, another sign of the times for the market.
In internals, there was NO Dominant Price/Volume theme whatsoever, not even close. As for the S&P and Morningstar sectors, NOTHING interesting there either, 5 of 9 were green in the S&P and 108 of 238 in Morningstar groups, dull, bland...
There's really not much more I can add about today, very dull, very bland.
We do have the F_O_M_C Wednesday, this time there's no press conference so the focus (unless they surprise which few expect, like extend QE) will be on the "DOTS" or the median forecast of where the F_E_D Funds rate will be at different times over the next year or two.
Since there's no presser after, if the F_E_D ends QE as all indications have pointed to, they haven't even delayed a single taper since starting the taper, then expect they'll throw the market some kind of bone and expect the "Considerable Period" language to remain, if it doesn't and there's no other surprises, the market could react VERY badly. As always, beware the F_O_M_C knee jerk reaction, it's almost always wrong.
With smaller budge deficits due to infighting between the parties on Capital Hill, there's less Treasury issuance so I suspect the F_E_D will end QE, however the flip side of that coin is with smaller deficits there's less deficit spending which has been a boost for the economy, that has recently been a drag with less deficit spending.
We'll see what tomorrow brings as the F_O_M_C kicks off and I'll check on futures later tonight, as of now, I still expect the theme of the week to be down as Index futures are pointing to...
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