For the first time since 2007, the spread between 2Y and 10Y US treasury yields has to 100bps. While not inverted, which the status quo maintains means there cannot be a recession, the bond market is flashing ominous signs for both the economy and the US financial system...
"The Fed doesn't have a clue!" - We allege that not only because the Fed appears to admit as much, but also because our own analysis leads to no other conclusion. With Fed communication in what we believe is disarray, we expect the market to continue to cascade lower - think what happened in 2000. To understand what's unfolding we need to understand how the Fed is looking at the markets, and how the markets are looking at the Fed.
After yesterday's mediocre 3 Year auction, there were concerns whether the Treasury would find willing buyers to soak up today's $23 billion in benchmark 10Year Paper. Those concerns were promptly relieved moments ago when not only did the 10Y auction price stopping through the When Issued by a whopping 1.3 bps, at 1.73%, but it was also the lowest yield since December 2012.
Yes, Chesapeake will default, but the question is when. For those who think the company will somehow survive for a more than a month without filing Chapter 11 or arranging some prepackaged bankruptcy, and actually repays the $500 million issue, this could be the trade that makes someone's full year.
"We are very bearish for the first half of the year. In the second half, every tank and swimming pool in the world is going to fill."
With negative interest rates around the corner, how long will it be until the Fed props up the zombie economy and pushes average profit margins below the zero bound?
"It's Worse Than 2008": CEO Of World's Largest Shipping Company Delivers Dire Assessment Of Global EconomySubmitted by Tyler Durden on 02/10/2016 - 12:10
“It is worse than in 2008. The oil price is as low as its lowest point in 2008-09 and has stayed there for a long time and doesn’t look like going up soon. Freight rates are lower. The external conditions are much worse but we are better prepared.”
JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to minus 4.5%. In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%. Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%.
Central Banks are losing control everywhere...
Just as we detailed last week, and it appears Rep. Hensarling has been reading, when pressed on The Fed's legal authority to take interest rates negative, Janet Yellen gushed that "Fed authority for negative rates is still a question." This appears to have been taken as bad news by the market (cutting off the potential easing paths of the future in a world of NIRP), and stocks, crude, USDJPY have all tumbled.
After finishing sixth in the key New Hampshire primary, New Jersey governor Chris Christie is set to bow out of the race for the White House. "We’ve decided that we’re going to go home to New Jersey tomorrow and we’re going to take a deep breath and see what the final results are tonight because that matters," he said.
It was illuminating, if not surprising, that during an interview with Bloomberg TV discussing the future of Deutsche Bank, John Mack said that "there’s no question in my mind, it is absolutely good for every penny." In other words, "Deutsche Bank is fine." Why is he so confident? According to Mack, "this idea that I heard yesterday, the possibility of not making their interest payments, it’s just absurd. The government will not let that happen."
Following last night's across the board build in inventories from API, DOE reported a surprising 750k drawdown (much less than the 3.2mm build expected). However, across the rest of the complex - inventories rose: Cushing +523 build (13th week in a row), Gasoline +1.26mm build, and Distillates +1.28mm build (first in 4 weeks). Having tumbled early on from Yellen's undovishness, crude spiked on the headline draw (back above $29) but is struggling to hold gains as BP's earlier storage concerns grow more prescient.
Rumors of ECB monetization (which would be highly problematic in the new "bail-in" world) and old news of the emergency debt-buyback plan have sparked an epic ramp in Deutsche Bank's stock this morning (+11% - the most since Oct 2011). This extreme volatility is, however, eerily reminiscent of 2007/8 when headline hockey sparked pumps and dumps on a daily basis in Lehman stock... until it was all over.