Month: March 2022

With most traders glued to screens and following every tick in the chaotic mess that is the Emini, where liquidity has collapsed to levels not seen since the March 2020 crash…

… the real action is in bonds, where as Nomura’s Charlie McElligott writes in his morning note that we are seeing a “paradigm shift” in rates as a result of the spike in “unknown unknowns” from the Ukrainian war, which has prompted comments such as this one from the ECB suggesting that central bank normalization plans may have just died a gruesome death…

• *ECB SHOULDN’T EXIT STIMULUS BEFORE ASSESSING WAR IMPACT: REHN

and immediately following:

• *TRADERS DELAY 25BPS ECB HIKE BETS TO MARCH 2023 FROM JANUARY

… and which means that the market’s massive front-end short positioning – where “six or seven” rate hikes had become the market’s flawed baseline – is being VaR-shocked in full-blown stop-out fashion, leading to the EDZ2 +46 ticks from Friday low to this morning’s highs…

… which in-turn is pricing-out implied hikes in both Europe and the US.

As a result, as shown above, McElligott notes that the first full ECB hike is now pushed-back into 2023 (after having pushed close to two implied hikes being priced-in by EOY just a few weeks back), while Fed implied liftoff is now a UNDER a full-hike in March (i.e. the debate has turned from “25 or 50” to now “0 or 25”) and down to btwn 4.5 and 5 hikes by the end-of-year Dec (which after the last CPI beat traded up to 7 hikes implied intraday on 2/10/22).

Of course, the magnitude of the short-squeeze (the 2d rally in ED1 is > +6 z-score move going-back 10 years to 2012!) was not purely about a new “dovish” CB view around the implications of the Ukraine Geopol shock in-and-of-itself—the scale of the move was of course too due to the enormous crowding / asymmetry in “hawkish” front-end shorts, where we are seeing a similar move to the epic snapback in stocks last Thursday.

And as yet another “100% consensus” trade implodes, it will come as no surprise that Eurodollar and Euribor futs signals have both been “-100% Short” since ~Oct ’21 according to the Nomura X-asset strategist, and most importantly had accumulated into the two largest exposures across the entire CTA Trend model — but now today, we see both being partially forced to cover some of that legacy “short,” as the signal is reduced down to “-79.8% Short” after the 1m and 3m buckets flipped “long”: ED covered at a 98.34 “trigger” and ER covered at 100.127, kicking off very large implied notional buying / squeeze.

More critical is that the next “cover” triggers from here are immediately proximate, depending on the magnitude of further stop-outs, and will see both ED and ER flip outright “+100% Long” in the CTA Trend model, leading to havoc in the STIR space:

• ED goes to “+100% Long” on a move and close above 98.57
• ER goes to “+100% Long” on a move and close above 100.18

As pertains to the market’s shock repositioning from last week’s “hawkish” stance into what is now “an almost certain stagflationary” economic outlook for Europe” (and we would add the US here), Charlie warns that the risk of slowing growth (ECB projections of potential 1% EZ growth hit) against persistently higher inflation is very much real (just today, Italian CPI surged to new Euro-era highs), as are risks of “worst case” war outcomes in the worst kind of “risk-off” fashion (Lavrov this morning talking about US nukes as unacceptable in Europe, all while a 40 mile column of weaponry, troops and support advances toward Kyiv), so this “hawkish Rates” trade and ensuing risk-off “dovish stop-out” remains “binary” from a macro catalyst- and price-signal- perspective, and could continue to “chop” again,particularly into next week’s potentially “still hot” US CPI print.

Finally, it’s not just Short-Term Interest Rates that are turmoiling: due to the sheer speed of the two-day rally, we have violently exploded near “buy to cover” stop-levels in legacy G10 Bond “-100% Short” positions as well across the CTA model:

One final point: the CTA position in aggregate G10 Bonds remains at a -2 sigma extreme dating back to 2002, so as McElligott warns, there is plenty of “wood to chop” on further short-squeeze, one which would then collapse the entire yield curve.

TL/DR Bottom line: the Fed is about to lose control, with the market saying it is unable to hike into what everyone now realizes is a major stagflationary shock.

Fed about to lose control pic.twitter.com/GzcQUBriY5

— zerohedge (@zerohedge) March 1, 2022

Shares of Lucid are getting pounded to start the trading session on Tuesday, after the company lowered its production guidance for 2022.

Lucid said it expects 12,000-14,000 units for 2022, down from previous expectations of 20,000. The company cited “extraordinary” supply chain pressures, once again raising a curious question as to how one EV manufacturer Tesla has sidestepped a semi crisis and supply chain pressures that are dragging down the rest of the industry.

Regardless, Lucid shareholders are selling first and asking questions later. Around the cash open the stock was down about 17% to $24.

A Bloomberg wrap up of the report on Tuesday morning noted that Guggenheim analyst Ali Faghri said: “While 2022 delivery targets were lowered significantly, slower near-term ramp and the ‘hockey stick’ cadence likely mean there isn’t much cushion.”

The analyst said that management should be “commended” for starting deliveries amidst the geopolitical and supply chain backdrop.

“Strong initial customer feedback and industry awards” will drive the company’s success going forward, Faghri said. He also pointed out strong growth in reservations serving as positive demand visibility. Customer reservations now exceed 25,000, Bloomberg pointed out. 

In its report, Lucid also announced an agreement with Saudi Arabia for an EV factory, which it said it would start building in the second half of 2022. 

The company has delivered over 300 vehicles to date.

Oil prices extended their gains this morning with WTI topping $102 – its highest since 2014 – as the Russian invasion of Ukraine continued to raise the specter of major global supply disruption.

“Prices are shooting up the last couple of days because the risk of sanctions really affecting the Russian energy sector” is very high, said Rohan Reddy, a research analyst at Global X Management, a firm that manages $2 billion in energy-related assets.

So policy makers decided they have to do something!

Bloomberg reports that, according to people familiar with the matter, The International Energy Agency (IEA) – which represents key industrialized consumers including Japan and Germany – has agreed to deploy 60 million barrels from stockpiles around the world.

The IEA’s intervention comes after the OPEC+ coalition, which is led by Saudi Arabia and Russia, disregarded encouragement from Biden last year to increase supplies more quickly. The group meets again on March 2 to discuss its production plans for April. Riyadh has signaled that it doesn’t consider markets to be tight enough to speed up the restoration of production.

Bloomberg notes that this is the first time the IEA has made a synchronised release of oil stocks since the Libyan civil war in 2011. There are echoes of that crisis in today’s events: It was Riyadh’s reluctance to open the taps a decade ago to offset the disruption caused by the uprising against dictator Moammar Qaddafi that prompted the agency into action.

So far, oil traders are less than impressed with WTI only ticking down modestly.,..

It is worth bearing in mind just how much impact the release of US SPR has had on WTI crude prices in the last 18 months…

But hey, maybe this time will be different.

Via Peter Tchir at Academy Securities,

While energy prices have grabbed the attention since the Russian invasion of Ukraine, there are some other concerning and interesting things occurring across the commodity space.

Agriculture

Corn, Soybean and Wheat prices have all gone up significantly. While WTI is up 8% and Brent is up 6%, Corn is up 7%, Soybean Oil is up 8%, Wheat is up 11% to 15% (depending on which contract) and something called European Milling Wheat is up 25% – in just 5 days! 

Broad based agriculture inflation is a consequence of this invasion, that isn’t getting much attention, but should.

Gold versus Bitcoin

Gold is up just over 1% while Bitcoin is up almost 20%.

While we have seen a rebound in tech (QQQ and ARKK) bitcoin has outperformed. Whether that is a direct consequence of people putting money into crypto to avoid sanctions, or whether it is investors betting that shutting down SWIFT, even on a limited basis, will encourage more investors to seek out crypt remains to be seen. 

The move is eye-catching enough that it is likely catching the eye of central bankers and policy makers.

European Carbon Emission Offsets are down 16% in a week! 

I don’t know enough about this contract, and maybe it is as simple as more supply coming on line, but it seems worth thinking about why the need for carbon emission offsets in Europe has dropped so much?

Is the economy slowing faster than we realize?

More questions than answers, but some things I found interesting.

US macro data has ‘outperformed’ admittedly dismal expectations in the last few weeks, as the politics science has lifted many COVID restrictions, and that is reflected in Markit’s US Manufacturing sector survey upticking from 12-month-lows at 55.5 in January to 57.3 in February (which admittedly is actually below the preliminary print of 57.5)

ISM’s Manufacturing survey also confirmed an uptick from Omicron’s dip, rising from 57.6 to 58.6

Source: Bloomberg

Under the hood, new orders surged (up to 61.7 vs 56,3 exp), while employment fell from 77.5 to 75.6, and prices were basically flat…

Source: Bloomberg

Chris Williamson, Chief Business Economist at IHS Markit said:

“The US manufacturing sector rebounded in February after the Omicron wave brought production close to a standstill in January. However, output remains heavily constrained both by ongoing raw material supply bottlenecks and labor shortages, albeit with some signs that the supply chain crisis has continued to ease. The decline in virus case numbers should also help alleviate labor shortages as we head into the spring.

“Demand is clearly continuing to run well ahead of supply, meaning it is a sellers’ market for a wide variety of goods. Although the survey’s price gauges covering companies’ costs and selling prices are off the peaks seen last year, they remain very high by historical standards and point to persistent elevated inflation in coming months. With rising oil prices adding further to soaring costs, and the Ukraine crisis likely to add to global supply disruptions, the inflation outlook is an increasing concern.

Most critically for all this sentiment data is the fact that with the survey data collected prior to the escalation of the conflict in Ukraine, the full impact of the situation is yet to appear in the data.

As Williamson notes, “supply chains are likely to be further disrupted, with existing shortages exacerbated by safety stock building, and prices will likely come under further upward pressure. Perhaps most important will be the effect on business optimism and whether the improvement in prospects seen in February will be reversed, which could lead to reduced spending and investment.”

“Kyiv is special. If we protect Kyiv, we will protect the state. This is the heart of our country, and it must keep beating,” Ukraine’s President Volodymyr Zelensky said on Tuesday. He gave a stirring video address to European parliament, the day after he signed a formal application for Ukraine seeking EU membership.

“Our people are motivated and we are fighting for freedoms and our lives,” Zelensky said. “We are fighting for our survival,” he added while urging the body to “prove” that they stand with Ukraine. This as he’s urging both NATO and the US to impose a No-Fly Zone, an appeal which both so far have rejected. 

Satellite imagery being widely reported on Tuesday morning suggests a massive column of Russian infantry many miles in length is now en route ready to bear down to the Ukrainian capital. Estimates as to its size have varied, but there’s consensus it’s at least many, possibly dozens of miles, long. 

CNN describes it as “A massive 40-mile-long Russian military convoy — made up of armored vehicles, tanks, towed artillery and other logistical vehicles — has reached the outskirts of Ukraine’s capital, Kyiv, according to satellite images from Maxar Technologies.”

Kiev officials have said the city has erected fortifications, while much of the civilian population has sought the safety of shelters or underground bunkers ahead of what’s expected to be a large-scale final Russian assault, also after two other large cities have in the past days come under heavy rocket barrage and shelling. 

BREAKING: Satellite photos reveal large Russian military convoy north of Kyiv, stretching 64 kilometers (40 miles) in total (📷: @Maxar) pic.twitter.com/61JLz8Gubf

— BNO News (@BNONews) March 1, 2022

The mayor of Kyiv, Vitali Klitschko, warned the people of the city as well as the world on Tuesday that “the enemy is on the outskirts of the capital,” and emphasized that national forces are “preparing to defend Kyiv.”

“Our armed forces, Territorial Defense Forces, are fighting heroically for our land,” Klitschko said. “Fortifications and checkpoints have been built at the entrances to the city. I ask everyone to keep calm. Do not go outside unnecessarily and stay in shelters in case of alarm,” he added.

Moscow has meanwhile reaffirmed that its military operation will not stop until it meets the objectives of “demilitarizing” Ukraine. However, talks just inside Belarus on Monday between a Ukrainian delegation and Russian delegation left agreeing to keep talking. Those talks lasted a reported five hours.

The Russian side has since confirmed that this second round of potential ceasefire talks will take place Wednesday, March 2. Ukrainian and Russian media are confirming the next round:

Another Ukrainian media outlet, Glavkom, citing sources in the Ukrainian delegation, disclosed the terms advanced by the sides during the first meeting. It said that Russia allegedly demanded Ukraine commit to paper its off-bloc status at the parliamentary level and organize a referendum on this matter. Apart from that, the Russian side demanded Ukraine recognize the Donetsk and Lugansk People’s Republics in the administrative borders of the corresponding regions and drop its demand that Crimea should be returned to Ukraine. Ukraine, according to Glavkom, demanded a ceasefire and withdrawal of Russian troops from its territory.

At the same time, on an international level communications between Russia and the West appear to be spiraling toward non-existent. With the European airspace closure around Russia, Russian Foreign Minister Sergei Lavrov opted to address an assembly of the UN Human Rights Council remotely, instead of traveling. 

More and more media pundits and US officials have begun to call for a West-imposed No Fly Zone:

Perhaps the biggest risk-calculation/moral dilemma of the war so far. A massive Russian convoy is abt 30 miles from Kyiv. The US/NATO could likely destroy it. But that would be direct involvement against Russia and risk, everything. Does the West watch in silence as it rolls?

— Richard Engel (@RichardEngel) February 28, 2022

Even the video speech prompted a mass-walkout, as Fox described:

As soon as the U.N. president turns over the floor to Lavrov, dozens of diplomats stand and leave the meeting chamber without a word.

Lavrov said he was “compelled” to make his address by video after the European Union restricted his “freedom of movement.”

Currently Ukrainian Defense Minister Oleksiy Reznikov is warning that Russia has preparations underway to launch a “large-scale information and psychological operation” against Ukraine, Defense Minister Oleksiy Reznikov said Tuesday. “Its goal is to break the resistance of Ukrainians and the Ukrainian army with lies,” Reznikov said in the statement.

By Michael Every of Rabobank

Barbarians at the Gate of Kyiv

While a large Russian convoy – stretching 60 km – is getting closer to Kyiv, the capital of Ukraine, and fierce battles are taking place in several other cities, the Ukrainians continue to fight for their country. The Russians are reported to have deployed about 75% of the 160K troops they had amassed around Ukraine. This could be the start of a protracted siege of Kyiv.

Yesterday, the US Treasury Department prohibited US persons from engaging in transactions with Russia’s central bank, its National Wealth Fund, and its Ministry of Finance. The Treasury also sanctioned the Russian Direct Investment Fund and its CEO,  Kirill Dmitriev. This follows Saturday’s commitment by the allies to prevent the Russian central bank from deploying its international reserves in a way that would undermine the impact of US sanctions. Russia’s National Wealth Fund is a sovereign wealth fund that came into existence in 2008, after the Stabilization Fund of the Russian Federation (2004) was split in two. In contrast to many other sovereign wealth funds, it serves mainly as a vehicle to invest in the Russian economy. It is controlled by the Russian Ministry of Finance. The Russian Direct Investment Fund (RDIF) was created in 2011 by then-President Medvedev and then Prime Minister Putin to develop relationships with international investors for direct investment in Russia. As the Treasury puts it: “While officially a sovereign wealth fund, RDIF is widely considered a slush fund for (… ) Putin.” The US Treasury imposed these sanctions on Monday before market opening, as allied officials had warned the US Treasury that the Russian central bank was preparing to transfer their holdings on Monday.

However, the Treasury contemporaneously issued a general license to authorize certain energy-related transactions with the Central Bank of the Russian Federation. Of course, this is meant to soften the impact on allied economies, limiting the negative supply shock and inflationary impact of the sanctions, but it also leaves some oxygen for the Russian economy. Will this be enough to cripple Putin into submission?

Meanwhile, there are also indirect effects of the sanctions. Banks from allied countries may be wary of the compliance issues of doing any transaction with Russian banks and err on the safe side. Also, we are seeing multinational corporations leaving Russia, with BP exiting Rosneft and Shell severing ties with Gazprom.

While the ruble tumbled, and the Russian central bank raised rates, global stock markets rebounded from their lows on last Thursday. The EUR/USD is now trading around 1.12, after dropping to 1.11 on Thursday, the day of the invasion.

In other news, Atlanta Fed President Bostic yesterday confirmed he was still in favor of a 25 bps rate hike in March. However, he said that if month-on-month inflation changes remain elevated or move upward, he would consider a 50 bps rate hike in March. Note that the CPI report for February will be released about a week prior to the March meeting of the FOMC. Bostic is a non-voting FOMC participant this year. As we discuss in the US section of the Monthly Outlook, to be released later today, the Russian invasion of Ukraine has reduced the probability of a 50 bps rate hike in March, but at the same time it may raise the need for monetary tightening later this year.

As it turns out, the Pfizer vaccine is almost entirely ineffective in children ages 5-11, according to the latest batch of trial data released by the vaccine giant.

Here’s more from the NYT:

The coronavirus vaccine made by Pfizer-BioNTech is much less effective in preventing infection in children ages 5 to 11 years than in older adolescents or adults, according to a large new set of data collected by health officials in New York State — a finding that has deep ramifications for these children and their parents.

The Pfizer vaccine is the only Covid shot authorized for that age group in the United States.

It still prevents severe illness in the children, but offers virtually no protection against infection, even within a month after full immunization, the data, which were collected during the Omicron surge, suggest.

The scientists who led the study noted that the jab was far less effective and that the data weaken the argument for mandating the jabs in children.

“It certainly weakens the argument for mandating that people get that lower dose,” said Dr. Philip Krause, who recently left the FDA.

While states across the US – including California, Oregon and Washington, which announced today they would lift masking guidance starting March 11 – and the CDC have lifted requirements for people to mask up (it’s worth noting that more than a dozen conservative-leaning states barred masking requirements). But vaccination requirements will likely remain a part of our society in some form from here on out. While a federal judge struck down the Biden Administration’s attempts to pass a federal vaccine mandaate, the firing of workers for being unvaccinated remains commonplace. Many others are forced to be tested for COVID at least once a week, at their own expense.

But as schools across the country move to require all students to be vaccinated – with rare exceptions – even the MSM is acknowledging that jabs in elementry school-aged children are ineffective.

While the jabs supposedly prevent “severe illness” in children, it’s worth noting that children who lack co-morbidities rarely display even moderate symptoms, and severe cases are almost unheard of.

Even Dr. Fauci has acknowledged that “many” children hospitalized with COVID are there for some other reason. However, every patient brought into a hospital is tested for COVID, and those who test positive are automatically counted as hospitalized with COVID.

Fauci: “If you look at the children that are hospitalized, many of them are hospitalized with Covid, as opposed to because of Covid.” pic.twitter.com/57Rdx8gPg3

— The Post Millennial (@TPostMillennial) December 31, 2021

Amusingly, the NYT suggested that one reason for the drop in performance might be the fact that children receive “one third the dose” of adults.

The sharp drop in the vaccine’s performance in young children may stem from the fact that they receive one-third the dose given to older children and adults, researchers and federal officials who have reviewed the data said.

The vaccine also performed poorly on children ages 2-4, the next-youngest age group.

Charts from the study show the slim gap between unvaccinated and vaccinated children in terms of hospitalizations.

It also shows how effectiveness wanes as the age of the recipient falls.

Readers can find the full study below:

2022.02.25.22271454v1.fullon Scribd