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The Fed's announcement Wednesday to begin the tapering of its bond buying program (to our surprise) has been followed by a spike in the US 10 year yield; however, Citi's FX Technical group cannot help but feel that we have seen this dynamic play out before.

Via Citi FX Technicals,

Previous endings of the Fed’s bond buying programs have seen a quick spike in yields that proves to be short-lived as the reality of a still weak global economic backdrop takes hold. If history is any indication, it would not surprise us to see the US 10 year yield top out over the next few days before turning lower towards 2.40%-2.47% and potentially continue declining towards 2.00%.

The pattern here is rather clear: introductions of unsterilized bond buying programs by the Fed lead to a sell-off in Treasuries (rally in yields) while the ends of these programs lead to a rally in Treasuries (decline in yields). (We exclude Operation Twist as it was a sterilized program which did not actually expand the Fed’s balance sheet).

It is clear to us that the introduction of QE leads investors to sell Treasuries (classic buy the rumour sell the fact) and rush into riskier assets on the back of the search for higher yield and the implicit market (Greenspan/Bernanke) put that promotes complacency and financial asset inflation.

Once that market put is removed, though, the economic backdrop becomes the bigger driver of investor sentiment. At the end of both QE1 and QE2, the US recovery was still very weak and the European sovereign crisis was taking hold.

While the current economic backdrop is certainly better than that seen during those periods, we still remain in an environment where:

– The US recovery remains weak by historical standards as unemployment is still elevated and the quality of jobs created is poor, core PCE is near historical lows, corporate earnings growth is based on margin compression rather than sales growth, the housing recovery is tepid at best and 30 year mortgage rates remain at the highest levels seen since mid-2011.

 

– While fears around the European sovereign crisis have been put on the back burner, the reality is that none of the structural issues which have affected Europe have actually been resolved.

 

– The recent spike in yields has shed light on the weakness of many emerging market countries that had previously been highly favored. In our view, going forward, emerging market investments will likely be done selectively and with more caution as investors adjust to the removal of the Bernanke put. This could put pressure on many of the fundamentally weaker countries which rely on foreign financing. In line with our views expressed earlier, this could lead to flows back into the USD and US Treasuries.

 

– Oil prices remain high and show no signs of declining in the near term. This (along with higher yields) can serve as a drag on the economy, the negative feedback loop of which would also suggest lower yields going forward.

On the back of all of this, we would not be surprised to see one last move higher in the US 10 year yield over the next few days, potentially as high as 2.95%-3.00%, the converging downward sloping trend line (see previous page) and the 2013 high. However, such a move would, in our view, likely be the medium-term top and if history is any indication, a move lower in yields from there would be likely, especially given our concerns with respect to the global economic backdrop.

While we do not necessarily expect a move similar in magnitude to that seen at the end of QE1 or QE2 given both the pace of tapering and the slightly better economic backdrop, a move towards 2.40%-2.47% seems likely (those levels are the converging 200 day and 200 week (not shown) moving averages, the October 2011 and 2013 highs and the October 2013 lows).

The 2.47% level also serves as the neckline of a potential double top and a break below there would confirm the pattern, which would then target just below 2.00%. As we have previously pointed out, The US 10 year yield has historically had a tendency to top out while posting a double top.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/w0YrO5oc92w/story01.htm Tyler Durden

The Fed's announcement Wednesday to begin the tapering of its bond buying program (to our surprise) has been followed by a spike in the US 10 year yield; however, Citi's FX Technical group cannot help but feel that we have seen this dynamic play out before.

Via Citi FX Technicals,

Previous endings of the Fed’s bond buying programs have seen a quick spike in yields that proves to be short-lived as the reality of a still weak global economic backdrop takes hold. If history is any indication, it would not surprise us to see the US 10 year yield top out over the next few days before turning lower towards 2.40%-2.47% and potentially continue declining towards 2.00%.

The pattern here is rather clear: introductions of unsterilized bond buying programs by the Fed lead to a sell-off in Treasuries (rally in yields) while the ends of these programs lead to a rally in Treasuries (decline in yields). (We exclude Operation Twist as it was a sterilized program which did not actually expand the Fed’s balance sheet).

It is clear to us that the introduction of QE leads investors to sell Treasuries (classic buy the rumour sell the fact) and rush into riskier assets on the back of the search for higher yield and the implicit market (Greenspan/Bernanke) put that promotes complacency and financial asset inflation.

Once that market put is removed, though, the economic backdrop becomes the bigger driver of investor sentiment. At the end of both QE1 and QE2, the US recovery was still very weak and the European sovereign crisis was taking hold.

While the current economic backdrop is certainly better than that seen during those periods, we still remain in an environment where:

– The US recovery remains weak by historical standards as unemployment is still elevated and the quality of jobs created is poor, core PCE is near historical lows, corporate earnings growth is based on margin compression rather than sales growth, the housing recovery is tepid at best and 30 year mortgage rates remain at the highest levels seen since mid-2011.

 

– While fears around the European sovereign crisis have been put on the back burner, the reality is that none of the structural issues which have affected Europe have actually been resolved.

 

– The recent spike in yields has shed light on the weakness of many emerging market countries that had previously been highly favored. In our view, going forward, emerging market investments will likely be done selectively and with more caution as investors adjust to the removal of the Bernanke put. This could put pressure on many of the fundamentally weaker countries which rely on foreign financing. In line with our views expressed earlier, this could lead to flows back into the USD and US Treasuries.

 

– Oil prices remain high and show no signs of declining in the near term. This (along with higher yields) can serve as a drag on the economy, the negative feedback loop of which would also suggest lower yields going forward.

On the back of all of this, we would not be surprised to see one last move higher in the US 10 year yield over the next few days, potentially as high as 2.95%-3.00%, the converging downward sloping trend line (see previous page) and the 2013 high. However, such a move would, in our view, likely be the medium-term top and if history is any indication, a move lower in yields from there would be likely, especially given our concerns with respect to the global economic backdrop.

While we do not necessarily expect a move similar in magnitude to that seen at the end of QE1 or QE2 given both the pace of tapering and the slightly better economic backdrop, a move towards 2.40%-2.47% seems likely (those levels are the converging 200 day and 200 week (not shown) moving averages, the October 2011 and 2013 highs and the October 2013 lows).

The 2.47% level also serves as the neckline of a potential double top and a break below there would confirm the pattern, which would then target just below 2.00%. As we have previously pointed out, The US 10 year yield has historically had a tendency to top out while posting a double top.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/w0YrO5oc92w/story01.htm Tyler Durden

While the recent confrontation between Putin’s Russia and Obama’s America has been a masterclass in how to manage one’s foreign interests (where one learns from Putin for those confused) in which Putin largely ignored every attempt at being jawboned by Obama, Kerry and their henchmen, what was left unspoken is that despite the superficial theatrics little would actually escalate since at the end of the day, Russia’s place in a globalized system (not to mention its commodities) is far too important to be jeopardized for political talking points.

Furthermore, as is well-known, when it comes to key players in a global fungible monetary system, a far more important decision-maker than the US government is the FDIC-insured hedge fund that controls all central banks: Goldman Sachs. Which is why it is certainly notable that moments ago none other than Goldman effectively downgraded Russia’s sovereign risk by announcing it is “shifting from constructive to neutral view on Russian sovereign risk.” With the legacy rating agencies now largely moot and irrelevant, what the big banks say suddenly has so much more import. But when the biggest – and most connected – bank of them all, outright lobs a very loud shot across the Gazpromia Russian bow, even Putin listens.

From Goldman’s Clemens Grafe

Shifting from constructive to neutral view on Russian sovereign risk

Bottom line:

Russian CDS spreads have tightened by more than those of peers in recent months, as Russia’s fundamentals remain strong and Russia, in our view, is less exposed to the slower pace of Fed asset purchases and higher global interest rates than many other EMs. However, two recent developments cause us to shift from a constructive to a neutral view on Russian credit in the near term. First, banking sector liquidity conditions have tightened significantly as the regulator has substantially stepped up bank oversight actions by withdrawing licences from 30 banks this year (1.2% of retail deposits in the system). While we currently find little evidence of systemic banking sector stress, we believe the risk of bank stress developing – and of potential sovereign exposure – resulting from the regulator’s actions has nonetheless risen. Second, Russian bank and sovereign exposure to both Belarus and Ukraine – credits that have deteriorated substantially in recent years – is both large (around 2% of GDP) and expected to rise further, especially in light of the recently-announced Russian financial assistance package for Ukraine. In our view, both of these factors could be credit-negative for the Russian sovereign.

Russian credit has outperformed peers recently

CDS spreads of Russia’s peers (as measured by credit rating) have tightened by 25bp since June, while Russia’s spread has tightened by 40bp. Russia has, thus, outperformed peers in the past six months. This was in line with the argument that we made in early September that Russian fundamentals are stronger than those of peers on many of the metrics that are important for credit ratings and, in particular, in external variables (current account) and balance sheet (debt stock) metrics, which have been of high market relevance in recent months in the context of the focus on the Fed’s slowing pace of balance sheet expansion. We continue to think that Russia’s conservative fiscal policy, low debt levels and the central bank’s emphasis on bringing down inflation will cause Russia’s risk premium to decline in the long run.

Rising banking sector concerns potentially discounted by current market pricing

However, as we argued in September and as ratings agencies have also emphasized in the past, it is institutional factors such as the structure of the banking sector and potential sovereign exposure to bank bailouts that are holding back ratings upgrades and that prevent Russian risk premia from decreasing below their post-crisis range. However, in recent months the CBR has stepped up its bank regulation efforts to address this issue. In particular, the CBR has withdrawn licences from 30 banks so far this year. While the number of banks concerned is only slightly higher than in previous years (22 in 2012 and 18 in 2011), the size of the banks affected has been larger, with total retail deposits in banks concerned in 2013 of RUB177bn (1.2% of system retail deposits), up from RUB23bn last year. Deposit losses from these banks have so far been covered entirely by the national deposit insurance fund (Agency for Deposit Insurance), which currently has around US$4-6bn of funds available for this purpose. In the long run, we think that strengthening bank supervision is clearly positive for Russian risk.

However, in the short term, these bank closures have introduced some concerns in the banking sector. Liquidity conditions have tightened, with Ruonia having risen to 6.5%, the upper limit of the CBR’s interest rate corridor, and overnight and 1-month Mosprime rates have risen toward 7% (150bp above the main policy rate). While unsecured interbank funding has not been that important as a source of funding for Russian banks, access to this market for many second- and third-tier banks has recently tightened further. Daily Ruonia volumes have fallen from around RUB100bn mid-year to RUB60bn at present. While some of the tightening in liquidity conditions is likely due to seasonal factors (in particular, strong cash demand in December in anticipation of the holiday season), we believe that this is not the driving force behind the recent dynamics.

While, in our view, there is little evidence of systemic stress in the banking sector at present and while we think that larger banks would be well-insulated from any shocks, we do think the CBR’s recent actions have increased the risk of stress developing in the banking sector. CBR actions have focused on banks below the top 50 and, so far, we have not seen any of the larger banks affected by recent CBR actions. In addition, given that the equity capital in the larger banks is likely significantly higher, it is less probable that there would be a concern with these banks and many of these would also likely be deemed systemically-important. Although we think the likelihood of system-wide banking sector stress has risen, we nonetheless think it remains low. Given the system’s low dependence on interbank funding, a more serious deterioration would require large-scale flows of deposits, for which there is little evidence so far. At the same time, banks appear to have significant liquidity buffers, judging from loan-to-asset ratios for most smaller banks of 0.50-0.55.

That said, to quantify potential exposure, we present below a table of loans/deposits of Russian banks ranked by total bank asset size. What we find is that retail deposits in banks below the top 50 amount in aggregate to around US$100bn. While government deposit insurance is up to RUB700,000 per account and we do not have details on the distribution of retail deposit sizes, we would see US$100bn as an upper bound on potential sovereign exposure in the event of the emergence of real stress in the banking sector. This exposure, in our view, could justify a more cautious stance on Russian sovereign risk than we argued several months ago.

Balance sheet exposure to low-rated sovereigns also a potential concern

Russia has also increased its sovereign, corporate and banking-sector (largely state-owned) exposure to lower-rated CIS credits in recent years. This has happened as a result of financial assistance packages provided to neighbouring Belarus and Ukraine. While aggregated information on this exposure is very difficult to obtain, there are some data to suggest that this exposure is both large and increasing. In addition, credit risk has increased in both Ukraine and Belarus at the same time as Russia’s exposure to these credits has grown, as e
videnced by their ratings downgrades and widening CDS spreads

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZSKMr6rRIN4/story01.htm Tyler Durden

Late last night, with just 4 days left until the December 23 deadline to choose plans that will begin Jan. 1, Washington Post reported that the Obama administration finally caved and “significantly relaxed the rules of the federal health-care law for millions of consumers whose individual insurance policies have been canceled, saying they can buy bare-bones plans or entirely avoid a requirement that most Americans have health coverage.”

The ability to get an exemption means that the administration is freeing these people from one of the central features of the law: a requirement that most Americans have health insurance as of Jan. 1 or risk a fine. The exemption gives them the choice of having no insurance or of buying skimpy “catastrophic” coverage. 

As was to be expected, the announcement which made the healthcare ponzi scheme far less powerful triggered an immediate backlash from the health insurance industry and “raised fairness questions about a law intended to promote affordable and comprehensive coverage on a widespread basis.”

“This latest rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers,” said Karen Ignagni, president of America’s Health Insurance Plans, the industry’s main trade group.

Another health insurance official, who spoke on the condition of anonymity because he lacked authorization to discuss the matter publicly, pointed out that the hardship exemption also gives one group the ability to buy coverage whenever they want, rather than during annual open-enrollment periods. As a result, he said, more people might not buy insurance unless they get sick.

Well, Karen: welcome to central-planning, where whatever can go wrong, ultimately does, and as for your profit margins which you had modelled as surging in the coming years: feel free to model them lower.

How did the latest humiliation for the administration come about? WaPo explains:

At a news conference in mid-November, an apologetic Obama relented to the criticism, announcing that the federal government would let insurance companies continue for another year to offer individuals and small businesses health plans that do not meet the new requirements. The decision, however , is up to each state’s insurance regulator, and not all have gone along.

 

This second change, prompted by a group of Democratic senators — most of whom face tough reelection campaigns next year — goes substantially further in accommodating people upset about losing their policies. The latest rule will allow consumers with a canceled health plan to claim a “hardship exemption” if they think the plans sold through new federal and state marketplaces are too expensive.

To be sure, the 2014 elections played a key role: As The Hill reported, the policy shift was laid out in a letter to Sens. Mark Warner (D-Va.), Jeanne Shaheen (D-N.H.), Mary Landrieu (D-La.), Heidi Heitkamp (D-N.D.), and Tim Kaine (D-Va.), who asked the administration on Wednesday to clarify whether those who had their plans cancelled could qualify for the exemption. The Washington Post pointed out the lawmakers faced tough reelection campaigns next year, or were from states that President Obama lost in last year’s election. Could it be that Obamacare is actually… unpopular with the broader population? Say it isn’t so!

WaPo also notes that “it is unclear how many people facing canceled policies will choose no insurance, bare-bones coverage or a plan through the insurance exchanges that meet new federal standards.”

Actually, it is clear: according to the WSJ the answer is “very few”, especially when one adds the healthcare law’s rolloug problems. The WSJ adds that “insurers pressing for last-minute enrollees under the health-care law say they are running into a worrisome trend: Customers who were put off by the insurance marketplaces’ early troubles are proving hard sells. Many people thwarted by the technical problems of HealthCare.gov are reluctant to try again, citing frustration with the federal site, web-security concerns and the pressure of the holidays, several insurers say.”

Geisinger Health Plan, a central Pennsylvania insurer, has tracked down more than 4,000 people who expressed interest earlier this fall, urging them to attend sign-up events this week.

 

So far, few have responded: About a dozen have shown up at each event, said Lisa D. Hartman, the insurer’s director of commercial marketing.

 

“It might be getting too late for people to make a move,” Ms. Hartman said. “We’ve had some people telling us it’s too close to the holidays.”

 

Call-center workers at Arches Health Plan, a new Utah plan, have been working through a list of about 4,000 people who unsuccessfully sought coverage in October and November. Insurers have identified about 2,000 people who are still interested and have managed to enroll about 90% of them.

 

“We definitely have lost a lot of momentum, where people said, ‘You know what, I’m going to come back in January,'” said Shaun Greene, Arches’ chief operating officer.

And the punchline: With only days before the Monday deadline to sign up for coverage that starts Jan. 1, insurers are facing a much smaller, and sicker, pool of customers than hoped for.

Like we said: anything that can go wrong… oh look, over there, the Stalingrad & Propaganda 500 just hit a new all time high!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Eoz1BRAW5UI/story01.htm Tyler Durden

Late last night, with just 4 days left until the December 23 deadline to choose plans that will begin Jan. 1, Washington Post reported that the Obama administration finally caved and “significantly relaxed the rules of the federal health-care law for millions of consumers whose individual insurance policies have been canceled, saying they can buy bare-bones plans or entirely avoid a requirement that most Americans have health coverage.”

The ability to get an exemption means that the administration is freeing these people from one of the central features of the law: a requirement that most Americans have health insurance as of Jan. 1 or risk a fine. The exemption gives them the choice of having no insurance or of buying skimpy “catastrophic” coverage. 

As was to be expected, the announcement which made the healthcare ponzi scheme far less powerful triggered an immediate backlash from the health insurance industry and “raised fairness questions about a law intended to promote affordable and comprehensive coverage on a widespread basis.”

“This latest rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers,” said Karen Ignagni, president of America’s Health Insurance Plans, the industry’s main trade group.

Another health insurance official, who spoke on the condition of anonymity because he lacked authorization to discuss the matter publicly, pointed out that the hardship exemption also gives one group the ability to buy coverage whenever they want, rather than during annual open-enrollment periods. As a result, he said, more people might not buy insurance unless they get sick.

Well, Karen: welcome to central-planning, where whatever can go wrong, ultimately does, and as for your profit margins which you had modelled as surging in the coming years: feel free to model them lower.

How did the latest humiliation for the administration come about? WaPo explains:

At a news conference in mid-November, an apologetic Obama relented to the criticism, announcing that the federal government would let insurance companies continue for another year to offer individuals and small businesses health plans that do not meet the new requirements. The decision, however , is up to each state’s insurance regulator, and not all have gone along.

 

This second change, prompted by a group of Democratic senators — most of whom face tough reelection campaigns next year — goes substantially further in accommodating people upset about losing their policies. The latest rule will allow consumers with a canceled health plan to claim a “hardship exemption” if they think the plans sold through new federal and state marketplaces are too expensive.

To be sure, the 2014 elections played a key role: As The Hill reported, the policy shift was laid out in a letter to Sens. Mark Warner (D-Va.), Jeanne Shaheen (D-N.H.), Mary Landrieu (D-La.), Heidi Heitkamp (D-N.D.), and Tim Kaine (D-Va.), who asked the administration on Wednesday to clarify whether those who had their plans cancelled could qualify for the exemption. The Washington Post pointed out the lawmakers faced tough reelection campaigns next year, or were from states that President Obama lost in last year’s election. Could it be that Obamacare is actually… unpopular with the broader population? Say it isn’t so!

WaPo also notes that “it is unclear how many people facing canceled policies will choose no insurance, bare-bones coverage or a plan through the insurance exchanges that meet new federal standards.”

Actually, it is clear: according to the WSJ the answer is “very few”, especially when one adds the healthcare law’s rolloug problems. The WSJ adds that “insurers pressing for last-minute enrollees under the health-care law say they are running into a worrisome trend: Customers who were put off by the insurance marketplaces’ early troubles are proving hard sells. Many people thwarted by the technical problems of HealthCare.gov are reluctant to try again, citing frustration with the federal site, web-security concerns and the pressure of the holidays, several insurers say.”

Geisinger Health Plan, a central Pennsylvania insurer, has tracked down more than 4,000 people who expressed interest earlier this fall, urging them to attend sign-up events this week.

 

So far, few have responded: About a dozen have shown up at each event, said Lisa D. Hartman, the insurer’s director of commercial marketing.

 

“It might be getting too late for people to make a move,” Ms. Hartman said. “We’ve had some people telling us it’s too close to the holidays.”

 

Call-center workers at Arches Health Plan, a new Utah plan, have been working through a list of about 4,000 people who unsuccessfully sought coverage in October and November. Insurers have identified about 2,000 people who are still interested and have managed to enroll about 90% of them.

 

“We definitely have lost a lot of momentum, where people said, ‘You know what, I’m going to come back in January,'” said Shaun Greene, Arches’ chief operating officer.

And the punchline: With only days before the Monday deadline to sign up for coverage that starts Jan. 1, insurers are facing a much smaller, and sicker, pool of customers than hoped for.

Like we said: anything that can go wrong… oh look, over there, the Stalingrad & Propaganda 500 just hit a new all time high!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Eoz1BRAW5UI/story01.htm Tyler Durden