Currently there are a number of weak spots in the global financial edifice, in addition to the perennial problem children Argentina and Venezuela... The happy bubble in risk assets could presumably be derailed a bit if any of the possible worst case scenarios were to become manifest.
All of this makes no sense at all until you consider that ALL Central Banking actions have been focused on one thing: making sure the global bond bubble DOESN’T IMPLODE.
Despite stressing time and again that the ECB cannot dictate policy within individual nation states in Europe, Reuters reports Draghi's henchmen are playing 'bad cop' to Germany's 'good cop' for now as they threaten the withdrawal of Greek financial system funding if reforms are not carried out post election. Greek stocks are falling once again (led by the banks) and default risk has soared, with 5Y CDS +250bps at 1555bps.
History literally appears to be repeating. The mainstream media and our politicians are promising Americans that everything is going to be okay somehow, and that seems to be good enough for most people. But the signs that another massive financial crisis is on the horizon are everywhere.
With Venezuelan bonds re-collapsing as belief in a 30c recovery floor fades rapidly (and hyperinflating Venezuelan stocks soar - whether oil prices are rising or falling), the people of Maduro's socialist utopia have a new problem to contend with. After running out of toilet paper, and finding soap and shampoo hard to come by, AP reports Venezuela's more than 100 McDonald's franchises have run out of potatoes and are now serving alternatives like deep-fried arepa flatbreads or yuca, "because of the situation here; it's a total debacle."
Things in risk land started off badly this morning, with the worst start to a year ever was set to worsen when European equities came under early selling pressure following news of German unemployment falling to record low, offset by a record high Italian jobless rate, with declining oil prices still the predominant theme as Brent crude briefly touched its lowest level since May 2009, this consequently saw the German 10yr yield print a fresh record low in a continuation of the move seen yesterday. However, after breaking USD 50.00 Brent prices have seen an aggressive bounce which has seen European equities move into positive territory with the energy names helping lift the sector which is now outperforming its peers. As a result fixed income futures have pared a large majority of the move higher at the EU open. But the punchline came several hours ago courtesy of Eurostat, when it was revealed that December was the first deflationary month for the Eurozone since the depths of the financial crisis more than five years ago, when prices dropped by -0.2% below the -0.1% expectation, and sharply lower than the 0.3% increase in November, driven by a collapse in Energy prices.
It has been a busy few days for Germany. In the space of a week, they have warned Greece "there will be no blackmail," adding that a Greek exit from the euro was "manageable," only to hours later deny (clarify) these comments. This was then followed up with beggars-are-choosers Syriza demanding any ECB QE must buy Greek bonds (or else) - which Germany has flatly ruled out - only to see today that Syriza is practically guaranteed to win a "decisive victory" at the forthcoming snap election. So it with a wry smile that we note Bild reports tonight that the German government is preparing for a possible Greek exit, warning of financial system collapse, bank runs, and huge costs for the rest of the EU.
Just when you thought it was all over... Having bounced post-CBR intervention and somewhat stabilized, the re-collapse in crude oil prices and continued weakness in Russian macro data provided just the impetus for a re-plunge in the Ruble (back above 63.5/USD) and surge in Russian bond yields (back to 14%). While Russian stocks are also retesting towards recent lows, it is Russian CDS that is the most telling as it closed to day at 595bps - the widest since March 2009. While these violent gyrations are new for recent history, they are not a new phenomenon, but are quite characteristic of the country’s financial history.
Same slide, different day, as the crude crash continues, with both WTI and Brent tumbling to multi-year highs, below $49 and $52 respectively. This happened despite the news overnight that China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year, suggesting that China will focus more on fiscal policy than monetary easing, which in turn led to much confusion in the SHCOMP, which fluctuated up and down for the day several times before finally closing unchanged. There was no confusion about the stops slamming USDJPY, and its Nikkei225 derivative which tumbled 3%, sending Japanese Treasury yields to fresh record lows. Record low yields were also seen in Germany, Austria, Belgium, Netherlands, Finland, France (and many other places), which in turn forced the US 10 Year to finally dip back under 2.00%. In fact, taken together, the average 10Y bond yield of the U.S., Japan and Germany has dropped below 1% for the first time ever, according to Citi.
“Don’t look back - something might be gaining on you,” Satchel Paige famously warned. For connoisseurs of civilizational collapse, 2014 was merely annoying, a continued pile-up of over-investments in complexity with mounting diminishing returns, metastasizing fragility, and no satisfying resolution. So we enter 2015 with greater tensions than ever before and therefore the likelihood that the inevitable breakdown will release more destructive energy and be that much harder to recover from.
Something stunning and unexpected took place in the third quarter: Citigroup, or rather its FDIC-insured Citibank National Association entity, just surpassed JPM and is now the biggest single holder of total derivatives in the US. Furthermore, as the charts below show, while every other bank was derisking its balance sheet, Citi not only increased its total derivative holdings by $1 trillion in Q2, but by a whopping, and perhaps even record, $9 trillion in the just concluded third quarter to $70.2 trillion!
To put this into perspective, the Credit Default Swap (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).
As investors and market participants become increasingly aware of the regulatory failures that allowed for manipulation of LIBOR, FOREX, municipal bond bidding and certain commodities markets, regulatory sources are increasingly expressing concern that they have paid too little attention to potential manipulations of an arguably larger, more systemically important and less regulated market – the CDS market as self-governed, through ‘regulatory license’, by the International Swaps and Derivatives Association (ISDA).
With Greek CDS surging to near post-bailout highs (and short-end bond yields back above 11%), it appears the market is anxious of the endgame as tomorrow's 3rd and final 'snap-election'-saving vote looms. Following Samaras fearmongering yesterday, it appears Germany is starting to fear the worst (and play down its effect), as Merkel's bloc states "the prospect of a Greek sovereign default is no longer a concern for euro member countries and financial markets," adding "hope that Greece’s international partners would pay if the country’s policymakers refuse to carry out necessary reforms is misplaced." However, as Bruno de Landevoisin notes, "what is at stake is none other than the prosperity of the common man pitted against the privilege of concentrated power."
Since the Russian Ruble troughed at almost 80 RUB/USD, it has rallied an impressive 34% erasing most of the dramatic devaluation of December. However, as The CBR just announced, this 'strength' came at a price. Russia burned through $15.7 billion of reserves in the week ending Dec 19th - the biggest percentage weekly drop in reserves since Jan 2009, leaving reserves below $400 billion (still a significant amount) for the first time since Aug 2009. While CBR explained much of this will come back as repo trades mature, Vladimir Putin turned inward, blaming the government for "defects" in restructuring the economy.