CDS

"Rising rates and falling profits are not a good combination for asset prices, so we will turn sellers of risk in early 2016."

"When the Fed moves next will depend importantly on how inflation evolves. The Fed’s preferred measure of inflation has run below its 2% objective for more than three years. The central bank focused extra attention on the inflation outlook in its statement, saying it would “carefully monitor” actual and expected progress toward the goal. This point implied the Fed will be reluctant to raise rates again unless it sees inflation actually moving up. For now, officials said they were “reasonably confident” inflation would rise."

We have reached the apogee of history’s greatest credit inflation. Now we’re hurtling into a prolonged worldwide deflation. You can already see this deflation in the plunge of oil, iron ore, copper and other commodity prices. We are in uncharted waters after nearly 20 years of madcap money printing by the Fed and other central banks. The world’s central banks are finally out of dry powder. They no longer have the means to inflate the global credit and financial bubble. That’s why today’s FOMC meeting is the most crucial inflection point since 1929.

The sell-off in credit over the past week has led many investors to ask what it means for equities. Credit spread widening usually has negative implications for equity but as Goldman notes,  it is critical to estimate the degree to which the equity market has already priced the weakness to determine the potential risks to equity going forward. Interestingly, Goldman finds the weakness in high yield credit was foreshadowed by weakness in the equities of high yield companies (like for like), but the weakness in Investment Grade credit spreads relative to their corresponding equities represents a new divergence suggesting meaningful downside for S&P 500 investors.

The Big Banks manipulate credit default swaps to perpetrate economic terrorism against other nations in the world, where they literally destroy the economies of those victim-nations. It used to be a theory, but now the proof is finally emerging. 

The $100 trillion global bond bubble has begun bursting.

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...

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).

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.

As of today, with Glencore stock once again trading near all time lows sliding as low at 75p, the company's default risk just hit 54%, the highest in 6 years, as a result of its CDS blowing out past 900 and wider than the intraday spreads hit in September as the following chart from Markit shows.

Government interference by both central banks and regulators (the latter are desperately fighting the “last crisis”, bolting the barn door long after the horse has escaped, thereby putting into place the preconditions for the next crisis) has created an ever more fragile situation in both the global economy and the financial markets. As the below charts and data show, price distortions and dislocations have been moving from one market segment to the next and they keep growing, which indicates to us that there is considerable danger that a really big dislocation will eventually happen.

Last week we asked (rhetorically) if "something just blew up in junk?" We have the answer today, as triple-hooks (CCC-rated debt) in the junk bond market have crashed through the worst levels of 2011 and are now at the highest yields since July 2009. Amid this complacency still reigns in the equity market (just as it did when the last credit cycle turned).

"Like most turns in the credit cycle, it is uncertain exactly when the bottom will fall out of corporate credit markets, but the catalyst is likely to be an unexpected major event, perhaps even a single company getting into trouble. While we have been bearish on high yield for over a year now, we didn't think the conditions were yet ripe for a collapse. Now they're ripe."

- Ellington Management

Turkey is the next key region in this conflict, since the only alternative gas pipeline that supplies Russia, and comes from Asia (Nabucco), passes through Turkey. Future conflicts between Turkey and Russia will be part of the Russian strategy within the region.