As happens at the end of every year, sellside analysts and economists, all predicted that this year would be different, and the long overdue capex spending would finally be unleashed. Apparently they had far greater visibility on this matter, than on the topic of snowfall in the winter, and its disastrous impact on a $17 trillion economy, whose Q1 GDP growth forecast has cratered from 3% at the start of the year, to barely half that number currently. One of the firms that preached that the CapEx recovery is imminent is none other than Goldman Sachs, the same firm that also year after year predicts a new golden age for the US, only to see its forecast crash and burn some 4-6 months later, couched in the tried (or is that now trite) and true scapegoatings: snow, unrest in Europe, inflation or deflation in Japan, the usual. However, this time may indeed be different, and the same Goldman has just released a piece wondering "Why no capex recovery?" (despite the firm's own forecasts to the contrary -just recall David Mericle's "Capex: The Fundamentals Remain Strong" which now in retrospect is completely wrong).
With Putin hoping that they can just keep it from going full civil war for a few more days, Ukraine continues to slide towards a dismal result. This morning sees the next level of escalation in the break-away Western region:
- *UKRAINE'S SECURITY SERVICE SAYS WEAPONS CACHE STOLEN: INTERFAX
- *UKRAINE SECURITY SERVICE SAYS PROTESTERS SEIZED 1,500 GUNS
- *UKRAINE SERVICE SAYS PROTESTERS SEIZED 100,000 ROUNDS OF AMMO
- *UKRAINE SERVICE SAYS PROTESTERS GUILTY OF `TERRORIST ACTS'
And with that, the 'excuse' the military needed to get involved as Interfax reports the Ukraine's SBU starts "Anti-terrorist" operation in the Western region of Ivano-Frankvisk. With 25 dead and 241 injured, according to the AP, we suspect these numbers are sadly just the start.
There is a very good chance that the crisis that began in 2008 is actually not over by any stretch – it is merely moving from one place to the next. After all, the developments discussed below are a direct result of the reaction of the world's monetary authorities to the initial crisis. China's credit bubble and ZIRP in the US and Europe are all children of the crisis and have evidently sown the seeds for the next crisis. As we always stress, we expect that the next major crisis will eventually lead to a crisis of confidence in said monetary authorities. At some point, faith in central banks is bound to crumble and then we will really experience 'interesting times'.
Following the 20% devaluation of Kazakhstan's currency on Tuesday, the nation has quietly drifted into a very un-safe scenario. As the following clip shows, tanks and Humvees are lining the streets around Almaty as stores are closed and food is running desperately short. Local accounts note that the people are growing increasingly indignant. At a mere 192bps, the cost of protecting Kazakhstan sovereign debt from default (or further devaluation) seems cheap in light of this.
A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast) despite, or maybe due to, the lack of any newsflow, although today's first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens' testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman's Jan Hatzius opined overnight, the third tapering - down to $55 billion per month - is on deck.
Yesterday we reported a warning by BNP that "The Run On Ukrainian Deposits May Have Already Started." Obviously, while the real implications for the country's financial system should a full-blown bank run emerge would be dire , they would take some time to manifest themselves, especially since as Interfax reported, the country's central bank still has $17.8 billion in reserves as of today (if sliding at an alarming pace). To be expected, overnight the same central bank reiterated its support for the currency, knowing that the last thing it can afford is an evaporation in confidence. However, judging by the surge in Ukraine CDS ealier today, which soared by 89bps to 1,089bps today, highest since Dec. 10 on closing basis, i.e., before the Russian bailout (which may or may not be concluded), investors are hardly convinced by the local developments. And the final confirmation that very soon it will be all up to a Russian bailout to fix the situation, was news from minutes ago that the Ukraine just had a failed bond auction. Then again, Russia itself had a failed bond auction just days ago, so perhaps it has bigger fish to fry than pre-funding the Ukraine rescue package.
Today the lingering problems of the "emerging" world and concerns about the Fed's tapering take a back seat to what the European Central Bank may do, which ranges from nothing, to a rate cut (which sends deposit rates negative), to outright, unsterilized QE - we will find out shortly: with 61 out of the 66 economists polled by Bloomberg looking for no rate changes from the ECB today it virtually assures a surprise . However, despite - or perhaps in spite of - various disappointing news overnight, most notably German factory orders which missed -0.5% on expectations of a +0.2% print, down from 2.4%, the USDJPY has been supported which as everyone knows by now, is all that matters, even if it was unable to push the Nikkei 225 higher for the second day in a row and the Japanese correction persists.
UDPATE: At today's Treasury auction - 4-week bills yield 13bps, 52-week bills yield 11.5bps... 1.5bps inverted!
Whether Treasury Secretary Lew's words were meant to calm and chaosify the markets yesterday, his comments on the debt ceiling have sparked a notable sell-off in ultra-short-dated Treasury Bills. As we noted previously the 2/28 ish date appears to be the market's bogey for now with the yield more than tripling from 3bps to 11bps in the last 2 days. CDS on the USA has also risen notably in the last few days with the 5Y now trading inverted to the 1Y cost of protection once again.
Kudos to the Bank of Japan. Its heroic campaign to water down the yen has borne fruit.
First, the Obama administration showed during the course of the GM and Chrysler bankruptcy proceedings, that when it comes to Most Preferred Voter classes, some unsecured creditors - namely labor unions, and the millions of votes they bring - are more equal than other unsecured creditors - namely bondholders, and the zero votes they bring. Five years later we are about to get a stark reminder that under the superpriority rule of a community organizer for whom "fairness" trumps contract law any day, it is now Detroit's turn to make a mockery of the recovery waterfall. As it turns out, bankrupt Detroit is proposing to favor pension funds at roughly double the rate of bondholders to resolve an estimated $18 billion in long-term obligations, according to a draft of a debt-cutting plan reviewed by The Wall Street Journal.
With the IMF frantically scrambling to cover its forecast errors and model-breakdowns amid an emerging market turmoil that no one could have seen coming, the contagion is beginning to spread. With all eyes fixed on Turkey (unfixed again) or Ukraine (never fixed), Argentina's troubles are exploding. The last few days have seen yields on their 2017 bonds scream higher from 11% to 19%... and 2015 Boden prices collapse.
There is no point in trying to avert or prevent bubbles caused by monetary pumping by regulatory means. If one avenue for bubble formation is cut off, the newly created money will simply flow into another area. In fact, new bubbles almost always become concentrated in new sectors. If there were a genuine desire to keep the formation of bubbles in check, adopting sound money would be a sine qua non precondition. However, no-one who has any say in today's system has a desire to adopt sound money and give up on the failed centrally planned monetary system in favor of a genuine free market system. Our guess is that the booms and busts the current system inevitably produces will simply continue to grow larger and larger until there comes a denouement that can no longer be 'fixed'.
Following discussions with Merkel, demands to de-escalate tensions from Barrose, and threats of sanctions from President Obama. Ukraine's President Yanukovych has gone on sick leave from "immense pshcological pressure." Despite his exclamations that he'll do everything for the sake of peace, he blames the opposition for "escalating the situation," which fits, rather ominously with warnings from former presdent Leonid Kravchuk. As The BBC reports, Ukraine's first post-independence president warned the country is on the "brink of civil war". While the Hyrvnia is not collapsing as much as it was (always the silver lining), money is running away from Ukraine stocks stuck at 5-year lows, bond term structure is inverted, and CDS are spiking back to recent highs over 1000bps.
And so following yet another Fed taper, coupled with another disappointing manufacturing data point out of China, emerging markets did their thing first thing this morning and all the most unstable EM currency pairs - the TRY, the RUB, the ZAR and the HUF - all plunged promptly in the process pushing down the USDJPY which as become a natural carry offset to EM troubles, only to rebound promptly. Specifically, USDTRY blew out 400 pips to 2.3010 highs after which it bounced, and has now stabilized around 2.27, well above the Turkish central bank intervention level, USDZAR is back down to 11.2120 after hitting five-year highs of 11.3850, the Ruble also plunged after which it jumped on speculation of Russian central bank intervention, while futures are tracking even the tiniest moves by USDJPY and pushing the Emini which is trading in a liquidity vaccum by a quarter point for ever 2 or pips. And with all news overnight shifting from bad to worse (keep an eye on declining German inflation now) it goes without saying, that EM central banks around the world now are desperately trying to keep their currencies under control: which is why the market's jitteryness is only set to increase from here on out.
With all eyes on Russia over the next month as the Sochi Winter Olympics ramps up, we are sure having the market's attention on a collapsing currency is not what Putin had in mind before he dropped $50 billion to make it snow. While the Ruble remains just above record lows against the USD, Bloomberg reports that it has dropped to a record low against the central bank's dollar-euro basket. Russia's finance minister proclaimed today (Erdogan style?) that Bank Rossii should not raise rates (which has been unchanged at 5.5% for the last 15 months). Russian CDS is widening (193bps at 4 month highs) but not cratering like other EM currencies but MICEX (stocks) have had their longest losing streak since April.