We recently noted the rise of counterparty risks in the financial system due to oil prices dropping (and leveraged derivative exposures) but as the Russia situation has deteriorated so dramatically this week, a renewed focus on bank exposures has sent stocks reeling (and credit risk soaring) among many European (and US) banks. As Bloomberg reports, Raiffeisen Bank International and Societe Generale, the European banks with most at stake in Russia, led European lenders lower. Raiffeisen fell as much as 10.3% to 11.40 euros in Vienna, the lowest level since it went public in 2005. Societe Generale dropped as much as 7.3% to 31.85 euros, hitting the lowest intraday level since August 2013. CDS markets for both also exploded with Raffeisen risk at 27 month highs. As one analyst noted, "There remains a huge amount of uncertainty at this juncture, but the key point is that there are no benign scenarios." While not on the same scale, US bank risk has also widened signicantly in recent weeks (despite equity strength).
Having once again broken its 100DMA, the S&P (and the rest of the US equity complex), the news that various platforms have halted FX trading in the Ruble (though they won't enact capital controls) and a modest bounce in oil prices seems to have sparked a EURJPY and VIX-driven v-shaped buying-panic very-visible-hand ramp in stocks into the European close... because nothing says dump VIX protection and BTFD in stocks with both hands and feet like totally disastrous US macro data and a global financial system on the verge of collapse.
Just like with the Mohammed Islam story, the religious belief by the cheerleading crew that the crashing price of oil is so "unambiguously, unquestionably, undisputably" good for the US is so taken for granted, that nobody actually checked the facts.So here is one such attempt by the FT, which writes that "almost $1 trillion of spending on future oil projects is at risk as a result of the plunge in crude to $60."
Yesterday - amid multiple options-based exchange "breakages", the VIX feed across various platforms appeared massively noisy. We assumed it would be cleaned up and brushed under the carpet in the new normal. Today, it is just as bad...it appears the plunge in stocks has been a catalyst for amplification of VIX pricing noise... so far no desks (or CBOE) have a reason for this.
This morning's bounce in stocks off the overnight lows is being entirely ignored by credit markets. US HY Energy spreads just broke 1050bps - record highs, worst than during the 98 crisis. Broad HY spreads have surged wider to 18-month wides. But perhaps most worrisome, investment grade credit spreads are 'relatively' underperforming, bursting to 77.5bps - the widest in 14 months.
But what about the massive cajillion-dollar tax cut for American manufacturers from the oil-drop? US Manufacturing PMI collapsed to 53.7 in December, missing expectations of a rebound to 55.2 by the most on record and falling to its lowest since January 2014 - the middle of the Polar Vortex. This is the 4th monthly drop in a row off the mid-year "yay recovery is here" record highs and 4th miss in a row as economists continue to 'price in' the hockey-stick. The employment sub-index dropped to its lowest since July and new orders collapsed to its lowest since January. This comes on the heels of Germany's 18-month lows for its Manufacturing PMI. No decoupling after all. As Markit noted about Germany, "the data are consistent with only marginal GDP growth in the fourth quarter at best," and we suspect the same is coming for USA soon, as they add "a cooling in the pace of expansion from unusually strong rates earlier in the year."
Dubai's Financial Market General Index is now down 40% since the peak in oil prices in June this year. For now, only Qatar is clinging to gains year-to-date as the rest of the Middle Eastern equity markets give up 30-60% gains from mid-year and tumble to negative. Dubai and Abu Dhabi alone are down over 8% since Friday. Saudi Arabia is down 7.3% today - the biggest drop in 6 years.
And bank dealers thought bid/ask spreads on CDS were wide.
After the entire world learned that young trading whiz-kid Mohammed Islam had "made" $72 million, certainly including the IRS which would promptly come looking for the $36 or so million it was due, the alleged megatrader, who got just the wrong 15 minutes of fame, scrambled to set the record straight, and explained the instead of making money, he actually made nothing, he just made it all up: to wit: "Is there ANY figure? Have you invested and made returns at all? No. So it’s total fiction? Yes. I run an investment club at Stuy High which does only simulated trades."
There goes another pillar of the sustainable growth meme. Housing Permits tumbled 5.2% MoM - the biggest drop since January (amid the Polar Vortex) to 1.035mm SAAR. Permits dropped in all regions except the Northeast. Housing Starts dropped 1.6% MoM to 1.028mm SAAR. The South was the only region with a rise in completions as the Northeast was cut in half and both single- and multi-family residences slid.
For those wondering if the CBR's intervention in the Russian FX market with its shocking emergency rate hike to 17% overnight calmed things, the answer is yes... for about two minutes. The USDRUB indeed tumbled nearly 10% to 59 and then promptly blew right back out, the Ruble crashing in panic selling and seemingly without any CBR market interventions, and at last check was freefalling through 72 74 76, and sending the Russian stock market plummeting by over 15%.
Always happy to look to the silver lining in markets, amid the total and utter carnage across global FX, commodity, and equity markets, there are a few markets benefiting from the scramble for a safe-haven. Gold (and Silver) prices, after dropping yesterday, has retraced all those losses and is up over $20 to $1215. Even more impressively, 10Y Treasury yields traded with a 2.00% handle (down 8-9bps today alone). Notably ultra-short-term US T-Bill yields have collapsed to zero with the Feb 2015s trading -0.5bps. Bunds are also bid (down 5bps) at fresh record-low yields of 56.6bps! While not a 'safe-haven" per se, JPY is aggressively bid also as leverage and risk unwinds carry trades and squeezes USDJPY lower (briefly touching 115.50).
Paging Waddell & Reed... Even for this early in the US session, liquidity in the most-liquid financial instrument in the world is - in the words of Nanex's Eric Hunsader, "abysmal."
- Ruble Sinks to 80 a Dollar Defying Surprise Russia Rate Increase (BBG)
- Oil slumps near $59 for first time since 2009 on oversupply (Reuters)
- Oil sinks, Russian moves fail to quell nerves (Reuters)
- Fed Seen Looking Past Low Inflation to Drop ‘Considerable Time (BBG)
- Students Among Dead as Pakistan Gunmen Kill 126 at Army School (BBG)
- Repsol to buy Talisman Energy for $13 billion (Reuters)
- Indonesia’s Rupiah Erases Decline After Central Bank Intervenes (BBG)
- Anti-Islam Rally Grows as Immigrant Backlash Hits Europe (BBG)
- Saudi Arabia is playing chicken with its oil (Reuters)