Glencore

It was a tale of two markets overnight: Asia first - where all commodity hell broke loose - and then Europe (and the US), where central banks did everything they could to stabilize the already terrible sentiment.

Following on from a weak Europe and US session (despite late-day heroics in China last night), Fed confusion and commodity-complex counterparty-risk-concerns have sparked further turmoil across AsiaPac in the early going. Noble Group (asia's Glencore) is crashing, down 6.7% at the open. FX markets are seeing outflows send CNH below CNY for the first time since July and crush Thai Baht to its weakest since Jan 2007. Equity markets are in trouble with Aussie stocks hammered (driven by a plunge in Miners) and Nikkei 225 down 1000 points from Friday's highs. Asia credit markets have spiked to 2-year wides. China injected another CNY40bn and strengthened the fix (by the most since 9/2) for 2nd day in a row.

Update: And there it is: GLENCORE DEBT INSURANCE COSTS SURGE TO RECORD HIGH; 5-YR CREDIT DEFAULT SWAPS RISE 207BASIS POINTS FROM FRIDAY'S CLOSE TO 757 BASIS POINTS

Those who listened to our reco to buy Glencore CDS at 170 bps in March 2014 can take the rest of the year off. As of this moment, GLEN Credit Default Swap were pushing on 600 bps, 4 times wider, and on pace to take out the 2011 liquidity crunch highs. After that, it's smooth sailing to all time wides and the start of a self-fulfilling prophecy which leads to the Companys's IG downgrade and the collapse of trillions in derivative notionals as what may be the trading desk of the biggest commodity counterparty quietly goes out of business.

Glencore is in total free-fall across all markets today. Most worrying for systemic risk concerns is the rush into credit protection that has occurred, as counterparties attempt to hedge their exposures. Forthe first time since 2009, Glencore CDS are being quoted with upfront pricing (something that happens as firms become seriously distressed). Based on the latest data, it costs 875bps per year (or 14% upfront) to buy protection against a Glencore default (which implies - given standard recoveries - a 54% chance of default).

Despite a relatively unchanged US Dollar, commodities across the board are under significant (and seemingly coordinated) pressure this morning. It appears that the key selling began as Europe opened and the carnage in massive commodity group Glencore began to materialize. Glencore CDS is now above 700bps (up 154bps today) and stocks down almost 30% today...

It was all about China once again, where following a report of a historic layoff in which China's second biggest coal producer Longmay Group fired an unprecedented 100,000 or 40% of its workforce, overnight we got the latest industrial profits figure which plunging -8.8% Y/Y was the biggest drop since at least 2011, and which the National Bureau of Statistics attributed to "exchange rate losses, weak stock markets, falling industrial goods prices as well as a bigger rise in costs than increases in revenue." In not so many words: a "hard-landing."

Did Goldman just hand out the blueprint to crush the next "Lehman" and unleash the next global bailout? Read on to find out.

Oe of the most surprising developments in recent months has been the relative scarcity of any high-profile commodity blow-ups or trader snafus, despite the tumbling commodity prices. That changed today when Dutch grain-trading firm, Nidera BV (whose name is an acronym consisting of the countries in which it operates: Netherlands, India, Deutschland, England, Russia, Argentina) has suffered a crushing blow as a result of a "rogue trader" whose actions led to "significant losses" in the company's biofuels business. Nidera CEO Ton van der Laan said the grain-trading house has since exited the biofuels business and closed all the deals linked to the losses. "There is a significant loss."

• Global Stocks Steady Despite China Slowdown (WSJ)
• European Recovery Saves Markets From China Gloom as Stocks Rally (BBG)
• Pope starts U.S. trip with tone of conciliation (Reuters)
• FBI Said to Recover Personal E-Mails From Hillary Clinton Server (BBG)
• Volkswagen chief faces grilling by board over diesel scandal (Reuters)
• 'European Detroit' Fear Grips VW Company Town as Scandal Widens (BBG)
• Berlin finds itself caught up in Volkswagen scandal (FT)

In many ways, the overnight market has so far been a reversal of yesterday, when a stable Asia session (with China stocks rising) gave way to a European tumble which in turn dragged the US lower.

The aggregate Buybacks to Free Cash Flow ratio for the S&P 500 exceeded 100% for the first time since October 2009. The ratio hit 108% on a TTM basis at the end of Q2, which represented a 12.9% increase quarter-over-quarter and a 42% increase year-over-year. The 10-year median ratio was 72.2%. And that, in a nutshell, is why the market is tumbling today - the biggest buyers of stock in the past 2 years, the corporations themselves, just priced themselves out of the market and no longer generate the cash needed to push their own stock to new all time highs.

Today's Glencore implosion is a far greater risk to the capital markets and the global economy than Volkswagen: a few executive resignations, a few bribes to US Congress, and the scandal will be promptly snuffed. For Glencore, however, which suddenly the entire world realizes is - as we said in March 2014 - the way to trade China, it may now be too late.

• Pressure builds on Volkswagen CEO as emissions-cheating probe spreads (Reuters)
• Volkswagen Emissions Scandal Relates to 11 Million Cars (WSJ)
• Volkswagen Emissions Investigations Should Widen to Entire Auto Industry, Officials Say (WSJ)
• Germany's Bosch makes VW's U.S. diesel components (Reuters)
• Volkswagen scandal will have personnel consequences - state economy minister (Reuters)
• Glencore Falls to Record as Mining Shares Lead Stock Losses (BBG)
• Despite Slump, China’s Xi Jinping Pledges Economic Reforms (WSJ)