Month: December 2014

Via Scotiabank’s Guy Haselmann,

The current market environment means that prices of securities can move wildly and to previously unforeseen and unexpected levels.   For many, P&L management and financial survival will trump economic valuation.  Capital is flowing quickly in a market place rife with compromised market depth.  It also follows a multi-year period where the Fed had given the green light to rampant market speculation; thereby, propagating herd-like positions which are in the initial stages of unwind.   This will take time.    As I have been warning, investors should not underestimate just how low long-dated Treasury yields can fall.

Below is a summary of some facts and thoughts (not a comprehensive list):

The Russian Ruble is the worst performing currency in the world losing about 60% of its value this year.  The Norwegian Krone is down 20%.  The Turkish Lira hit an all-time low of 2.41 last night.

 

In dollar terms, the Russian Micex Benchmark Equity Index is down over 30%… this month!!

 

Russian corporations and banks have an estimated $135 billion of foreign currency debt that needs to be repaid by the end of 2015.  With the ruble 60% weaker, refinancing will be monumentally challenging.  Defaults will impact banks and investors – the level of contagion is uncertain.

 

Large intervention in the Ruble currency markets yesterday had little effect.  In a desperate move to halt the plummeting Ruble, the Central Bank of the Russian Federation hiked rates from 10.5 to 17%.  This also had little immediate impact as the currency is down 10% overnight, a bounce from the lows of down 20%.  Capital controls are the likely next step.

 

Venezuela 5yr CDS is pricing a 97% chance of default.

 

Greece has (the first round of) a Presidential election tomorrow.  A failure to gain 180 votes or a strong showing by Syriza may cause a steep widening of EU periphery spreads currently priced to perfection.

 

EU periphery rates are at low levels and at historically tight spreads to Germany partially due to expectations of the ECB initiating sovereign QE next months.  Again, valuations appear to have this fully priced in.   Yet, here are some quotes over night from the Bundesbank President Weidmann:

• *WEIDMANN SAYS DON’T EXPECT QE MIRACLE AS EFFECTS WOULD BE MUTE
• *WEIDMANN SAYS BALANCE-SHEET TARGET NOT SENSIBLE POLICY STRATEGY
• *WEIDMANN SEES `WHOLE ROW’ OF ECONOMIC REASONS AGAINST QE
• *WEIDMANN: CURRENT DEVELOPMENTS DON’T WARRANT POLICY RESPONSE

The energy industry is highly-capital intensive.  US energy companies have more than $200 billion of junk bonds outstanding, not including large amounts of bank debt.  (Our energy analyst  Jerod Lenderman wrote a note this morning about the Oil Market)

 

The FT has a front page article about how plunging crude prices threaten $1 trillion worth of energy projects.

 

The High in Junk Bonds was in June.   The HYG (High Yield ETF) is down 9% since that time and down 4% this month.  The high in the S&P was on December 5th.   Such divergences have historically acted as a warning sign for equities.

IN CONCLUSION:  I could extend the list of bullet points for many more pages, but the overall conclusion that market turmoil and volatility will be here to say has been made. 

So, what does this mean for the Fed meeting tomorrow?

I believe the Fed is best served to focus on the domestic economy and not delay the path to policy exit, due to overseas troubles, and foreign economic and political mismanagement.   The US economy is improving and showing plenty of signs of normalization.  I believe the FOMC should try to instill confidence by acknowledging this domestic economic improvement, while down-playing concerns aboard.

 

There is never a good time to remove accommodation and waiting may only delay the inevitable, potentially make the ultimate fall-out even worse.   The drop in oil is a boon to the US consumer and elevates disposable income.

 

The Fed should increase its flexibility by removing the forward guidance language, and mitigate that action by adding language that they are watching developments closely, will act accordingly (and that rates will only move slowly, as outlined in my “Sooner, but Slower” note from Oct 23).

So, how should active accounts tactically trade the market until then?

Global capital is moving.  Portfolios are adjusting exposures after years of over-extended risk to piggy-back off of central bank stimulus in an attempt to beat peers and benchmarks.  The high point of stimulus is behind us.  Global central banks followed Fed rates down toward zero and the G-5 provided $13 trillion in QE balance sheet expansion.   The arsenal has already been depleted.

 

US QE has now ended.  Forward guidance is likely to end tomorrow and a rate hike looms.  BoJ QQE is beginning to be challenged as ineffective.  ECB QE promises are also beginning to be questioned.   The central bank ‘put’ is now weaker and farther out-of-the-money.

 

Geo-political and economic uncertainties are high and rising. Portfolios recognize the need to become more conservative and protect against downside risk.  Cash equivalents and Treasuries are the clear winners.

 

As I stated last Monday, “I would not underestimate just how low Treasury yields can fall”, but that is now tactically true until 1:45 PM tomorrow.   Since I still expect a hawkish Fed and a removal of the Forward Guidance language, it will be tactically prudent to leg from a long into a flattening trade just in front of the meeting.  I believe a hawkish Fed will flatten the curve quite a bit.  Much can happen between now and tomorrow afternoon, as market movements will be dictated by positions and safety.  At 2:00 PM tomorrow the focus will shift to being all about the Fed.

*  *  *

Turmoil

via Zero Hedge http://ift.tt/1ACAYHw Tyler Durden

The 2008 crash was a warm up.

 

Many investors think that the markets could never have a crash again. They think that the 2008 meltdown was a one in 100 years crisis.

 

They are wrong.

 

The 2008 Crisis was a stock and investment bank crisis. But it was not THE Crisis. THE Crisis concerns the biggest bubble in financial history: the epic Bond bubble…

 

If you need proof that bonds are in a truly epic bubble… one that will implode the financial system when it breaks… consider that half of ALL government bonds in the world currently yield less than 1%.

 

What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another.

 

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries to break out of the stimulus trap, including Fed officials themselves.

 

http://ift.tt/1B36qzw

 

Why are yields this low?

 

Because, by holdings interest rates at zero or even negative, global Central Banks have forced investors to pile into bonds in search of yield (stocks are too risky for many of the largest pools of capital).

 

When investors pile into bonds, bonds rally, which drives yields lower. This has been reinforced by the fact that Central Banks have been engaging in or promising QE (buying Government debt) consistently for the last five years. So investors have been front-running the Fed and other Central Banks.

 

After all… if you know a Central Bank will buy your bond at a price that is higher from where the market prices it… you effectively know there is a “bigger fool” waiting in the wings.

 

The end result?

 

The bond bubble today is over $100 trillion. When you include the derivatives that trade based on bonds it’s more like $500 TRILLION. And it’s growing by trillions of dollars every month (the US issued $1 trillion in new debt in the last 8 weeks alone).

 

When this thing bursts it’s going to be an absolute disaster as it will involve entire countries going bust.

 

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis "Round Two" Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

 

You can pick up a FREE copy at:

http://ift.tt/1rPiWR3

 

Best Regards

Phoenix Capital Research

 

 

 

 

via Zero Hedge http://ift.tt/1yZw2zu Phoenix Capital Research

As we reported over the weekend, in the tumult surrounding Citigroup’s annexation of Congress with the passage of the theatrically dramatic $303 trillion derivative quid-pro-$1.1 trillion spending quo, what most missed is that Congress also unanimously passed the The Ukraine Freedom Support Act of 2014, which not only expands Russian sanctions (read the details here) but far more impotantly, provides “lethal assistance to Ukraine’s military.” And as we explained, passage of this law is just the pretext some Russian legislators needed to push for a full-blown, preemptive military incursion in east-Ukraine.

Recall:

“The decision of the US Senate is extremely dangerous. If it is supported by the House of Representatives and signed by their president, Russia must reply with adequate measures,” Mikhail Yemelyanov of the Fair Russia party told reporters on Friday.

 

“It is quite possible that we should return to the decision by our Upper House and give the Russian president an opportunity to use military force on Ukrainian territory preemptively. We should not wait until Ukraine is armed and becomes really dangerous,” the lawmaker stated.

 

Yemelyanov also noted that in his opinion the US Senate’s decision to arm Ukraine had revealed that Washington wasn’t interested in the de-escalation of the Ukrainian conflict. He then said that US actions gave him the impression they was seeking to turn Ukraine into some sort of an “international militant targeting the Russian Federation.”

 

“In a few years Ukraine will turn into a poor and hungry country with an anti-Russian government that will teach its population to hate Russia. They will be armed to the teeth and Ukraine and US reluctance to recognize the Russian Federation within its current borders would always provoke conflicts,” the MP said.

Furthermore, we asked if “this means that what was a lingering proxy cold civil war in east Ukraine between NATO-armed Ukraine troops and Russia-armed Separatists and local militias is about to escalate into a shooting precursor to something greater? There is still hope an all out escalation can be avoided” and we cited White House press secretary Joshn Earnest who last week said that “the administration hadn’t finished reviewing the language and isn’t ready to take a position on the legislation. He said the administration wants to ensure that the U.S. and its European allies are working together, that any sanctions are effective and that they minimize harm to U.S. and European companies. “This is delicate work,” Earnest said.”

Apparently, not delicate enough, and moments ago we got confirmation that the epic collapse in the USDRUB is just a jovial preview of the main event. To wit:

• OBAMA DOES INTEND TO SIGN RUSSIAN SANCTIONS LEGISLATION:EARNEST
• OBAMA LIKELY TO SIGN SANCTIONS BILL BEFORE END OF WEEK: EARNEST

And with that, US “lethal aid” will shortly begin arriving in Kiev, which in turn will be just the pretext needed by Sergey Lavrov and the Kremlin to escalate the recent events in Russia as a direct attack by the West, and to demand retaliation against a US president who “does not reason” as the Russian media will appeal to the population in an attempt to “rally round the flag“, and as a result Russian tanks may have no choice but to enter the separatist territories in East Ukraine.

What the western, and certainly NATO, response at that point will be, is far beyond our meager prediction skills.

via Zero Hedge http://ift.tt/1A5ubrV Tyler Durden

Gold Imports ‘Phenomenal’ In India – 571 Percent Surge To 150 Tonnes in November

India’s gold imports were over a staggering 150 tonnes in November and have seen a “phenomenal” rise in India, according to India’s Trade Secretary, Rajeev Kher.

A few weeks ago we said that the death of the Indian gold market was greatly exaggerated. The latest gold import data out of India confirms this.

The import restrictions on gold that were imposed on Indians in August of 2013 were lifted at the end of last month. Despite the fact that the restrictions were still in place gold importation in November surged an incredible 571% relative to the same month last year at over 151.58 tonnes.

This was an increase of 38 percent from 109.55 tonnes a month earlier, trade ministry data showed on Tuesday.

The Indian government had recognised the socially destructive impact of the 80:20 scheme – which obliged importers to export 20% of it’s gold imports before bringing in another shipment – by pushing business into the hands of smugglers and thereby empowering criminality while losing out on the 10% duty currently charged on all gold imports.

It had been assumed that, because demand was being met by these “informal” supplies, the relaxing of the 80:20 policy would not have a dramatic impact on gold imports into India. That remains to be seen. Smuggling networks are now well established and arguably could provide cheaper gold than government-sanctioned channels.

The restrictions were put in place because the appetite of the growing Indian middle classes for gold was causing India to run large trade deficits. It is believed that it was also a misguided attempt at financial repression of gold in order to discourage Indians from buying physical gold. There were concurrent attempts to get Indians to open bank accounts and indeed to own digital and paper gold.

This highlights once again how deeply Indians feel about gold in that demand for this single commodity or form of money – could skew the trade deficit in such a dramatic way.

India officially imported $5.6 billion worth of gold in November. The trade deficit increased to $16.9 billion in the same period despite the cost of oil imports being low. This is putting pressure on the rupee which is currently valued at almost 63 to the dollar.

The central bank appears happy enough at this level as it will help boost exports which have been booming. However, India’s trade secretary – Rajeev Kher – has said that any level below 62 rupees to the dollar would cause him to be a “little more concerned.”  

Russia’s drastic rate hike of 6.5% up to 17% is likely to further unnerve the Indian government as it tries to balance insatiable public demand for gold with the need to rein in the deficit. If the rupee falls more, India will be forced to raise rates to discourage capital flight.

However, taking the longer term view, it must be said that – as a country that imports between 25% and 33% of the global gold supply – India will be well placed when currency wars deepen and the inevitable world-wide monetary reset occurs.

India’s imports are around the 1,000 metric tonne mark and global gold production is just under 3,000 metric tonnes.

We believe that it will be eastern countries who will determine monetary policy when that time comes. As Russia’s foreign minister Lavrov has pointed out the seven countries led by the BRICS nations now have a larger combined GDP than the western G7.

The old adage that “those who own the gold make the rules” will likely come to pass again. As it did in 1945, when the U.S. was the largest holder of gold in the world which enabled it to dictate the terms of the new Bretton Woods monetary system.

This seems likely given the affinity that the people, governments and central banks of India, China and the East have for gold as a store of value.

Essential Guide to  Storing Gold Bullion In Singapore

MARKET UPDATE
Today’s AM fix was USD 1,199.25, EUR 960.25 and GBP 763.95 per ounce.
Yesterday’s AM fix was USD 1,210.75, EUR 974.53 and GBP 772.41 per ounce.

Spot gold slid $30.40 or 2.49% to $1,191.70 per ounce yesterday and silver plummeted $0.87 or 5.12% to $16.14 per ounce despite no market moving news or developments.

Gold in USD – 5 Days (Thomson Reuters)

Gold in Singapore was flat overnight in Asia prior to gold bouncing back from yesterday’s biggest drop this year and is over 2% higher today as buyers accumulate after yesterday’s dip. Traders await the policy statement from the U.S. Federal Reserve meeting tomorrow.

Gold fell yesterday as U.S. manufacturing data beat estimates supporting the case for higher borrowing costs next year. Federal Reserve officials meet today and tomorrow to debate the possibility of rising U.S. interest rates, which have been near zero since 2008.

Silver for immediate delivery rose 2.5% to $16.70 an ounce, after plunging by 5.1% yesterday. Platinum was little changed at $1,209.88 an ounce. Palladium added 0.3% to $800.38 an ounce.

Holdings in gold-backed ETPs dropped 3 metric tons to 1,608.2 tons as of yesterday, Bloomberg data showed.

Silver in USD – 5 Days (Thomson Reuters)

The world’s second largest gold consumer surprised analysts and discarded a rule for traders to export 20% of all gold imports.  This change led to gold imports surging to 151.58 tonnes in November, an increase of 38% from 109.55 tonnes a month earlier, noted the trade ministry data yesterday.

Indian gold imports had risen hugely and the government should examine the impact of last month’s revision of the so-called 80:20 rule commented Trade Secretary Rajeev Kher.

The global price of crude oil plummeted through $60 a barrel for the first time in five years with almost no signs producers are ready to tackle a glut. Brent futures slid as much 3.3% to its lowest since May 2009 in London.

Crude oil fell about 45% this year as OPEC (Organization of Petroleum Exporting Countries) sought to defend market share amid a U.S. shale boom that’s exacerbating a global glut. The group, responsible for 40% of the world’s supply, will refrain from curbing output, U.A.E. Energy Minister Suhail al-Mazrouei said over the weekend.

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We recently noted the rise of counterparty risks in the financial system due to oil prices dropping (and leveraged derivative exposures) but as the Russia situation has deteriorated so dramatically this week, a renewed focus on bank exposures has sent stocks reeling (and credit risk soaring) among many European (and US) banks. As Bloomberg reports, Raiffeisen Bank International and Societe Generale, the European banks with most at stake in Russia, led European lenders lower. Raiffeisen fell as much as 10.3% to 11.40 euros in Vienna, the lowest level since it went public in 2005. Societe Generale dropped as much as 7.3% to 31.85 euros, hitting the lowest intraday level since August 2013. CDS markets for both also exploded with Raffeisen risk at 27 month highs. As one analyst noted, "There remains a huge amount of uncertainty at this juncture, but the key point is that there are no benign scenarios." While not on the same scale, US bank risk has also widened signicantly in recent weeks (despite equity strength).

Credity risk is surging…

 

As Bloomberg continues,

“More fundamental concerns are building over the outlook for Russia’s economy and the likely policy response,” Neil Shearing, an economist at Capital Economics in London, wrote in a note to clients. “There remains a huge amount of uncertainty at this juncture, but the key point is that there are no benign scenarios. Even if the ruble does stabilize over the coming weeks, the economic crisis facing Russia has much further to run.”

 

Societe Generale is the bank that has the biggest absolute exposure to Russia, at 25 billion euros ($31 billion), according to Citigroup Inc. analysts led by Kinner Lakhani. That’s equivalent to 62 percent of the Paris-based bank’s tangible equity. Raiffeisen has 15 billion euros at risk in Russia, almost twice its tangible equity, and it also has the biggest exposure to Ukraine, with 4.9 billion euros, according to Citigroup.

 

UniCredit, the third European bank strongly invested in the former Soviet Union, has 18 billion euros at stake in Russia, or 40 percent of its tangible book value, Citigroup said.

And while European banks are starting to show real cracks, US financial institutions are also seeing spreads widen notably since oil prices peaked…

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1uUIha2 Tyler Durden