Investment Grade

Confused why the blistering rally off the open following Draghi's uber-dovish commentary has completely faded? The following note from BMO's Mark Steele should explain it.

"In the meantime, in our (un)beloved country, there is something scarier than Freddy Krueger: our growth / fiscal outlook."

After forensically analyzing Morgan Stanley's balance sheet (which is very much like the rest of Wall Street's balance sheet) I can draw direct parallels to that of Lehman and Bear Stearns in 2007. It's a party!

"We conclude that, under current circumstances, it is only a matter of time until Brazil loses its investment grade status."

One month ago we asked: "Which will be first: Trafigura, Mercuria or Glencore." Today we got our answer.

After trading at what we postulated was the rough floor for the CDS at 150 bps for over a year, in the past month Glencore CDS have exploded higher, and at last check was trading 315 bps wide, about 150 wider from the March 2014 levels with the likelihood of a major gap wider when the rating agencies downgrade the company from investment grade to junk, which in turn would trigger an unknown amount of cascading collateral calls and an accelerated liquidity depletion, which would then further hammer Glencore's bonds, and as a result, send its default risk, and CDS, surging.

The bond bubble is now well over $199 trillion in size. And if we were to include credit instruments that trade based on bonds, we’re well north of $600 trillion.

It is what happened in investment grade fund flows in the latest week that is making CEO, especially those whose compensation is a direct function of how much stock they repurchase, very nervous because as Lipper reported overnight IG funds just saw $1.8 billion in outflows, the most in over two years or since June 2013. And without the fund inflow train into IG funds operating smoothly, suddenly stock buybacks appear in jeopardy...

• China central bank tries to soothe global markets, says no reason for yuan to fall further (Reuters)
• Huge blasts at Chinese port kill 44, with hundreds injured (Reuters)
• China efforts to slow yuan fall hoist Europe shares, bond yields (Reuters)
• Greek Economy Unexpectedly Surged Before Capital Controls (BBG)
• Joe Biden Is Sounding Out Allies About a 2016 Bid (WSJ)
• U.K. Tries to Kick-Start Shale Gas With Planning Speedup (BBG)

The significance of these developments cannot be overstated. Central Banks will be increasingly acting against one another going forward. There will more surprises and more volatility across the board. Eventually it will culminate in a Crash that will make 2008 look like a picnic.

"There's a saying, 'if there's peace, it will start from Cizre, and if there's war, it will start from here as well.' And we can say we have a civil war in Turkey."

Having exposed the reality that the world's capital markets are a manipulated shell game, Janus' Bill Gross has a message for the perpetual bulls in his latest letter to investors - "say a little prayer." Gross continues, "low interest rates are not the cure – they are part of the problem," warning that ZIRP has enabled, "a host of zombie and future zombie corporations now roam the real economy. Schumpeter’s 'creative destruction' – the supposed heart of capitalistic progress – has been neutered. The old remains in place, and new investment is stifled." As he previously warned, when the central bank manipulation is removed the likely trajectory of prices is downward...

On a day when market participants will care about only one thing - how hawkish (or dovish) the FOMC sounds at 2:00 pm (no Yellen press conference today) - Chinese stocks provided the usual dramatic sideshow and traded unchanged or modestly negative for most of the day despite the latest $100 billion injection, the close of trading on Wednesday was a mirror image of what happened in the last hour on Monday, as various Chinese "plunge-protection" mechanism went into a furious buying frenzy and government-backed funds rushed to buy anything that trades in the last 60 minutes of trading in what may be the most glaring example of banging the close yet.

"Central bank quantitative easing drove traditional investors seeking mid-to-high single digit yields out of investment grade/ crossover credit into high yield, loan and emerging market debt to satisfy yield bogeys. The problem, however, is some of the tourists underappreciate the exponential loss and mark-to-market functions for low quality high yield assets."