Deutsche Bank

Soaring junk bond redemptions; rising investment grade (and high yield) yields pressuring corporate buybacks; record corporate leverage and sliding cash flows; Chinese devaluation back with a vengeance; capital outflows from EM accelerating as dollar strength returns; corporate profits and revenues in recession; CEOs most pessimistic since 2012, oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity. To Wall Street's strategists none of this matters: as Bloomberg observes, virtually every single sellside forecasts expects "no end to the bull market."

The real "data" that The Fed is "dependent" on...

Because when your year-end bonus depends on you not seeing it coming, you don't.

"either the Fed achieves its goals quickly to a very low terminal Funds rate. Buy bonds. Or they need to be even more aggressive. Buy even longer duration bonds. The choice is more about where to put the long leg of the curve flattener not about whether to steepen or flatten the curve."

In light of surging concerns about mutual and hedge fund fixed income (and soon other asset classes) "gating", "runs" or outright liquidation, Deutsche Bank has prepared the following infographic which summarizes the main choke points which predispose both open and closed-end funds to runs or outright shutdown.

With just 72 hours to go until Yellen decides to soak up to $800 billion in liquidity, suddenly we have China and the Emerging Market fracturing, commodities plunging, and junk bonds everywhere desperate to avoid being the next to liquidate.

China’s sweeping crackdown on sellers, “manipulators”, frontrunners, financial journalists and anyone else “suspected” of acting in such a way as to sow fear and uncertainty in the wake of the dramatic meltdown in Chinese equities that unfolded over the summer has ensnared money managers, high profile executives, and government officials alike. Earlier this week, it reached a crescendo with the disappearance of Guo Guangchang, known to some as “China’s Warren Buffett. We now have a bit more in the way of color regarding Guo’s detention and sure enough, he’s being “held in connection with an investigation.”

The U.S. establishment has been aggressively pushing against the American public’s right to private communications, i.e. encryption, ever since the terror attacks in Paris. This push continues unabated, with the latest shots fired earlier this week by FBI chief James Comey at a Senate Judiciary Committee hearing. “I don’t want to tell them how to do their business... but there are costs to being an American business."

At the peak of the craziness of the last cycle, banks took to protecting themselves by buying (credit) protection on other banks as a 'hedge' for systemic risk (which instead exacerbated contagion concerns and was never going to payoff anyway given the systemic - counterparty - collapse required to trigger it). Fast forward 8 years and it appears once again, as Bloomberg reports, that banks are buying (equity) protection in order to hedge the stress-test downside scenarios enforced by The Fed.

"... a default cycle in commodity-related areas at this point is unavoidable, and the only real question here is whether it stays contained to those areas or extends itself to other sectors."

"... if nominal growth is 3 percent and the debt GDP ratio is 300 percent, the implied equilibrium nominal rates is around 1 percent. This is because at 1% rates, 100% of GDP growth is necessary to service interest costs."

"Very much in evidence, once more, has been the perennial contrast between the hectic rhythm of markets and the slow motion of the deeper economic forces that really matter. Markets can remain calm for much longer than we think. Until they no longer can."

"The liquidity picture for EM corporates in 2017 looks less appealing, due to a 38% yoy increase in USD bond maturities (to USD122bn) and lingering uncertainty on commodity prices (an important component of the corporate sectors’ cash flow) and FX (a headwind for domestic-oriented players). A further depletion in cash buffers and reduced appetite for certain portions of the EM corporate universe may lead to increased refinancing stress in 2017."

For about three weeks, beginning on August 11, just about all anyone wanted to talk about were EM FX reserves, and for good reason. But because the market has a short memory, the global EM FX reserve liquidation story has been largely forgotten even as commodity prices remain in the doldrums and even as a laundry list of idiosyncratic factors are still weighing on the world’s most important emerging economies from Brasilia to Ankara to Beijing to Kuala Lumpur.