Friday's main event, Ukraine's alleged attack of a Russian military convoy, has come and gone, and as we mused on Friday has promptly faded into the memory of all other fabricated headlines released by the country engaged in a major civil war and an even more major disinformation war. To be sure, Germany's DAX has recovered virtually all losses, US futures are up about 9 points, and the 10 Year is back to 2.37%. One wonders what algo-slamming headline amusement Ukraine has in stock for us today, although anyone hoping for a quick "de-escalation" (there's that word again) will have to wait following yesterday's meeting of Russian, Ukraine, German and French ministers in Berlin where Russia's Lavrov said he saw no progress on Ukraine cease-fire, Foreign Minister Sergei Lavrov says in Berlin, adding that a cease-fire should be unconditional.
- Gunshots, tear gas in riots over shooting of black Missouri teen (Reuters)
- Russia sends big aid convoy to Ukraine, West sounds warnings (Reuters)
- Maliki Bid to Block Successor Escalates Crisis in Iraq (BBG)
- Poor German data pushes euro toward 9-month lows against dollar (Reuters)
- Derivatives Reincarnate Boosting Debt Wagers in New Era (BBG)
- Israel Says No Gaza Talks Progress as Hamas Warns on Truce (BBG)
- Traders brace for research crackdown as easy money dries up (Reuters)
- U.S. Bank Profits Near Record Levels (WSJ)
- Unproven Ebola Drugs Are Ethical to Use in Outbreak: WHO (BBG)
- Caesars’ CEO Loveman Says No Qualified Bidders for Revel (BBG)
Current Junk-Bond Turmoil just Preliminary, 'Prisoner Dilemma' Ensues, but “The Real Panic Will Come With…”Submitted by testosteronepit on 08/08/2014 13:33 -0400
Junk bond investors are running for the hills. But there are no hills.
Alarm bells in the European banking system have been ringing for quite a while but nobody seems to be listening. The roaring capital markets are just too loud. But we have been keeping track of a few things.
As every 'real' corporate bond manager knows (as opposed to playing one on television), forecasting from historical defaults is a fool's errand as the process is entirely cyclical and non-stationary. The fact that default rates have been low for 4 years (thanks to an overwhelming flood of liquidity-driven demand for yield) is of absolutely no use when pricing discounted cashflows into the future. However, as Fitch warns, a jump in US high-yield default rates looms. There have been 10 LBO related bond defaults thus far in 2014, compared with nine for all of 2013. While most sectors remain relatively clam, the utilities and chemicals sectors are seeing huge spikes in defaults... which explains why the market is starting to price that in.
The Russian Ruble slumped 1.6% today, its biggest drop in over 4 months as investors kneejerk-reacted to the US latest round of restricted-funding-access sanctions. The Ruble is back at 2-month lows against the USD. The bonds of several of the sanctioned companies are also breaking down with Rosneft yields up 89bps at 6.22% and Novatek yields surging to 6.44% as even though Fitch confirms these firms can manage their own cash needs through 2015, as one analyst notes, "the lack of ability to raise long-term dollar funding will become a big economic limitation for all of them." The broad Russian stock market is also tumbling, down to 2-month lows (though still notably above the US markets since sanctions began). We wonder how long before BRICS Bank steps in to provide 'temporary' funding... and just how quickly Putin's "boomerang" will hit if this selling continues.
Just as they promised (and acting unilaterally as Europe declined to go along with The White House), President Obama has unleashed a set of 'sectoral' sanctions to wreak havoc in Russia. The sanctions include the standard travel bans but adds rules that block several of Russia's largest firms from American debt markets. The plan - to restrict funding availability for Russian firms to under 90-days - is however, dead-on-arrival. As we explained here, Russian companies, facing $115 billion of debt due over the next 12 months, will have the funds even if bond markets shut as "the amount of cash on balance sheets of Russian companies, committed credit lines from banks and the operating cash flows they will get is sufficient for the companies to comfortably service their liabilities." This will do nothing but raise Putin's ire even more.
Back in the summer of 2011 during the debt ceiling debacle, S&P did the unthinkable: it dared to speak the truth when it downgraded the US from its pristine AAA rating, setting off a stock market selloff and paradoxically sending bonds to record low yields. This resulted in a vindictive Tim Geithner promptly warning the Chairman of McGraw-Hill the US would retaliate (which it did), the termination of then CEO Devan Sharma (and his replacement with the all too friendly COO of Citibank), and most importantly, a still ongoing legal fight in which the DOJ sued S&P (and only S&P, not Moody's, not Fitch) allegedly for rating improprieties during the first housing bubble, but even 5 year olds knew it was just to teach S&P a lesson. Today we learn just what the cost is for anyone who dares to downgrade the US. The answer: $1,000,000,000. That is the amount that S&P has decided it will agree to pay in a settlement with the DOJ to put all this "truthiness" unpleasantness behind it.
Now that the World Cup is over, and following last week's global macro reporting slumber (aside for the Portuguese risk flaring episode of course), things pick up quite a bit in the coming week. Here are the key events.
Poor algos: after they got no love on Monday from the overnight USDJPY selling team which took the all important pair back to the 200 DMA, today, inexplicably (it is a Tuesday after all, and if one can't frontrun a rigged market surging higher on Turbo Tuesday may as well throw in the towel on free money and learn about fundamental analysis) the same overnight USDJPY selling team has pushed the key carry pair to below the 200 DMA, and has dragged US equity futures lower with it for the second day in a row.
It is the last day of not only the month but also the quarter, not to mention the halfway point of 2014, which means that window dressing by hedge funds will be rampant, as they scramble to catch up some of the ground lost to the S&P 500 so far in 2014. Most likely this means that once again the most shorted names will ramp in everyone's face and the short side of the hedgie book will soar, further pushing hedged P&L into the red, because remember: in a market in which all the risk is borne by the Fed there is no need to hedge.
Believe it or not, the main driver of risk overnight had nothing to do with Iraq, with the global economy or even with hopes for more liquidity, and everything to do with a largely meaningless component of Japan's future tax policy, namely whether or not Abe (who at this pace of soaring imported inflation and plunging wages won't have to worry much about 2015 as he won't be PM then) should cut the corporate tax rate in 2015. As Bloomberg reported, Abe, speaking to reporters in Tokyo today after a meeting with Finance Minister Taro Aso and Economy Minister Akira Amari, said the plan would bring the rate under 30 percent in a few years. He said alternative revenue will be secured for the move, which requires approval from the Diet.
- World Bank Cuts Global Growth Forecast After ‘Bumpy’ 2014 Start (BBG)
- Al-Qaeda Offshoot Threatens Iraq Oil Site After Taking Mosul (BBG)
- Fed Prepares to Keep Record Balance Sheet for Years to Come (BBG)
- EU investigates tax rulings on Apple, Starbucks, Fiat unit (Reuters)
- Cantor Loss Shocks Republicans, Dims Immigration Changes (BBG)
- More surveillance: Google to Buy Satellite-Imaging Startup for $500 Million (WSJ)
- Tea Party activist who defeated Cantor focused on budget, immigration (Reuters)
- Airbus Suffers Worst Order Loss as Emirates Deal Scrapped (BBG)
- Amazon.com plans local services marketplace this year (Reuters)
- Amazon Stops Taking Advance Orders for ‘Lego’ and Other Warner Videos (NYT)
A dispassionate look at the week ahead.
- The Fed can't print trade? World Trade Flows Fall in First Quarter (WSJ)
- PBOC’s Zhou Says China May Have Housing Bubble in ‘Some Cities’ (BBG)
- ECB's Weidmann - Reviving ABS market not task for central bank (Reuters)
- LOL: Fitch upgrades Greece by a notch to 'B'; outlook stable (Reuters)
- LOL x2: Spain Sovereign Debt Rating Upgraded by S&P (BBG)
- China Will Vet Tech Firms After Threatening U.S. Retaliation (BBG)
- US to claim victory over China in WTO car dispute (BBG)
- Obama urges Democrats to vote in midterms, attacks Republicans (Reuters)
- U.S. Military Pushes for More Disclosure on Drone Strikes (WSJ)