Archive - 2014 - Story

Lots of old market hands are talking about how its similar to the Russia default and crash of ‘98 all over again.. Actually... its worse. Much worse.

What Jefferies is best known for among Wall Street shareholders is that, by still reporting a Nov. 30 fiscal year end, 1 month ahead of everyone else, it provides an invaluable glimpse into the fortunes of its Wall Street peers with a 4 week advance notice, especially when it comes to its bread and butter: fixed income trading (recall that CEO Rich Handler was a Drexel bond trader when the firm blew up). And report it did earlier today, although most of Wall Street shareholders would rather it didn't, because the numbers were absolutely abysmal, and indicative of nothing short of a trading bloodbath on Wall Street in the latest three months of trading.

Last weekend’s election in Japan was the opposite of exciting. The upcoming elections in Greece, however, are another matter entirely. What’s really different about the Greek elections now and the Greek elections in 2012 is the lack of a Oh-My-God-Look-At-Greece media Narrative today, particularly in the US. Here it’s all oil, all the time, which means that any power transition in Greece will come as a big negative “surprise” to US investors and US markets. What we can tell you with confidence is that the Common Knowledge of the market today is that Greece is “fixed”, which means that any un-fixing will hit markets like a ton of bricks. It’s an asymmetric risk/reward profile – in a bad way – for global markets in general and European markets in particular.

Dear Client,

Please be advised that that most Western Banks have stopped pricing USD/RUB. As such, FXCM can no longer offer this instrument to our clients and will begin closing any existing client trades in USD/RUB effective at Noon EST today, December 16th, 2014,

As liquidity evaporated from Ruble, after three retail FX platforms abandoned trading of the USDRUB pair, Reuters reports, the more liquid Norwegian Krone began acting as a proxy for the Russian unit of exchange. When the selling in the Ruble was at its peak, the Krone bore the brunt and smashed to its lowest level in over a decade, dropping below parity against its Swedish counterpart for the first time in almost 15 years.

In the most ironic twist of all amid the "currency crisis" enveloping Russia, we suspect the world's central bankers will be looking on jealously as The CBR manages to achieve precisely what The BoJ and The Fed are desperate to achieve. In raising inflation expectations, The FT reports, Russians are hurriedly turning their depreciating Rubles into jewelry, furniture, cars, and apartments as the currency's collapse prompts a shopping spree that will likely lead to a surge in GDP. As one anxious shopper noted, "none of us know what’s happening. We’re all worried that the currency will keep falling," and so "it’s time to buy furniture!" And sure enough, shopping centers are currently experiencing a spectacular rush.

The epic melt-up in US equities stalled "surprisingly" exactly as Europe closed and the EURJPY-pumpathon, VIX-dumpathon instantly reversed... because it's not rigged at all. The other driver - a dead-cat bounce in Crude - has also stalled as Kuwait's oil minister confirmed no new OPEC meeting until June (hardly good for oil expectations of a production cut any time soon with in OPEC). 5Y5Y inflation breakevens continue to free-fall in US, Japan, and Europe.

Let's pause for a moment, take a breath, and reflect on what has happened. As Scotiabank's Guy Haselmann notes, "The current market environment means that prices of securities can move wildly and to previously unforeseen and unexpected levels. For many, P&L management and financial survival will trump economic valuation." But what does all this mean for The Fed tomorrow?

Moments ago we got confirmation that the epic collapse in the USDRUB is just a jovial preview of the main event. To wit:

OBAMA DOES INTEND TO SIGN RUSSIAN SANCTIONS LEGISLATION:EARNEST
OBAMA LIKELY TO SIGN SANCTIONS BILL BEFORE END OF WEEK: EARNEST

And with that, US "lethal aid" will shortly begin arriving in Kiev, which in turn will be just the pretext needed by Sergey Lavrov and the Kremlin to escalate the recent events in Russia as a direct attack by the West, and to demand retaliation against a US president who "does not reason" as the Russian media will appeal to the population, and as a result Russian tanks may have no choice but to enter the separatist territories in East Ukraine.

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.