"Although the levitation of financial assets has yet to levitate gold, we will grit our collective teeth on that score and await either 'asset price justice' or the 'end times,' whichever comes first."
Quietly, and without the drama associated with The Fed and ECB, China unveiled what looks like QE recently (as we discussed in detail here). Whether this is a stealth creation of a 'fannie-mae' structure to support housing or merely another channel for the PBOC to shovel out hole-filling liquidity is unclear. However, one thing is very clear, demand for CNY is surging (even as the PBOC weakens its fixing) and the Shanghai Composite is surging as hot money chases free money once again...
As every 'real' corporate bond manager knows (as opposed to playing one on television), forecasting from historical defaults is a fool's errand as the process is entirely cyclical and non-stationary. The fact that default rates have been low for 4 years (thanks to an overwhelming flood of liquidity-driven demand for yield) is of absolutely no use when pricing discounted cashflows into the future. However, as Fitch warns, a jump in US high-yield default rates looms. There have been 10 LBO related bond defaults thus far in 2014, compared with nine for all of 2013. While most sectors remain relatively clam, the utilities and chemicals sectors are seeing huge spikes in defaults... which explains why the market is starting to price that in.
With Argentine politicians explaining that "Argentina is not in default" and ISDA set to decide if last night's default is an 'official' trigger event for CDS, it appears Kirchner, Kicillof, and their (k)omrades may have found an angel. The initial 'bailout' plan, by which Argentine banks bought the holdouts defaulted debt (then promptly acquiesced to Argentina's old debt-swap agreement), failed last night; but, as WSJ reports, JPMorgan is in discussions to buy the defaulted bonds of Argentina's holdout creditors. While this would not impact the default decision (that is history), it would speed up the exit from default rapidly. Of course, JPM is not doing this out of love for Argentina, we suspect they are on the hook for a few billion CDS and need some cheapest-to-deliver bonds to help them through the settlement process.
- Moscow fights back after sanctions; battle rages near Ukraine crash site (Reuters)
- On Hold: Merkel Gives Putin a Blunt Message (WSJ)
- Argentina’s Default Clock Runs Out as Debt Talks Collapse (BBG)
- Argentina braces for market reaction to second default in 12 years (Reuters)
- Banco Espirito Santo Plunges After Posting 3.6 Billion-Euro Loss (BBG)
- Adidas Plunges After Cutting Forecast on Russia, Golf (BBG)
- GOP Says Lerner Emails Show Bias Against Conservatives (WSJ)
- Londoners Cashing in Flee to Suburbs as Home Rally Wanes (BBG)
- BNP Paribas Reports Record $5.79 Billion Quarterly Loss (WSJ)
- Swiss Banks Send U.S. Client Data Before Cascade of Settlements (BBG)
- Putin Sows Doubt Among Stock Bears Burned by 29% Rebound (BBG)
"...the numbers that they crank out to make everybody feel good are almost as phony as the numbers that the Argentine government cranks out... I would say that inflation is realistically in the 8-10% range here in the US—and it’s going much higher. The growth is all a fantasy. It’s all a result of the assumption that there is no inflation, when there really is because what we have is inflation masquerading as economic growth. But the bottom line is the economy is really contracting, that’s why the labor force is shrinking, that’s why we’re using less energy, that’s why the people’s standard of living is going down, and real incomes are falling and job opportunities are disappearing. It’s because we’re in a recession and no one wants to admit it."
The question of whether 'tapering is tightening' is often discussed but what is really meant is - when the Fed tapers, will risk assets suffer (and bonds benefit)? The answer is - yes. As Gavekal finds, long-dated US government bonds are following the reduction in QE nearly perfectly so far. The link between Fed asset accumulation and these various bond yields is unmistakable, especially for longer duration bonds, and this simple model shows how even lower bond yields may be in the offing as the Fed puts on the breaks. For junk bonds, this seems to portend higher spreads, which may help to put the recent widening of spreads in context.
It's all over but the crying: having explained Argentina's position (i.e. not giving to so-called vulture funds), Economy Minister Kicilloff explains:
- *KICILLOF SAYS HEDGE FUNDS NOT WILLING TO GIVE DELAY ON RULING
- *KICILLOF SAYS HARD TO BELIEVE ARGENTINA IN DEFAULT IF HAS FUNDS
- *KICILLOF SAYS ARGENTINA CAN'T COMPLY WITH COURT RULING
- *HOLDOUTS DIDN'T ACCEPT ARGENTINE OFFER: KICILLOF
As Bloomberg notes, by defaulting today, Argentina may trigger bondholder claims of as much as $29 billion -- equal to all its foreign-currency reserves. Just remember that the last 2 days have seen 'smart money' buy Argentine bonds and stocks to all-time record highs.
After an exuberant day in Argentine bond and stock markets, we are nearing a decision. With a handful of hours left until it's all over, various 'deal's have been proposed today from Argentine bankers as a last-minute rescue package. S&P has already decided that it's a done deal:
- *ARGENTINA CUT TO SD FROM CCC- BY S&P
- *ARGENTINA DEFAULTED ON $13B IN FOREIGN DEBT, S&P SAYS
- *ARGENTINA MISSED $539M BOND PAYMENT, S&P SAYS
And now, Argentine Economy Minister Axel Kicillof will speak in a press conference at country’s consulate in Manhattan (ironically a block from the holdouts' office).
"More of the same," should summarize today's FOMC statement. There will be no press conference or refresh of the 'dot plot' economic projections. The Fed is expected to continue to taper by $10 billion with confirmation that the "growth meme" is playing out just as they projected (especially after today's GDP print). Goldman believes the focus will be on the jobs 'dashboard' and recent inflation data enables the dovish Fed to argue recent moves were noise and stay easier for longer. The downside risk (for markets) may be that Fed hawks will likely have little luck in altering the way forward guidance is employed by the Fed (and chatter over a Fisher dissent is possible).
Treasury yields are surging across the complex with the long-end steepening notably. Today's 10.5bps jump in 10Y yields is the biggest percentage shift since early November 2013... and a significant tail in the 7Y auction just made things worse.
Portugal's PSI20 plunged over 3.4% today extending recent losses after its dead-cat-bounce, leaving the index near its lowest since October 2013. Interestingly peripheral bond spreads (and IG/HY credit spreads) compressed while equity markets all dumped across Europe amid concerns of blowback from Russia. As the sell-off accelerated into the close, credit markets also tumbled. An initial rally in financials gave way rapidly as US opened and rumors of G7 statements and Russian retaliation spread. Europe's VIX closed just shy of 18.00 - its highest close since early May. Banco Espirito Santo fell another 10% to record lows ahead of tonight's earnings.
Bond yields jumped over 4bps on the better than expected GDP print. Stocks popped along with the USD index. Gold was flip-flopped all over the place - an initial dump was followed by a rip back over $1300 only to be sold back down to $1295 now... Equity exuberance is fading back a little now as machines 'read' the anti-goldilocks ADP print and inventory-stuffed Fed-hawk-supporting GDP print as indicative of a punch bowl that just got dragged away a little more...
This week's US data onslaught begins today, with the ADP private payroll report first on deck (Exp. 230K, down from 281K), followed by the number of the day, Q2 GDP, which after Q1's abysmal -2.9%, is expected to increase 3%. Anything less and in the first half the US economy will have contracted, something the purists could claim is equivalent to a recession. The whisper numbers are to the downside since consumption and trade never caught up and the only variable is inventory as well as Obamacare, whose impact was $40 billion "contribution" in Q1 was entirely eliminated and instead led to a deduction, something we expect will be reversed into Q2. Following the backward looking GDP (which will be ignored by the sellside penguins if it is bad and praised if good) at 2:00 pm Yellen Capital LLC comes out with a correction on her call to short social networking stocks, as well as admit once again that the "data-driven" Fed really has no idea what it is doing and how it will tighten, but that tightening is imminent and another $10 billion taper to QE will take place ahead of a full phase out in October. Joking aside, the Fed is expected not to do much if anything, which may be just the right time for Yellen to inject an aggressively hawkish note considering her inflation "noise" refuses to go away.
High yield bond markets are another victim of the "new normal"