It would appear the fears of a global bank run are spreading. From HSBC's limiting large cash withdrawals (for your own good) to Lloyds ATMs going down, Bloomberg reports that 'My Bank' - one of Russia's top 200 lenders by assets - has introduced a complete ban on cash withdrawals until next week. While the Ruble has been losing ground rapidly recently, we suspect few have been expecting bank runs in Russia. Russia sovereign CDS had recently weakned to 4-month wides at 192bps.
As a prelude to the following dismal market update, Japan just posted the largest annual trade deficit ever (ever ever ever) at JPY 11.47 trillion... so much for Abenomics and the magic J-Curve as the year just got worse (not better). With the Nikkei 225 (cash) down over 400 points (as we would have expected given futures action) and back under 15,000; Japanese stocks are at 7-week lows but Japanese credit risk is rapidly accelerating lower at its riskiest in 10-weeks. Japanese government bonds are well bid with yields on the 20Y having dropped to 1.443% - the lowest since April 2013. Away from Japan, the iTraxx Asia index (which tracks credit risk of investment grade corporates) has soared in the last few days to almost 5-month highs. Emerging Market Sovereign CDS are all notably wider with Vietnam and Indonesia topping the relative moves so far (and most at multi-month wides). Chinese repo is stable for now (CDS are wider by 2bps at 7-month wides) but so far, no good, for those believing the contagion in EM FX will remain contained.
While last night's almost unprecedented reverse repo liquidty injection into the Chinese banking system stopped the bleeding of short-dated money-market rates briefly, the likelihood remains that a shadow-banking system default will occur: As CASS's Zhang noted:
*CHINA TRUSTS AND SHADOW BANKING TO SEE DEFAULTS IN 2014; DEFAULTS WOULD BE GOOD THING
Perhaps that explains why China's CDS spread remains at its highest since the summer credit crunch, barely budging on last night's cash drop. At double the default risk of Japan, China appears far from out of the contagion fire.
Some better than expected economic news out of Europe, Greek 10 Year yields dropping to 7.65% or the lowest since May 2010, and futures are... red? Alas, such is life in a world in which the S&P500, aka the E-mini, is simply a derivative of the Yen funding currency pairs, where the USDJPY touched on 105 after a straight line diagonal move only to sell off in recent trading. Heading into the North American open, stocks in Europe are seen mixed, with peripheral stock indices outperforming, buoyed by the prospect of Portugal echoing yesterday’s Irish NTMA return to capital markets with its 10y bond syndication. As such, despite the cautious sentiment, financials led the move higher, with Italian banks gaining for 4th session as IT/GE 10y spread narrowed to its tightest level since early July 2011. Of note, FTSE-100 index underperformed its peers since the get-go, with retailers and tobacco names under pressure. In spite of opening higher by over 3%, Sainsbury's shares have since reversed and are seen lower by almost 2% after co. CFO said that he expects FY LFL sales to be just below 1% and expects Q4 to be similar to Q3. Elsewhere, tobacco names came under selling pressure following reports that China is planning a ban on smoking in public by year's end.
Everywhere you look these days, central planning just can't stop reaping failure after failure. First it was Japan's Q3 GDP rising just 1.1%, well below the 1.9% in the previous quarter and the 1.6% expected, while the Japanese current account posted its first decline since of €128 billion (on expectations of a JPY149 billion increase) since January. What's worse, according to Asahi, Abe's approval rating tumbled to 46% in the current week, down from the low 60s as soon as early 2013, while a former BOJ member and current head of Japan rates and currency research, Tohru Sasaki, said that the high flying days of the USDJPY (and plunging of the JPY respectively) is over, and the USDJPY is likely to slide back to 100 because the BOJ would not be able to expand monetary easing by enough to repeat this year's "success." He definitely uses that last word rather loosely.
As DB notes, it appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent - so his comments that the government shutdown will make coming data "less reliable" than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year. In other words, an Oscar-worthy good-cop/bad-cop performance by the Fed's henchmen, confusing algotrons for the second day in a row.
Bond markets may be closed today for Veterans' Day, but equities and far more importantly, FX, are certainly open and thanks to yet another overnight ramp in the ES leading EURJPY, we have seen one more levitation session to start off the week, and an implied stock market open which will be another record high. There was little overnight developed market data to digest, with just Italian Industrial Production coming in line with expectations at 0.2%, while the bulk of the attention fell on China which over the weekend reported stronger Industrial Production and retail sales, while CPI was just below expectations and additionally China new loans of CNY 506 billion (below est. of CNY 580bn) even as M2 in line, should give the Chinese government the all clear to reform absolutely nothing. That all this goldilocks and goalseeked data is taking place just as the Third Plenum picks up pace was not lost on anyone.
Understanding the complexities of the sovereign CDS market is tricky... so we are constantly bemused by the mainstream media's constant comment on it as if they have a clue. The fact is that the USA CDS market is indicating a higher risk of imminent technical default now than in 2011. As we explained in painful detail previously, you cannot compare a 71bps (+8 today) 1Y USA CDS spread to a 1200bps JCPenney CDS spread - they are apples and unicorns. Having got that off our chest, the fact that the cost of 1Y protection is at 2011 extremes (implying around a 6.5% probaility fo default) and has been higher (inverted) relative to 5Y now for 3 weeks is a clear indication that investor anxiety is very high this time (just look at T-Bills!).
The prospect of financial sector deleveraging in China increases the risk of a hard landing - despite yesterday's goldilocks GDP print (and ugly miss in IP). Although the probability of the hard landing is still low, Morgan Stanley warns it’s not low enough to make hedging costs irrelevant: The new government's policy drive to deleverage the banking sector has become more apparent, and they think this deleveraging will likely continue to unfold in the next 6-12 months. In MS' Super-Bear scenario, they expect aggressive policy tightening to reduce 2H13 GDP growth to 5.5% YoY. In this scenario, policy-makers are also slow to respond to this deceleration, leading to more turmoil in the financial sector. Although a low probability event, this would have major implications for global markets. MS estimates that markets are pricing in a 1-in-10 chance of a Super-Bear scenario in China in the coming 12 months, more in equities, less in FX markets.
With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.
The global liquidation wave started with Bernanke's statement yesterday, which was interpreted far more hawkishly than any of his previous public appearances, even though the Fed had been warning for months about the taper. Still, markets were shocked, shocked. Then it moved to Japan, where for the first time in months, the USDJPY and the Nikkei diverged, and despite the strong dollar, the Nikkei slumped 1.74%. Then, China was swept under, following the weakest HSBC flash manufacturing PMI print even as the PBOC continued to not help a liquidity-starved banking sector, leading to the overnight repo rate briefly touching on an unprecedented 25%, and locking up the entire interbank market, sending the Shanghai Composite down nearly 3% as China is on its way to going red for the year. Then, India got hit, with the rupee plunging to a record low against the dollar and the bond market briefly being halted limit down. Then moving to Europe, market after market opened and promptly slid deep into the red, despite a services and mfg PMI which both beat expectations modestly (48.6 vs 47.5 exp., 48.9 vs 48.1 exp) while German manufacturing weakened. This didn't matter to either stocks or bond markets, as peripheral bond yields promptly soared as the unwind of the carry trade is facing complacent bond fund managers in the face. And of course, the selling has now shifted to the US-premarket session where equity futures have seen better days. In short: a bloodbath.
Thursdays may be the new Tuesdays (if only this week), but so far Fridays are still just Fridays, and no mysterious overnight levitation is here to open the market 0.5% higher. The Nikkei 225 retraced a fraction of Thursday’s losses overnight as the positive close on Wall Street and a dovish interpretation of Hilsenrath’s WSJ piece yesterday allowed the Japanese indices to recover from the worst levels of the week. USD/JPY has pared Thursday’s bounce and trades lower as the Bank of Japan’s minutes showed one member of the board proposing the advantages of limiting the bank’s QQE program to just two years in order to avoid financial imbalances. Overnight in China, as we warned yesterday, the liquidity situation got even worse, when the PBOC's attempt to drain liquidity failed to sell some 30% of the planned 15 billion yuan in 273-day bills (more on this shortly), leaving the banks screaming Uncle and on the verge of a full-blown liquidity crisis: we expect rumors, and news, of more banks failing to roll over overnight liquidity to hit the tape shortly.
In the brief but tempestuous fight between Abe and the "deflation monster", the latter is now victoriously romping through an irradiated Tokyo, if last night's epic (ongoing) collapse in the Nikkei is any indication: down 6.4%, crushing anyone who listened to Goldman's "buy Nikkei" recommendation which has now been stopped out at a major loss in three days, and now well in bear-market territory, it would appear that a neurotic Mrs. Watanabe is finally with done with daytrading the Pennikkeistock market, and demands Shirakawa's deflationary, triumphal return to finally clam the market. Only this time the Japan's selling tsunami is finally starting to spill, if not to the US just yet (it will) then certainly to Asia, where the Shanghai Composite which was down 2.7%, and is once again well down for the year, and virtually all other Asian stock markets. Except for Pakistan - the Karachi Stock Exchange is an island of stability in the Asian sea of red.
Overnight, following the disappointing BOJ announcement which contained none of the Goldman-expected "buy thesis" elements in it, things started going rapidly out of control, and culminated with the USDJPY plunging from 99 to under 96.50 as of minutes ago, which was the equivalent of a 2.3% jump in the Yen, the currency's biggest surge in over three years. Adding insult to injury was finance ministry official Eisuke Sakakibara who said that further weakening of yen "not likely" at the moment, that the currency will hover around 100 (or surge as the case may be) and that 2% inflation is "a dream." Bottom line, NKY225 futures have had one of their trademark 700 points swing days, and are back knocking on the 12-handle door. Once again, the muppets have been slain. Golf clap Goldman.
A peculiar trading session, in which the usual overnight futures levitation has not been led by the BOJ-inspired USDJPY rise (even as the Nikkei225 rose another 0.6% more than offset by the Shanghai Composite drop of 0.86%), which actually has slid all session briefly dipping under 99 moments ago, but by the EURUSD, which saw a bout of buying around 5 am Eastern, just after news hit that the UK would avoid a triple dip recession with Q1 GDP rising 0.3% versus expectations of a 0.1% rise, up from a -0.3% in Q4 (more in Goldman note below). Since the news that the BOE will likely delay engaging in more QE (just in time for the arrival of Carney) is hardly EUR positive we look at the other news hitting around that time, such as Finland saying that the euro can survive in Cyprus exits the Eurozone, and that Merkel has rejected standardized bank guarantees for the foreseeable future, and we are left scratching our heads what is the reason for the brief burst in the Euro.