Archive - Jan 2014 - Story

With all eyes focused on China (shadow bank liquidity fears), Emerging Market currencies, and US equities; something very concerning has been going on in short-dated Treasury Bills. The ultra-short-term remain bid (near zero yield) as the saftey crush demand bids for them but move out one month - across the dreaded late-February debt-ceiling debacle maginot line - and suddenly yields are exploding! The March 16th yields have screamed from 1bps to 12.75bps in the last 2 days - now above the October debt ceiling levels..

In a 2-line statement, offering very few details, ICBC's China Credit Trust Co. said it reached an agreement to restructure the CEG#1 that ha sbeen at the heart of the default concerns in recent weeks. The agreement includes a potential investment in the 3 billion-yuan ($496 million) product but didn’t identify the source of funds, or confirm whether investors would get all of their money back. The media is very excited about this entirely provisional statement and we note, as Bloomberg reports, investors in the trust product must authorize China Credit Trust to handle the transaction if they want to recoup their principal which will involve the sale of investors' rights in the trust at face value (though no mention of accrued interest). As BofAML notes, however, "the underlying problem is a corporate sector insolvency issue...  there may be many more products threatening to default over time," and while this 'scare' may have raised investors' angst, S&P warns "a bailout of the trust product [leaves] Chinese authorities with a growing problem of moral hazard," and they have missed an opportunity  for "instilling market discipline."

The taper-driven rate-rise scare mid-summer that stalled home-buyer (speculator) confidence has been matched by the Decmeber 2013 numbers. New Home sales plunged 7.0% against expectations of only a 1.9% drop as total sales (seasonally adjusted and annualized) dropped to 414k - the biggest miss (against 455k exp.) since July 2013. Of course the data is dreadfully sparse and noisy, as we note a mere 1,000 (non-seasonally-adjusted) homes were sold in the Northeast. Notably, the exuberant levels of the last few months have also been revised markedly lower.

Following the rejection of President Yanukovych's offers of key positions to opposition leaders (because key demands were not met), unrest is now spreading further into the country's east, which is seen as Mr Yanukovych's support base (as we discussed here). As The BBC reports, at least a dozen attempts by protesters to seize government buildings were made with the Justice Ministry successfully over-run. Justice Minister Olena Lukash, an ally of Yanukovych and involved in the negotiations, has called for a "state of emergency" if protesters - who claim "the seizure of the Ministry of Justice is a symbolic act of the people of the uprising. Now, these authorities are stripped of justice," - do not leave. Furthermore, he said she would be "forced to turn to the Ukrainian president with a request to stop the negotiations unless the justice ministry building is vacated without delay." The Ukraine Hyrvnia has weakened markedly despite the central bank's intervention.

The big story last week was the rapid devaluation of the official Argentine Peso (abbreviated, perfectly enough, ARS) exchange rate, which tumbled by 17% overnight from USDARS 6.8 to over 8.0, when the government decided to liberalize the exchange regime and "ease" capital controls, allowing citizens to purchase dollars in hopes of stabilizing the currency and halting the ongoing outflow of reserves. Other downstream effects aside - and there will be many -  the most immediate outcome for the economy will be a surge in inflation, which is already overheating at 25% in 2013 based on analyst estimates even if the "official number" is half of this, and set to get even higher.  What worse, however, is that only some 20% of the population will be able to take advantage of the "relaxed" capital controls, because only Argentines who earn at least 7,200 pesos ($901) per month will be allowed to buy dollars, Cabinet Chief Jorge Capitanich told reporters today. And since only 20% of Argentines earned 7,000 pesos or more as of 3Q 2013, according to the National Statistics and Census Institute, it means that 80% of the population will get all the "benefits" of inflation with zero benefits from dollar purchase price protection.

This week, much of the market focus will remain on the policymakers' responses to the challenges emerging out of the, well, emerging markets. In particular, the response of the Turkish Central bank will be key. This week we also have eight MPC meetings, with the US FOMC on Wednesday standing out. Consensus expects the continuation of the tapering of asset purchases – by another USD10bn, split equally between Treasuries and MBS. Other than that, the announcement should be fairly uneventful. In India GS forecasts an out-of-consensus hike of the repo rate to 8.00% after the central bank published a report on suggested changes to the monetary policy framework. In New Zealand, South Africa, Israel, Mexico, Malaysia and Colombia, consensus expects no change in the monetary policy stance. Among economic data releases, the focus will be on consumer surveys, as well as business surveys (US, Germany and Italy). There are also inflation numbers from the US, Euro Area, Japan and Brazil. Advanced Q4 GDP data prints will come out for the US and the UK. US consumption and production numbers are due at the end of the week.

What goes up (and tests $1,280 overnight)... must not be allowed to go up for the sake of the children of the status quo. It would appear the BIS' Benoit Gilson took over the reins from Michel Charoze this morning and the precious metal pilfering has begun. Why not? What else would you do faced with an Emerging Market FX crisis, various nations in mass upheaval, China's liquidity crisis front-and-center, and growth hopes around the developed and emerging world collapsing... buy US stocks and sell gold...

"... either way 2014 is already proving to be more challenging, more volatile, more illiquid and more bearish than the significantly bullish positioning and sentiment indicators warranted as we came into this year, and way more bearish than the enormously bullish consensus emanating from the sell-side. We will see painful counter-trend rallies, perhaps even to marginal new highs (3A above) – never underestimate the willingness and ability of central bankers to persist with flawed policies – but overall I think the end of the post-2009 QE-driven bull is at hand (or very soon to be at hand) and the onset of the next significant (post-QE) deflationary bear market, which I think will run deep into 2015, should now begin to guide all investment decisions." - Bob Janjuah

1) Reinforcement of preference for DM vs EM    

• While EM have cheapened vs DM, value might not be enough as long as the flow continues to favor DM

2) Potential short-term solutions leading to longer-term problems

3) FX depreciation leading to outflows from local markets

4) Due to decentralized nature of these shocks, no silver bullet can restore appetite for risk

And the best for last: "Unlike the market shocks of recent years, QE or IMF bailouts unlikely to come to rescue this time"

• Emerging sell-off hits European shares, lifts yen (Reuters) - but not really if you hit refresh since the latest central bank bailout announcement
• Apple’s Holiday Results to Show Whether Growth Is Back (BBG)
• Israel attacked Syrian base in Latakia, Lebanese media reports (Haaretz)
• Abenomics FTW: Japan Posts Record Annual Trade Deficit as Import Bill Soars (BBG)
• When all else fails, Spain's hope lie in a 16th century saint: Saint “might help Spain out of crisis,” says interior minister (El Pais)
• Global Woes Fail to Send Cash Into U.S. Stocks (WSJ)
• IMF's Lagarde sees eurozone inflation "way below target" (Reuters)
• Minimum wage bills pushed in at least 30 states (AP)
• AT&T Gives Up Right to Offer to Buy Vodafone Within 6 Months (BBG)

The last time the Turkish Central Bank announced, after the fact, it has failed to intervene decisevely in FX markets, the country's currency collapse became a vivid example of what happens when monetary collapse looms and the monetary authority is unable to do anything about it. This morning, things got even more surreal after the Turkish lira cratered from 2.32 to a record low against the dollar, just shy of 2.39, when at 5:30 Eastern time, the Turkish CB decided to do what Draghi, Bernanke et al are so good at doing: threaten with some unknown future action, in the process spooking everyone into covering shorts, when it unexpectedly announced it would meet on 28 January 2014, Tuesday evening to discuss recent developments and take the necessary policy measures for price stability. The decision would be announced at midnight. A fitting hour for yet another central bank bailout...

A slew of favorable overnight news, including a stronger than expected German IFO business climate print, reports that Draghi has signalled he would be prepared for the ECB to buy packages of bank loans to households and companies, when he said "the ECB might be able to buy securitised bank loans if they could be packaged as asset-backed securities in a transparent manner" (a QE-lite will hardly make the market happy), a largely expected bail out of the Chinese Trust Equals Gold imminent default (more in a subsequent post), as well as the announcement of Argentina's new liberalized dollar purchase capital controls (which have a monthly purchase limit as well as a minimum income threshold), not to mention the traditional USDJPY levitation which drags all risk along with it, were unable to put an end to the ongoing rout in emerging markets, which saw the Turkish Lira collapse to fresh record lows before it jumped on news the Turkish Central Bank would hold an extraordinary meeting tomorrow (if the recent intervention by the CB is any indication, watch out), not to mention the Ruble, Zloty and even the Ukraine Hryvna dump as the outflows from EMs continued over a mixture of tapering fears as well as concern that the one way fund flow would accelerate creating its own positive feedback loop. Is today the day the fund flow exodus will finally be halted? Stay tuned to find out and keep a close eye on the USDJPY - the most manipulated, confiduing-boosting "asset" in the world right now, more so than gold even.

Earlier, we debunked an alarmist Forbes story about halted cash transfer by PBOC decree, which was erroneous along various lines all explained previously, not in the least that the actual announcement had first appeared some three weeks ago. And despite the kneejerk reaction of some of our more fatalist readers and not to mention the general public, the reality is that China has more than enough real problems (Trust Equals Gold being at the forefront) and certainly does not need to add imaginary, made up ones, conceived only with the intention of generating conflated ad revenues through click-baiting headlines. Which is why we commend Forbes for, better late than never, pulling the story even without providing an explanation of how this story appeared in the first place. Because where the article once was, there is only a 4-0-Forbes now...

After the worst week for the market in over a year, the US knows the drill. Must. Distract. Population. And if a drunk-driving, prepubescent Miley Cyrus Canadian lookalike on a work visa won't do the trick, then by all means resort to ye olde faithful - bombing the feces out of some "independent" nation. In this case Somalia. CNN reports that earlier today, the US conducted a missile strike in Southern Somalia. The target: a "senior leader" affiliated with al Qaeda and Al-Shabaab, al Qaeda's affiliate in Somalia. Supposedly this is the Al Qaeda that the US isn't officially funding and supporting in Qatar's desperate and ongoing attempt to push its pipeline under Syria.