Bond

The writing has been on the wall for a few days/weeks, but it appears a combination of global FX and equity turmoil and domestic corporate debt market collapse is finally starting to roil US equity markets. The Dow is down over 600 points in the last week or so, bond yields are collapsing, the USDollar is tumbling, crude is crashing, and junk bonds are in free-fall.

We have been almost alone in our exclamations at the collapsing offshore Yuan in the last few days but since The IMF blessed China's currency with inclusion in The SDR, CNH is down 13 handles. However, now we appear to have an answer. Overnight saw commentary from CFETS (China's FX market 'manager') that indicated implicitly that Trade-Weighted Yuan was still trading too high.

Now that the first casualty in the junk bond space has spilled its blood in the water, the hungry sharks are circling. And perhaps the best place to look for the chum is where Third Avenue itself was discovered: dead last in the morningstar list of worst (and best) performing High Yield funds of 2015...

"The Fed will drive home the lower and slower mantra. That is all spin, signifying nothing... There are so many unknowns, good and bad. Either way, absolutely ignore the "it’s priced in" claims... The Fed is going to raise rates next week, and anyone who claims it is not a huge deal is fooling you, as well as themselves."

• Futures down sharply as oil hits seven-year low (Reuters)
• Oil slides to new seven-year low as IEA warns of worse glut (Reuters)
• But... but... they all said... Cheap Oil Gives Little Help to U.S. Spending (WSJ)
• Disappearances in China Highlight Ruling Party Detention System (BBG)
• China’s Credit Rebounds as Stimulus Helps Boost Loan Demand (BBG)
• Junk Fund’s Demise Fuels Concern Over Bond Rout (WSJ)

It was a relatively calm overnight session in which European stocks wobbled modestly, Japan was up, China was down following its weakest fixing since 2011 as the PBOC continues to aggressively devalue since the SDR inclusion (stoking concerns capital outflows are once again surging), EM stocks stocks were weak and the dollar was unchanged ahead of today's retail sales data and next week's Fed meeting, and then suddenly everything snapped.

USDCNY broke above 6.4500 for the first time since the August devaluation, extending its post-IMF plunge to 6 days. This is the largest and longest streak of weakness since March 2014 as China seems to have taken the SDR-inclusion as blessing to devalue its currency drip by drip. Default risk is once again stomping higher as CDS surge from 94bps to 112bps (2-month highs). The biggest news in China tonight is the disappearance of Fosun International's Chairman, China's 17th richest man (and the collapse in the company's bonds, since stocks are suspended).

We are less than one week away from a historic monetary experiment in two parts: first, attempt the Sisyphean task of pushing up the rate of interest on over $2.5 trillion in excess liquidity, and second, to assure the market that it has correctly priced in the overnight evaporation of up to $800 billion (or more) in liquidity from asset prices. If one or both of these fail to deliver, than the embarrassing disappointment that marked the ECB's December announcement and its dramatic impact on asset prices and FX levels, will be a walk in the park compared to "disappointment" that the Fed will unleash once the market realizes that while in theory the Fed can and is ready to hike, it simply can't do so in practice.

"Third Avenue is extremely disappointed that we must take this action"...

With sadly ironic timing, we noted just last week that the blowback from "unequivocally good" low oil prices was set to cross the border from an increasingly suicidal Canada, and so, as AP reports, it appears Alaska is facing the toughest of times. As oil prices make new cycle lows, Alaska Gov. Bill Walker has called for the state's first income tax in 35 years in order to close a $3.5-billion-dollar deficit the state is carrying. Alaska is currently the only state that does not have a state sales tax or personal income tax, having relied on oil income but, as Walker tweeted, "now is the time for Alaskans to pull together."

The next financial crisis could manifest itself in the coming months. If so, it will mark the end of current central bank monetary policies and state control of markets, as free markets reassert realistic pricing. Government bond yields will normalise, stock markets will fall, and banks will almost certainly fail. When something as epochal as this happens, we can expect the macroeconomic establishment to be clueless with respect to the problem itself and its scale.

The just concluded 30-Year bond reopening of Cusip RP5, in which the US Treasury sold another $13 billion in long-dated paper in this year's final auction of 30 Years, was almost a carbon copy of yesterday's 10 Year auction.

"What I find most hilarious is that some serious commentators have been pontificating at considerable length about what the market’s participants think. These days, some 70% of market orders are generated by computers, and many of the rest by indexers. And computers do not think... I cannot remember a time when less thinking has ever been done in the financial markets, which is why I find today’s financial markets infinitely boring."

- Charles Gave

Without giving any reasons, South African President Jacob Zuma has fired his finance minister (after just 19 months in office). This has shocked investors, already anxious about the nation's surging debt and sluggish economy and South African bonds and FX have collapsed andhas given rating agencies “perfect justification” for further downgrades and the loss of investment grade status. 10Y yields spiked 140bps to 10.18% - the highest since July 2008 - and CDS have soared. The Rand has crashed to new record lows above 15 to the USD.