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Summary:

• US hospitalizations hit yet another record
• American cases bounce back after holiday week downtick
• Russia promises vaccinations will start  next week
• WHO again revises mask guidelines
• Italy imposes holiday guidelines
• Poland latest country to top 1 million confirmed cases
• Italy imposes new restrictions

* * *

Hospitals across the US, especially in hard-hit parts of the Midwest, are seeing record numbers of patients, with some warning that they’re dangerously close to reaching max capacity of COVID-19 beds, a point at which the quality of care for the most vulnerable patients severely deteriorates due to staff and other resource shortages.

Indiana and Nevada are now reporting more than 500 currently hospitalized per million people, along with South Dakota. For reference, the highest value of hospitalizations per million people we’ve seen was 968 in New York back in April.

The number of currently hospitalized patients nationwide is set to top 100k, as daily cases start to pick back up following a holiday week slump.

US hospitals reported the most COVID-linked deaths since May in November, according to Bloomberg data.

The biggest news internationally Wednesday is yet another step in the process to vaccinate the globe (or at least the developed world) as the UK’s primary pharma regulator announced that it had become the first western country to grant emergency-use authorization, promising that the risks of waiting for a more comprehensive review were far outweighed by the risks of allowing COVID-19 to continue to ravage the elderly and vulnerable, along with the health-care workers tasked with caring for them.

The authorization, which follows similar moves by China and Russia (though no other regulator in the west has actually signed off on experimental vaccines being administered to health-care workers) has clearly made Russian President Vladimir Putin feel some type of way, because the Russian President announced Wednesday that mass vaccinations in Russia would begin next week.

Overnight, the WHO warned that people should wear masks indoors and outdoors where physical distancing of at least 1 meter can’t be maintained, especially in areas with community or cluster transmission, the World Health Organization said in its updated guidance for mask use.

Of course, this isn’t the first time the WHO has tweaked its guidance on masks.

Finally, Poland – Germany’s relatively tiny neighbor – has just become the latest European country to pass 1 million cases, becoming at least the 14th country to pass that milestone.

Here’s more news from Wednesday morning:

European Union regulators offered a fresh set of safe-travel recommendations to make it easier for people to cross national borders within the bloc while guarding against another resurgence of the coronavirus (Source: Bloomberg).

Austria is reopening schools for students under 14 years of age, as well as most stores and services such as hairdressers from next week, subject to social distancing rules. Restaurants and hotels will remain shuttered over Christmas and New Year’s, Chancellor Sebastian Kurz told journalists in Vienna (Source: Bloomberg).

Interpol issued a global warning to law enforcement to prepare for organized crime to target Covid-19 vaccines, saying authorities should expect “an onslaught of all types of criminal activity” linked to the shot (Source: Bloomberg).

The Italian government is set to tighten estrictions during the Christmas and New Year holiday season. Health Minister Roberto Speranza told the Rome Senate that a new decree, due to come into force on Friday, will prolong a three-tier system that tailors restrictions to regional contagion levels. With cabinet members divided on how tight the new curbs should be, measures under consideration include banning travel between regions, closing hotels in mountain areas and ski-lifts, and keeping a 10 p.m. curfew in force, according to officials who asked not to be identified discussing confidential talks (Source: Bloomberg).

The writing was already on the wall last month when we reported that SoftBank’s attempt to corner a handful of giga-cap tech stocks with call spreads lead to a surprising $3.7 billion loss for the Japanese VC conglomerate’s brand new public trading entity, SB Northstar, better known as the “Nasdaq Whale”, which is one-third owned by Masa Son and headed by former Deutsche Bank prop trader Akshay Naheta out of Abu Dhabi.

As a result of the unexpected loss, which according to Bloomberg led to a “sustained backlash from investors”, SoftBank Group has decided to beach the Nasdaq Whale for good (contrary to prior reports it would no longer dabble in derivatives which proved to be fake news) and is winding down its derivatives strategy (even as it continues investing in large US tech stocks such as Amazon and Facebook, using $80bn in cash raised from its recent asset sales). It will do so by letting its billions in options expire, instead of maintaining its positions, Bloomberg sources said.

As of the end of September, the unit had purchased almost $17 billion of shares in US tech companies and invested another $3.4 billion in equity derivatives. Since most of the derivatives are short-term, about 90% of the contracts – which were used to supercharge returns by squeezing option gamma in an illiquid market – will close out by the end of December, even as SoftBank holds on to its underlying portfolio of big tech stocks listed below.

This is not the first time SoftBank investors have expressed displeasure with Masa Son’s odd foray into public markets: shareholders balked after SoftBank’s foray into derivatives trading was first disclosed on this website in September (one day before the Financial Times), cutting the company’s market value by as much as $17 billion, questioning the rationale of a company known for its years-long bets on technology startups dabbling in public securities, especially derivatives. They also criticized founder Masayoshi Son for taking a personal stake in the trading, Bloomberg notes. “We should not be day traders,” a SoftBank employee said.

“For such a long-term investor as Mr. Son, we don’t understand the attraction of short-term call-spreads,” Jefferies analyst Atul Goyal wrote in a report in November, perhaps failing to grasp that all the call spread strategy was meant to do is push the underlying stock price higher with the help of dealer gamma, a strategy which however collapsed after dealers learned who was behind the massive call surge in late August.

Others investors questioned the highly leveraged structure of Northstar, which used margin loans of cash and publicly traded securities from SoftBank’s vast balance sheet to invest in publicly listed stocks. As we reported last month, in October SoftBank borrowed $6 billion against its holdings in Alibaba.

Finally, as the FT notes, some investors also raised governance concerns, since the trading arm effectively allowed Son to take out loans from SoftBank via Northstar, while benefiting from 33% of the profits from a division inside the group.

“If he has created a box where he gets to keep 33 per cent and he decides to call it an asset management unit, that’s just lipstick on the pig. It’s using SoftBank’s cash,” said a person with knowledge of the fund’s structure. David Gibson, an analyst at Astris Advisory, said: “The structure where the CEO takes 33 per cent of the profits of one division should not be occurring from an ESG point of view.”

For his part, the SoftBank chief defended the investment program in November as a way to put to use SoftBank’s massive cash pile and has said the derivative bets are “a rounding error” relative to the company’s assets. The fair value of SoftBank’s futures and options positions came to $2.7 billion at the end of September, or just 1.2% of the $292 billion in shareholdings.

The positions include long call options on listed stocks worth $4.69 billion and short call options on listed stocks with negative $1.26 billion of value. SoftBank also stated how much impact these derivatives trades could have on pre-tax profits. A 30% rise in the stocks that Northstar went long on would have boosted its long call options by $14bn, but seen its short call options lose $5.7BN. Alternatively, a 30% fall in the stock price, would have hit its long call options by $4.3BN but boosted its short call options by $1.2BN, still resulting in sizable losses. It is this downside which appears to have spooked investors most.

That said, investors would have had no problem if the “Whale” had been profitable; instead in addition to all the controversy generated by the trading unit, SoftBank failed to impress with its publicly-traded skills: A 292 billion yen ($2.8 billion) derivative loss in the September quarter all but wiped out gains in the first quarter. That left a little over $1 million in gains in the six months ended Sept. 30, a surprising result given the rally in most tech stocks.

While a source told Bloomberg that earnings in the business are improving this quarter, turning a profit on the derivatives has become increasingly difficult as implied vol has tumbled after the conclusion of tumultuous presidential elections in the U.S. and rising prospects for an effective Covid-19 vaccine.

While Son came up with the idea for entering public markets earlier this year when stocks plunged with the coronavirus pandemic, “investor pressure and opposition from key lieutenants since have helped change his mind” Bloomberg concludes, adding that  shuttering the program completely will take time because it has become “a matter of face for the billionaire.”

While one wouldn’t necessarily expect yields to spike on the day the labor market macro index hit its weakest level since February following the latest disappointing ADP print…

… that’s exactly what is going on this morning, with 10Y yields continuing their Tuesday surge, and last trading just above 0.95%, approaching the critical resistance level hit following the first Pfizer vaccine news on Nov 9.

Yet while nominal yields are surging, traders are focusing on Breakevens, which are also levitating higher, and at 1.8359% last were at the highest level since May 2019.

That said, breakevens are only higher because Real Rates have dipped in recent days, which can be attributed to continued outsized buying in TIPS, perhaps by the Fed itself.

In short: reflation trade galore this morning, with optimism rising that Congress will pass some fiscal stimulus deal, even if it is a small one, ahead of a much bigger deal in 2021. Or perhaps it is JPMorgan’s Tuesday warning that with $600 billion in excess bond supply in 2021, yields will have to jump by at least 20bps to spark the needed demand for US paper.

And with yields rising amid renewed reflation prospects, the question is when does it become too much. Echoing what we said yesterday, Bloomberg writes this morning that “renewed optimism about U.S. stimulus talks pushed the benchmark 10-year yield to a high of 0.94% on Tuesday, a move which if continued could spark a domino effect across risk assets trading at all-time highs thanks to low interest rates.” As Bloomberg correctly notes, “at issue is whether the jump in yields is accompanied by an economic recovery and moderate levels of inflation that would allow the Federal Reserve to keep rates low.”

So far it seems investors are positioning for that scenario, with the Treasury curve steepening overnight and U.S. stocks rallying to a fresh record and as noted above, 10Y breakevens rising to their highest level since May 2019.

Of course, now that the Fed controls the bond market, we wouldn’t put it past bond traders to get ahead of themselves, especially if vaccine rollout in 2021 proves to be “problematic” while shutdowns continue.

On the other hand, continued rise in yields could have dire consequences for high duration stocks such as the market-leading FAAMGs, and would spark a market rout unless the “reflation” trade offsets the drop in growth names (spoiler alert: it won’t):

“A range of 1% to 2% is certainly possible and it would have wide implications across everything from emerging Asian currencies to commodities,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “It’s likely a matter of when – not if – yields will climb.”

For better or worse, yields are climbing, and for those who enjoy old-school correlations, such as Gundlach’s favorite copper/gold vs TSY ration, here is how high they could rise:

Needless to say, a 2% on the 10Y would have very unpleasant consequences for the S&P500.

Just hours after the UK approved the rushed Pfizer vaccine for use in the UK as soon as next week (it remains unclear just who will volunteer first), President Vladimir Putin ordered the start of mass-scale vaccination against coronavirus in Russia by the end of next week with medics and teachers first to get the shot.

In a teleconference on Wednesday, Putin said that Russia’s pharma industry is ready for a large-scale vaccination as the amount of doses of the pioneering anti-Covid “Sputnik V” vaccine already produced will reach two million in the coming days.

The vaccination against Covid-19 will be voluntary, and Russian citizens will be getting the shots free of charge.

“I’d ask you to organize the work in a way that would allow the start of large-scale vaccination by the end of next week,” the president told Deputy Prime Minister Tatyana Golikova.

The deputy PM said that she would report back when the government is ready to fulfil that task, but the ever laconic Putin responded by saying that he didn’t want a report, but an actual start of the vaccination.

Authored by Ivan Pentchoukov via The Epoch Times,

The Department of Justice (DOJ) issued a statement on Tuesday in response to the backlash from an article by The Associated Press which quoted Attorney General William Barr saying that “to date, we have not seen fraud on a scale that could have effected a different outcome in the election.”

“Some media outlets have incorrectly reported that the DOJ has concluded its investigation of election fraud and announced an affirmative finding of no fraud in the election. That is not what the Associated Press reported nor what the Attorney General stated,” a DOJ spokesperson said, according to CBS News reporter Catherine Herridge.

“The Department will continue to receive and vigorously pursue all specific and credible allegations of fraud as expeditiously as possible.”

The Epoch Times reached out to the DOJ to confirm the statement but did not immediately receive a response.

Attorney General William Barr appears before the House Judiciary Committee on Capitol Hill in Washington on July 28, 2020. (Matt McClain/The Washington Post)

In its headline, The Associated Press twisted Barr’s comment to suggest that the attorney general has passed final judgment on whether fraud occurred in the 2020 election. “Disputing [President Donald] Trump, Barr says no widespread election fraud,” the wire service reported.

But the AP’s own article prefaced Trump’s comment on the matter by saying that “Barr told the AP that U.S. attorneys and FBI agents have been working to follow up specific complaints and information they’ve received.”

Attorneys for the Trump campaign issued a response to Barr’s comments, underlining that the many witnesses they are working with have not been contacted by the FBI.

“With all due respect to the Attorney General, there hasn’t been any semblance of a Department of Justice investigation. We have gathered ample evidence of illegal voting in at least six states, which they have not examined. We have many witnesses swearing under oath they saw crimes being committed in connection with voter fraud. As far as we know, not a single one has been interviewed by the DOJ. The Justice Department also hasn’t audited any voting machines or used their subpoena powers to determine the truth,” Rudy Giuliani and Jenna Ellis, attorneys for Trump, said in a statement.

Several days after the 2020 election, Barr authorized the DOJ to probe any “substantial allegations” of voter fraud and noted that “such inquiries and reviews may be conducted if there are clear and apparently-credible allegations of irregularities that, if true, could potentially impact the outcome of a federal election in an individual state.”

China’s second largest cell phone maker, Xiaomi, dropped the most ever in Hong Kong after the company raised US$3.1 billion in the city’s biggest follow-on equity offering on record. The stock plunged as much as 12% to $HK23.10 as trading resumed at 1pm local time.

Traders were surprised when Xiaomi’s shares were initially halted during the morning session after the company failed to disclose the placement in time for the open. Eventually, the company confirmed it had raised US$3.1 billion selling shares at HK$23.70 apiece, or a 9.4% discount to its last close, in a filing released during the midday break Bloomberg reported. Credit Suisse Group, Goldman Sachs Group, JPMorgan Chase & Co and Morgan Stanley arranged Xiaomi’s offering. Apparently they did a good job since shares closed at HK$24.30, or well above the offering price.

The company’s failure to announce the stock sale on time came a month after Hong Kong was rattled by an abrupt decision by Chinese regulators to pull Ant Group’s planned initial public offering, which would have been the largest ever, after China’s president took personal aim at Jack Ma’s growing financial empire and influence.

“It’s definitely unusual because other companies which had share placements usually file the official announcements soon after pricing,” said Castor Pang, head of research at Core Pacific-Yamaichi International Hong Kong.

Hong Kong’s stock exchange requires a company to apply for a trading halt if certain inside information has been made public before an official disclosure. Bizarrely, Bloomberg News first reported the deal on Tuesday, a day before Xiaomi’s official disclosure.

Despite the record drop, investors will hardly be disappointed: Xiaomi shares have rallied a record 143% this year, though they slipped from a high last month after the company said its internet services revenue had grown at its slowest pace in three years in the quarter ended September.

Proceeds from the share sale as well as a separate issue of more than $800 million in convertible bonds will add to a liquidity buffer meant to help Xiaomi continue taking market share from competitors such as Huawei. Xiaomi has successfully grabbed market share from Huawei after American sanctions deepened particularly in overseas markets from Europe to India.

By Michael Every of Rabobank

Tidings of comfort and joy (and socks)

Another all-time high in US equity markets; a surge in US bond yields (10-years up as high as 0.93% before retracing slightly); EUR up to 1.2076, meaning USD down, down, down. Open the brandy and put out a mince pie!

Somebody was feeling awfully festive on 1 December.

Yes, we have further movement towards a US stimulus package, with a number below USD1 trillion now appearing to be small enough that everyone in DC concurs that it can fit into a Christmas stocking: even those involved in vicious internecine lawfare for or against President Trump. In short, a stimulus package that was seen as too small to help the US economy out of its slump a few months ago is being celebrated today when the economic damage (such as the return to a decline in manufacturing jobs according to the US ISM survey) is already deeper. Tidings of comfort and joy.

Meanwhile, that DC lawfare is still very real, even if it is increasingly not being covered in depth by US media, which is focusing instead on rumors of Trump considering pardons for friends and family (for what specifically is not mentioned), investigations of considerations of previous pardons (for whom for what?), and the sudden revelation that Attorney General Barr appointed Durham as a Special Counsel to investigate the Russiagate hoax (not to be confused with the Special Counsel to investigate Russiagate!) back in October but didn’t tell anyone ahead of the US election – which will potentially make life as interesting for a Biden presidency as the Mueller investigation did for Trump. Tidings of comfort and joy.

AG Barr also came out to say he has seen no evidence of electoral fraud that would overturn the result, which did make a media splash, and which the Trump campaign was forced to rebut, claiming the DOJ has been far from active on the ground. Crucially, however, for a market that has long given up on nuance or detail, Barr was specifically referring to *criminal* cases, and stated that the correct courts for US election remedy are instead civil – which is indeed the constitutional case. On that front, the lawfare is indeed still blazing away, even if the media aren’t paying too much attention.

Yesterday, for example, the Trump campaign provided what it claims is statistical evidence that there are a larger number of illegitimate ballots in several disputed states than the margin of Biden’s victory there – which is the legal benchmark of how one can overturn a US election result. To be clear, this does not mean the evidence will hold up in court, or even that it will be *heard* in court, because as many seasoned US observers make clear, this is as much a de facto political battle as it is a legal one.

Nonetheless, some of these cases could potentially get to either a sympathetic state supreme court, or to the Supreme Court. The outcomes there are far from certain even if so…yet as keeps being repeated here, the markets are **absolutely** certain that they know what is about to happen. Tidings of joy for whom exactly? At least the relevant lawyers’ pockets will be jingling all the way.

Meanwhile, are higher bond yields much comfort for bond holders or states swimming in debt? And is EUR heading for 1.21, for just one example, a comfort for the ECB, which already faces deflation for Christmas? More like a lump of coal in the stocking.

On which note, UK and EU negotiators are still apparently racing to strike a deal with their own lawfare regarding trade before the end of the week; and it is still unclear what the outcome will be. Does BoJo even know what he wants? Hopefully the UK negotiating team will be fully equipped with scotch eggs in both pockets at all times, given this seems to be the most essential item for Brits to hold to be able to keep calm and carry on.

In short, everyone seems to be full of seasonal good spirits, or just spirits if they have a scotch egg on hand, “because markets”, and it seems that in December every day of advent is going to have a little chocolate to gobble up.

But are we really all going to get global reflation for Christmas?

Sometimes all one gets is socks.