CDS

CDS
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Emerging Market CDS Blow Out





The last time markets scrambled for protection against sovereign defaults was over European country collapse in the summer of 2012 around the time Mario Draghi introduced a non-existent measure to allow Europe's nations to engage in zero reforms while their bond yields plunged. This time it is the emerging markets.

  • Argentina +139bps at 2562.07bps, hit highest since Sept.
  • Venezuela +81bps at 1398.19bps, highest since 2010
  • Turkey +11.6bps at 276.7bps, highest since June 2012
  • South Africa +10bps at 236bps, highest since Sept.

Of course, CDS aren't telling us anything (capital-controlled) FX hasn't already made quite clear.

 
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Risk Off: Yen Soars, Equity Futures Tumble As EM Revulsion Escalates





It's Risk Off time.

Things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, when EM revulsion once again hit participants, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%.  And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?

 
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Chinese CDS Worsens As Post-Year-End Liquidity Needs Spike





The PBOC has injected around CNY 400 billion into China's banking system in the last week focused in the 7-day reverse-repo maturity. While this has been greeted with moderation of the spiking trend in ultra-short-dated funding costs, there is a problem still. With the CEG#1 Trust maturing on 12/31 coinciding with the farce that is the 'confess all mismatched sins' debacle that occurs every Chinese Lunar New Year, the need for liquidity through that maturity is becoming extreme (while shorter-dated not so much). 14-day repo is now at 7.2% - almost 300bps above 7-day repo (which matures before year-end). In fact, it seems those concerned about possible Chinese contagion effects are buying protection aggressively as 5Y CDS jumped over 5bps to 102bps - the widest in 7 months (since the credit crunch in the Summer). This is far from over...

 
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Stocks Spanked; Gold Glistens; Currencies Crushed; And Bond Bears Battered





Quite a day...

  • All-time record lows in many Emerging Market Currencies (TRY, ARS, VENZ (unof.) most)
  • Nikkei 225 -3.75% - biggest drop in 7 months
  • Emerging Market Stocks -3% - (4 month lows)
  • USD Index -0.7% - biggest drop in 3 months (2014 lows)
  • USDJPY -1.3% - biggest drop in 5 months
  • AUDJPY -2.35% - biggest drop in 7 months (4 month lows)
  • Dow -1.3% - biggest drop in 5 months (5-week lows)
  • 30Y Treasury Yield -9bps - near biggest drop since April 2013 (2-month lows)
  • Gold +2.3% - biggest gain in 3 months (2 month highs)
  • VIX +1.8vols - biggest jump in 3 months (1 month highs)
  • IG Credit +2.5bps - biggest jump in 5 months (1 month wides)
  • HY Credit -$0.5 - biggest drop in 4 months (1 month lows)

It seems that without the safety net of Fed flows, the reality that bad news might just be bad news and event risk is a real risk just started to hit home. The deer is back...

 
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Japanese Tapering Whispers Define Overnight Session: Yen Soars, Dollar Slides, Futures Droop





Following last night's surprise event, which was China's HSBC PMI dropping into contraction territory for the first time since July, which in turn sent Asian market into a tailspin, the most relevant underreported news was a speech by International Monetary Fund Deputy Managing Director Naoyuki Shinohara who said that "As long as steady progress is being made toward the 2% target, we do not see a need for additional monetary accommodation in Japan." He added that while exit from unconventional monetary policy "is still very likely some way off for the euro area and Japan, I believe that the moment to start planning is now." This warning - an echo of prcisely what we said yesterday - promptly roiled the Yen, sending it far higher and sending the EMini futures sliding by over 10 tick in no time: a drop from which they have not recovered yet.

 
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Thai CDS Rise To One Year Highs After Pro-Government Faction Leader Shot





Following last night's implementation of emergency rule in Thailand for a period of 60 days, where the ongoing clashes between protesters and the government mean the economy is likely set to grind to a halt at least judging by the constant downward revisions in the country's GDP, the default risk of Thailand just jumped to a fresh one year high, rising to 159 bps, or double where it was in May of this year (but still well below the 240bps hit at the peak of the European crisis in September 2011). However, since tensions do not appear to be getting resolved, expect this particular CDS to continue drifting higher, especially following news that the Thai leader of a pro-government group was shot last night.

 
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China's Liquidity Injection Did Not Calm All Its Credit Markets





While last night's almost unprecedented reverse repo liquidty injection into the Chinese banking system stopped the bleeding of short-dated money-market rates briefly, the likelihood remains that a shadow-banking system default will occur: As CASS's Zhang noted:

*CHINA TRUSTS AND SHADOW BANKING TO SEE DEFAULTS IN 2014; DEFAULTS WOULD BE GOOD THING

Perhaps that explains why China's CDS spread remains at its highest since the summer credit crunch, barely budging on last night's cash drop. At double the default risk of Japan, China appears far from out of the contagion fire.

 
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Frontrunning: January 21





  • Hilsenrath: Next Cut in Fed Bond Buys Looms - Reduction to $65 Billion Could Be Announced on Jan. 29 (WSJ)
  • China Workforce Slide Robs Xi of Growth Engine (BBG)
  • Obama pulls the race card: Obama Says Race May Blunt Poll Standing in Interview (BBG)
  • Chinese firm's IPO deal switches banks as chairman's daughter moves from JPMorgan to UBS (SCMP)
  • China and Russia may hold joint naval drill in the Mediterranean (RT)
  • Iran invite to Syria talks withdrawn after boycott threat (Reuters)
  • Seven Chinese IPOs Halt Trading After 44 Percent Share  (BBG)
  • U.S. military says readying plans for Olympic security assistance (Reuters)
  • Thank you Bernanke: Investors Most Upbeat in 5 Years With Record 59% Bullish in Poll (BBG)
  • From His Refuge in the Poconos, Reclusive Imam Fethullah Gulen Roils Turkey (WSJ)
 
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Davos And Polar Vortex 2 Unleashed As Hilsenrath Says "More Taper" - The Complete Overnight Preview





One of the bigger stories overnight is Hilsenrath's latest communication from the Fed which once again simply paraphrases the status quo opinion, namely which is that the Fed will taper by another $10 billion on January 29, reducing the total monthly flow to $65 billion. "The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank's expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments." Of course, should the Fed not do that, as the Hilsenrath turned to Hilsen-wrath after all those Taper rumors in September ended up being one giant dud, one can once and for all completely ignore the WSJ reporter, who will have lost all his Fed sources and is now merely an echo chamber of consensus. What is notable is that the result of the latest mouthpiece effort, the USD is stronger, which means USDJPY is higher, which means US equity futures are flying.... on less QE to be announced. We eagerly await for this particular correlation pair to finally flip. The other big story, of course, is the already noted well-telegraphed in advance PBOC liquidity injection ahead of the Chinese Lunar New Year, and ahead of a potential January 31 Trust default which will certainly shake the foundations of the Chinese shadow banking system to the core. Not helping nerves was last night's announcement by Zhang Ming, a researcher and director of the international investment department at the Chinese Academy of Social Sciences, that "trusts and shadow banking will see defaults this year, and this is a good thing." Let's circle back in 6 months to see just how good it is.

 
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JPMorgan Non-GAAP Revenues Beat, GAAP Miss; Earnings Boosted By $1.3 Billion Loan Reserve Release





Non-GAAP EPS, sure. But non-GAAP revenues? Up until today one would think that kind of accounting gimmickry is solely reserved for the profitless one-hit wonders of the world, i.e. Tesla, but moments ago we just saw JPM report two sets of revenues: one which was the firm's GAAP revenue, and which was $23.156 billion, and another, far higher number, which was $24.112 billion which JPM described as revenue on a "managed basis" or also known as non-GAAP, and largely made up as they go along. So continuing with the other fudges, JPM also reported Net Income of $5.3 billion, or EPS of $1.30, once again on a pseudo-GAAP basis. However, this wouldn't be JPM if it didn't have a boat load of adjustments, and sure enough it did as per the waterfall schedule below. As can be seen, the biggest benefit aside from the $0.32 DVA & FVA (yes, blowing out your CDS is profitable once more), was the $0.27 in litigation charges. Of course, for these to be an addback, they have to be non-recurring instead of repeated, guaranteed every quarter, but once again, who cares.  And since we choose to stick with GAAP, the bottom line is that JPM revenues dropped from $23.7 billion in Q4 2012 to $23.2 billion this quarter, while EPS dropped from $1.39 to $1.31. Oh, and yes: for the purists, here is the bottom line: of that $5.3 billion in "earnings", $1.3 billion or double the expected (at least from Barclays) $616MM, came from loan loss reserve releases. Accounting magic wins again.

 
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Here Is The Next Wall Street Crack Down (And Yes, JPMorgan Is In The Middle Of This One Too)





Nearly a year ago, we predicted that the party for bond traders was over. The reason: MBS bond trader Jesse Litvak, formerly of mid-tier, perpetual aspirational bulge bracket, and the place where every fired UBS banker has a safety cubicle, Jefferies, got not only too greedy (that's ok, everyone on Wall Street is), but what's worse, got caught, and as we said at the time, ended the party for Wall Street's bond trading cash bonanza. Little did we know how correct we would be, because not only did the former MBS trader, who "proceeded to rip virtually all of his clients on seemingly every single trade he executed for the three years he was employed at Jefferies, lying to everyone in the process: both clients and in house colleagues, generating some $2.7 million in additional revenue for Jefferies for the duration of his tenure, and who knows how much in personal bonuses", end the party, but it appears he unleashed the next big regulatory crack down on Wall Street. And one which may just cost perennial Department of Justice favorite JPMorgan another several billion in "litigation reserves."

 
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FOMC Minutes Day Market Summary





Some better than expected economic news out of Europe, Greek 10 Year yields dropping to 7.65% or the lowest since May 2010, and futures are... red? Alas, such is life in a world in which the S&P500, aka the E-mini, is simply a derivative of the Yen funding currency pairs, where the USDJPY touched on 105 after a straight line diagonal move only to sell off in recent trading. Heading into the North American open, stocks in Europe are seen mixed, with peripheral stock indices outperforming, buoyed by the prospect of Portugal echoing yesterday’s Irish NTMA return to capital markets with its 10y bond syndication. As such, despite the cautious sentiment, financials led the move higher, with Italian banks gaining for 4th session as IT/GE 10y spread narrowed to its tightest level since early July 2011. Of note, FTSE-100 index underperformed its peers since the get-go, with retailers and tobacco names under pressure. In spite of opening higher by over 3%, Sainsbury's shares have since reversed and are seen lower by almost 2% after co. CFO said that he expects FY LFL sales to be just below 1% and expects Q4 to be similar to Q3. Elsewhere, tobacco names came under selling pressure following reports that China is planning a ban on smoking in public by year's end.

 
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Brian Pretti: The World's Capital Is Now Dangerously Boxed In





Since quantitative easing (QE) became the policy of the world's major central banks, capital is being herded into fewer and fewer asset classes. With such huge volumes of money at play, very crowded trades in assets like stocks and housing have resulted - bringing us back to familiar bubble territory in record time. The key for the individual, as Pretti emphasizes in this excellent interview, is risk management. The safety many investors believe they are buying in today's markets is not real... "this comes down to individual families making an assessment of how much risk they can afford to take. Below that line, they do not allow it to happen. It may sound trite but: You have every day of your life to get back into the market, but sometimes you do not have a second chance to get out."

 
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TruPS CDOs Explained - With Charts





Over the past two weeks, Trust Preferred (or TruPS) CDOs have gained prominent attention as a result of being the first, and so far only, security that the recently implemented and largely watered-down, Volcker Rule has frowned upon, and leading various regional banks, such as Zions, to liquidate the offending asset while booking substantial losses. But... what are TruPS CDOs, and just how big (or small) of an issue is a potential wholesale liquidation in the market? Courtesy of the Philly Fed we now have the extended answer.

 
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Ackman Issues Status Update On The One Year Annivesary Of His Herbalife Ideological Obsession





It was nearly three months ago when we warned that Ackman's latest strategy of converting 40% of his Herbalife short exposure into puts would massively backfire, first because he still have major short squeeze potential left on his books, and second because now he is subject to theta or a time horizon, for his thesis to play out. Ackman's (il)logic was summarized as follows: "The explanation of being forced out of nearly half of his position is amusing: "we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position." So Ackman is forced out by his Prime Brokers so as not to be forced out by market manipulators? That's an interesting explanation for what is a far simple situation: booking your paper losses." Just under three months later HLF hit its all time highs, and Ackman's puts (not to mention his stock short) have generated material losses. Back then we concluded that "with trades like this, which has now become an ideological obsession and moved beyond and semblance of rational investing (any normal person would have pulled the plug on the nearly half a billion dollar losing trade long ago) and is rapidly morphing into a replica of Pershing Square IV, said career may not be too long." Today, the embattled so-called retail expert pours more fuel in the futre, and provides a 7-page update on what his plans for Herbalife are. In short: it really does seem that Ackman is prepared to take his HLF short until the end of the world...  or its LBO. Whichever comes first.

 
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