Markets Rally on Terrible News – Is Abenomics Going Global?

Here’s a brief rundown of some of the data we saw in the last 12 hours:

  • US Flash PMI came in at 52, weaker than expected and down from 54.6 last month.  
  • German Flash PMI hit a six month low of 48.8.
  • China PMI hit a two month low of 50.5, down from 51.6 last month.
  • Richmond Fed Manufacturing came in at -6 vs expectations of a +3 reading.
  • Redbook sales were up just 1.8%, down from 2% last week.
  • New home sales came in at 417K, below estimates of 419K, but up from last month’s 411K.

So, not a great day for data.   And yet the equity markets in Europe were up 1-3% and the S&P is up over 1%.  No one I’ve talked to can make a whole lot of sense of this.

The big news in Europe overnight was that the ECB and Germany in particular might be easing on their austerity approach.  The Euro tumbled in response and European equities soared despite very weak overall PMI data.  So I think it’s the Abenomics effect.  As the Japanese market rallies higher almost every single day on the back of the “whatever it takes” commitment by the BOJ/MOF, there appears to be a belief that the policy is already working and worth trying elsewhere.  It might just be that simple – we’re seeing market participants all over the place capitulating to the power of governments.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • pas

    The secular bear market is over. PE expansion is here at last. It’s the Mary Poppins rally, take your medicine ie. reduce social spending, and Mary Poppins, the Fed will help the medicine go down.

  • Cowpoke

    Sadly, Markets are not Economies

  • Nils

    Sadly? Imagine how dull trading would be if they were.

  • KB

    Cullen,
    I think you are right. Bashing of R&R, and destruction of gold align well with the trend you mentioned. Some recent comments from Spain fit quite well too.

    If capitulation to the government power is uniform across the globe, and austerity is abandoned, it would very likely grant another couple of years to strong bull market in all asset classes, with possible exception of gold. Coupled with weak real economy data, it will likely be the last leg of the great government bonds bull market.

    A failure of some significant non-US government would probably kill equity rally, but still reinforce US treasuries. Thus, to me US treasuries look now the best bet.

  • DanH

    We’re now entering the phase of the bear market where everyone wants in no matter what price it takes.

  • DanH

    oops, bull market.

  • LVG

    Nothing matters except what central bankers say.

  • Joe 401k

    I’m glad you raised this issue. I was thinking of bringing it up as a comment, if opportunity arose. I haven’t had much chance to read financial news lately (been working) but I’ve noticed that any kind of news, good or bad, seems to drive the market higher. Sorry to be a pessimist, but it reminds me of 2007. IMO the cause of the rally at this point is capitulation and greed. I’m waiting for the drop… but prepared for the market to keep roaring higher.

  • Panskeptic

    I won’t mourn austerity’s passing. It hasn’t worked anywhere in particular. It’s satisfied a handful of big money people and destroyed the lives of far more with less access to power.

    Good riddance.

  • LRM

    It is unfortunate that when one looks to macroeconomics to explain what is happening today in the markets that a young bright macroeconomic expert has also had to consult with others and found no logical answer.

    It is days like this that make me want to smash all communications devises, buy a house in the country with no cable/internet and just unplug totally from the world.

    After spending too much time over the last 4 years trying to make sense out of the markets my conclusions have to be that it is not possible.

    Gold crashes while people line up to buy gold,
    Cat advances 3% after telling all outlook not rosy

    I have no idea who to believe. Hussman says QE is a rabbits foot .
    Cullen says QE is not money printing . What in HELL is going on. Is CNBC truly the best source of financial intelligence. OMG

  • csodak

    6 years of pushing on a string and everyone with authority over the purse is scared….nothing has changed systemic collapse has suspended for an undetermined time frame and sstemic risk has been elevated.

  • Steve W

    When my clients ask me (lately) why the market keeps going up, I say “for no good reason”. Actually, I don’t say it quite like that, but beyond “muddle through”, and some improvement in residential real estate and some improvement in private (household) balance sheets (in the aggregate) — it’s difficult to come up with an explanation. Of course, the stock market and GDP growth don’t always correlate.

  • Andy Richardson

    What is hard to understand?? Europe may abandon austerity. Austerity doesn’t work and they are going to spend money into the economy like we are doing and it will work like it worked here. Europe’s weak economy has been holding the global economy down and it turns around we are all better.

  • LRM

    I thought that it was spending too much that got the weak Euro countries into trouble in the first place. I am glad that was not the case and the same markets that said it was a mistake are now seeing the light turn on

  • jaymaster

    There’s still 8 days until May.

    Everybody knows you can’t sell in April!

  • LRM

    Yes, must follow the rules. Who’s on first?

  • Cowpoke

    After the massive flash crashes and rebound today on the false AP story about Whitehouse bombings, there should be no question that algos are running this mkt.

  • DRR

    Bad news = more CB stimulus = higher stock market prices. Every hedge fund north of Hades is trying to front run the central banks policies.

    Macro is soooo 90s.

  • VCC

    “everyone gets what they want out of the market” – ed seykota

  • Alberto

    “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

    Charles O. Prince, (former Citigroup chief executive), July 2007

  • http://www.nowandfutures.com bart

    There is no correlation between Fed credit and the S&P 500

    http://www.nowandfutures.com/images/fed_credit_sp500_short.png

    /sarc

  • Boston Larry

    Good news came out today in the form of much lower yields on Spanish and Italian gov’t bonds. An 87 yr old man is taking a key role in the Italian gov’t and somehow the European bond markets are cheering this – not sure why. The European elites must have gotten what they wanted. Can anyone shed more light on why European equities were up so much today?

  • Boston Larry

    Markets love nothing more than a Rate Cut. FT.com: Gloomy eurozone output points to rate cut [by ECB].

    http://www.ft.com/intl/cms/s/0/afef5fce-abed-11e2-a063-00144feabdc0.html#axzz2RJvKKelJ

    This must be a key reason why equity markets rose so much today.

  • LRM

    Normally one may think that if a CB was needing to cut rates, that something was wrong with economy like poor economic activity that was causing market declines. Maybe the rate reduction will be so large that business will definitely borrow more because the hurtle rate is just too high at current rates to let business have any chance for positive NPV. That must be it

  • Observer

    Is Japan buying european debt with it’s newly printed cash? If so…the rally makes sense

  • Lance

    Strange title, because ‘Abenomics’ hasn’t *done* anything yet, other than to change the exchange rate. But while the government here in Japan blathers about “possible changes in inflation expectations,” I can tell you for sure that there is a limit here, because incomes are NOT rising, and even if exports rise due to a better exchange rate, the response of producers will be to increase robot efficiency before hiring new workers or raising the salaries of existing ones. About a year from now or so, ‘Abenomics’ ends in tears. It’s like the stupid idea no one ever thought of before — except there was probably a good reason for not considering it.

  • huan nguyen

    Maybe traders betting on more QEs when things are bad. Hell, whether it’s good or bad, I am just waiting for for more accommodative to deploy capital.

  • kman

    Gonna go down to my local Lexus dealership- this should result in at least a 20% price reduction no ???

  • http://www.patriotreport.org/ Alisha

    Much of the global financial markets have been complacent about what has been going on in Japan.
    Kuroda’s
    Policies
    Incites Bond Market Volatility

  • Nils

    Obviously there is no way to spend more without having the ECB push rates down.

  • LRM

    Yep kman,
    Those dealers live to pass all their unexpected gains directly to you. No need to hurry, wait for the full currency decline then back up the truck or I mean Lexus!!!!

  • Johnny Evers

    Not only is it an algo market, all the algo are programmed the same. God forbid they all decide to get out of the market before the stampede.

  • Karl

    I think this is very underdiscussed. When you have zilch yields in your home country getting 4% Italian yield is “good” especially if “backstopped”. All that Japanese money needs to go somewhere.

  • Adrian

    From my point of view at least on DAX index it’s just a bounce from the oversold levels. Even now after a big gain the downturn is still in place. I don’t think the correlation between stocks and economic data are daily, more like monthly.
    I have no idea why US market is still rallying.

  • Indignado

    Market prices reflect perceptions and are not based on fundamentals. I think the points listed in this article help to prove that point. If you can front run the collective psychological perceptions of what equities are worth then I take my hat off to you..

  • Panskeptic

    Backpedalling on austerity isn’t capitulation to government power. It’s capitulating to reality.

    And high time.