Month: April 2021

One day after an commendable bubble-blowing performance by the uber-dovish Jerome Powell who warned of “froth” in stocks as a result of his own policies – and to think it was just 9 years ago when Powell admitted the Fed was blowing a fixed income bubble “that will result in big losses when rates come up” …

…  we are seeing a burst the “reflation” trade with Brent surging…

… which is lifting 10Y breakevens to fresh multi-year highs, printing at 2.45% this morning…

… and pushing 10Y yields to a level where traders are starting to sweat the impact of rising yields on stocks.

What is bizarre is that yields are spiking even as the Nasdaq is back to all time highs, largely on the back of blowout earnings from Google, Facebook and Apple. As a reminder, it was the spike in yields in late February that hammered high-duration (i.e., growth, tech) names although it now appears that the market has forgotten all about the negative correlation between higher yields and tech stocks.

In any case, yields may just be starting their next big move higher: as Nomura’s Charlie McElligott reminds us this morning, from a sequencing / timing perspective, “it is worth noting that in Eurodollar options, there has been a very large trade building the past few days which is anticipating a Fed hawkish shift in outlook built around the Jackson Hole event held in late August (Risk Reversal via Sep21 3-year midcurve options).”

Charlie picked up on an observation from Bloomberg’s Edward Bolingbroke, who over the past few days has been describing a massive ED trade by an unknown entity, who appears to be betting that the Fed’s dovish stance will end with a bang not in June, as many analysts predict, but in August with Powell making the inevitable taper announcement at Jackson Hole, which will lead to a bloodbath across the curve and especially the short-end.

Why Jackson Hole? Because last year, Powell unveiled a new policy framework for inflation, while in 2012 Ben Bernanke signaled more bond purchases were on the table.

Sure enough, over the past week, there has been a burst in eurodollar options activity involving a position that will benefit from a ramp-up in taper rhetoric in August. As Bolinkgbroke explained, the position is a risk reversal via Sep21 3-year mid-curve options. The Sep21 mid-curve options expire Sept. 10, before the Sept. 22 Fed policy meeting with the subsequent meeting on Nov. 3, expiration date appears to specifically target Jackson Hole for a taper-talk repricing in eurodollar futures.

Some more details:

Ahead of this year’s meeting, a large wager has been placed on a faster-than-expected pace of rate hikes before Sept. 2024, though with an expiry of this coming September.

As it stands, Eurodollar futures imply around five rate hikes, or 125 basis points of tightening by Sept. 2024. The new bet has been entered via risk reversals — where investors buy options which pay off if rates rise but offset the cost by selling those which benefit from a fall.

The investor bought put options which target three-month Libor over 2%, which would equate to around seven Fed hikes, and sold those targeting rates below 1%, which implies slightly less than three increases. The rate rose 0.84 basis point on Wednesday to 0.1855%.

While the identity of the trader is unknown, this is rapidly becoming an “extremely high conviction” trade with exposure in the tens of millions: on Wednesday, 20,000 3EU1 98.00/99.00 risk reversal traded at 1.5, buying 98.00 puts, selling 99.00 calls, a continuation of a similar trade from Tuesday where 25,000 were put on for new risk, position has now grown to around 120,000 contracts since the start of last week.

The P&L profile is evolving, but as of Thursday morning, the strategy could generate around a $60 million payoff if markets price in eight hikes or an $90 million loss if expectations fall to two hikes. Needless to say, the trader is betting on the former.

Since 2017 controversy and speculation has abounded over the legitimacy of the so-called “Havana syndrome” story, which involved some 50 diplomatic officials working at the US Embassy in Cuba coming down with strange illnesses and symptoms – from headaches to vomiting to ‘brain trauma’ – which was blamed on high tech covert ‘sonic attacks’ by nefarious actors. Officials were quick to blame either Russian intelligence or Cuban operatives in what sounded like a wild James Bond style bit of futuristic espionage. 

Last week the allegations returned to national media spotlight after defense officials said they believe Russia is likely behind “directed energy” attacks on US troops in northeast Syria. Apparently some US troops occupying the country began reporting “flu-like symptoms” which caused the DoD to investigate possible linkage to microwave or directed energy weapons on the battlefield of Syria. Politico reported that “officials identified Russia as a likely culprit, according to two people with direct knowledge of the matter.”

And now CNN is reporting what is perhaps the most bizarre and outlandish instance of this yet – a ‘sonic attack’ which sickened a top administration official while standing just outside White House grounds.

“That incident, which occurred near the Ellipse, the large oval lawn on the south side of the White House, sickened one National Security Council official, according to multiple current and former US officials and sources familiar with the matter,” CNN writes. 

The report says the symptoms experienced by the unidentified official were consistent to those reported in Havana at the embassy years ago. The original Havana Syndrome incident involved personnel saying they experienced everything from vomiting to concussions to extreme nausea to chronic headaches and even minor brain injuries. However, analysts and scientists have remained deeply divided on the issue, with speculation ranging from high pitched sounds from crickets or even mass hysteria causing the illness.

At the same time the US-funded National Academy of Sciences concluded that “microwave radiation” was most likely the source of the strange illnesses in Havana. Should this be the case, what makes it hugely alarming for US national security is that it’s invisible, soundless, and thus undetectable. 

So theoretically it could be used even against the White House without the Secret Service or US intelligence and law enforcement knowing in real-time. But despite years of this being investigated, including top generals most recently briefing Congressional leaders wherein they pointed the finger at Russia, there’s yet to be any hard evidence presented to the public.

Below is an image of the Ellipse, officially known as President’s Park South, located directly to the South of the White House…

NEWS: The US is investigating a possible incident that occurred near the Ellipse in November, where an NSC official was sickened with symptoms similiar to “Havana Syndrome” that have affected dozens of US personnel abroad, w/ @KatieBoWillCNN https://t.co/KVgSKNwpuV

— Jeremy Herb (@jeremyherb) April 29, 2021

Apparently this latest White House incident was not the first suspected ‘sonic attack’ in the area, as CNN details:

Multiple sources familiar with the matter tell CNN that while the Pentagon and other agencies probing the matter have reached no clear conclusions on what happened, the fact that such an attack might have taken place so close to the White House is particularly alarming.

…In a separate 2019 episode, a White House official reported a similar attack while walking her dog in a Virginia suburb just outside Washington, GQ reported last year.

The October 2020 GQ report was somewhat comically titled, “The Mystery of the Immaculate Concussion”. 

It detailed that “According to three sources familiar with the incident, a White House staffer was hit while walking her dog in Arlington, Virginia. Her dog started seizing up. Then she felt it too: a high-pitched ringing in her ears, an intense headache, and a tingling on the side of her face.”

The mystery of the Havana Syndrome: https://t.co/W71FyzW7jb pic.twitter.com/CruEWuBYU9

— The New Yorker (@NewYorker) November 11, 2018

Example of a US Air Force experimental directed energy weapon: 

Again, despite the wealth of what is perhaps anecdotal evidence and testimony, and with at this point the original Havana episode serving as the clearest evidence yet of a large group of people saying they  experienced bizarre unexplainable symptoms all at once, it remains that US intelligence and defense officials have failed to produce known evidence that Russia or a US enemy zapped Americans with an advanced microwave weapon. 

By Michael Every of Rabobank

Feddling While Rome Burns?

“Friends, Romans,…”

“Countrymen!”

“I know!”

As expected, the Fed didn’t do anything yesterday. Our Fed-watcher Philip Marey underlines here that the FOMC said: amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened; that the sectors most adversely affected by the pandemic remain weak, but have shown improvement; and inflation has risen, largely reflecting transitory factors. And that was it. During his press conference Powell repeated that the US is only going to see transitory inflation, and does not want to start talking about tapering – they are not close to the substantial further progress the FOMC wants to see before starting this discussion. Perhaps the most surprising thing was Powell daring to use the word “froth” to describe the stock market he himself is boiling.

Bloomberg chimes in that “The Fed’s New Reaction Function is Winning”, and that the market now understands what the Fed is doing. Yes, many of us do. It couldn’t really be any more obvious. But is the Fed really in control via this process of actively doing nothing?

If one believes yes, then all is well: assets will levitate; the USD to soften; rates and yields to stay low; and it’s boom-time.

By contrast, if one believes no, and that the Fed is blind to how bad the current supply-chain snarl is, and how high prices are likely going to rise as a result, and to risks of a further USD4.1 trillion in stimulus spending (over a decade) being thrown in on top, then Powell is Feddling while Rome burns: markets are on fire; and soon prices will be too; and then what?

For those who don’t know, the source of this phrase is the popular belief that Emperor Nero played the fiddle while Rome burned during the great fire of 64AD. It’s a useful idiom to describe doing something useless while important events are transpiring. The only problems with it are that: 1) fiddles didn’t exist when Nero was alive; and 2) we have no idea if Nero actually did such a thing, because historical records are written by the winners. One historian says Nero did; others disagree. Today we have The New York Times and Glenn Greenwald/Matt Taibbi. Plus ça change.

Indeed, as I type, US President has just started his first annual message, traditionally in a Roman-style Capitol building to a Congress including a Roman-named Senate. Some traditions have deep roots, as both proponents and opponents point out at the moment.

Media reports suggest there will be a further push for the USD2.3 trillion American Jobs Plan, which will be partially spent on physical infrastructure, and involve higher taxation; and on the USD1.8 trillion American Families Plan, which will be spent on more European-style social care, and again involve higher taxation. The appeal will be to the American people – and to one Democratic Senator in particular, Joe Manchin, who is again making press statements showing his unhappiness with what is being floated so far.

There will no doubt be mention of foreign policy, with reports the White House is intent on removing all sanctions on Iran, including over terrorism and its ballistic missile program, in order to re-enter the 2015 JCPOA nuclear deal. In effect, the US will accede to every Iranian demand. The ripple effects of this are already being seen in the region. Alongside tit-for-tat attacks on shipping and ports, there are rumours Riyadh is talking to Tehran, and that Saudi Aramco may sell a 1% stake to China, giving Beijing a foothold in what was always considered a critical US interest. It’s unclear if this US U-turn will mean lower energy prices due to new Iranian supply, or higher, due to greater geopolitical instability as the regional power-balance shifts. Markets will also be listening carefully to what President Biden has to say about India and vaccine help (as Prime Minister Modi calls President Putin “my friend” on Twitter and thanks him for his cooperation on multiple fronts); and about Russia; and about China, of course.

Meanwhile, thinking of the classical architecture of Washington DC —and without making any partisan political statement— while brushing up on my Nero, I was surprised to see how much history can echo down to the present:  

• Nero negotiated peace with the Parthian Empire (today’s Iran); crushed a major revolt in Britain, led by the Iceni Queen Boudica (what will the US say about Scottish independence prospects?); got deeply involved in the Bosporan Kingdom (today’s Crimea); and also ended up at war with a rebellious Kingdom of Israel that didn’t see eye-to-eye with the Empire;
• Nero focused much of his attention on diplomacy and trade, as well as theatres and athletic games;
• Nero also introduced what his critics dubbed as extravagant, empire-wide programs of public and private works, funded by a rise in taxes that was much resented by the Roman upper classes who paid them – yet this economic populism sold well among the Roman lower classes until his death, and even beyond. Which might explain why the story was then spread that he fiddled while Rome burned: perhaps it was all just “Fake News”?

Of course, inflation isn’t fake news, and supply chains aren’t fake news, and geopolitics aren’t fake news. They are just uncomfortable truths that we can temporarily choose to ignore. Thinking of the Fed more than the White House, historians will also point out that well after Nero’s populism, Emperor Diocletian was forced to introduce his ‘Edict on Maximum Prices’ to try to order inflation caused by constant monetary debasement to disappear. That policy certainly went up in flames.

Of related interest, yesterday saw China slash import tariffs on steel and impose export tariffs of up to 25%, effectively making it very expensive to sell steel abroad and even cheaper to bring it in. Is this about capping soaring local prices? Probably partly, yes. Is it about lowering carbon emissions? Maybe, if it is also about reducing local steel output, which has been often promised and never delivered. Is this about China trying to import more and export less to rebalance global trade? Hardly, if you have paid attention to their stated policy goals. Yet what could it mean for the rest of the world if China stopped exporting steel and started buying it the way it has been doing agri-commodities? How much global Building Back Better is going to be affordable then?

Maybe it’s time for Bread and Circuses instead…

As India reports growing numbers of COVID-19 deaths every day, the US and other nations are sending critical supplies while cutting off travel links. But Washington has just taken its first steps toward an evacuation as it warns all Americans still in India that it’s time to get out of Dodge.

Bloomberg reports that the US has – via the State Department and local consulates – warned any Americans in the country to start making arrangements to leave as soon as possible, while also advising anybody with travel plans “not to travel to India or to leave as soon as it is safe to do so.”

There are still 14 direct daily flights between India and the US, and others that connect through Europe, according to the State Department

#India: Access to medical care is severely limited due to COVID-19 cases. U.S. citizens wishing to depart should use available commercial options now. Daily direct flights to the US and flights via Paris and Frankfurt are available. https://t.co/p5a3v5ws9y pic.twitter.com/LqHhCiZVEg

— Travel – State Dept (@TravelGov) April 28, 2021

It’s particularly urgent for Americans to leave since shortages of beds and oxygen at Indian hospitals have led to sick Americans being turned away, according to the State Department. “US citizens are reporting being denied admittance to hospitals in some cities due to a lack of space,” the website of the U.S. Embassy and Consulates in India warned in a health alert. “US citizens who wish to depart India should take advantage of available commercial transportation options now.” All routine US citizen services and visa services at the US Consulate General Chennai have been canceled.

But before they can return to the US, anybody traveling from abroad – whether they’re citizens, or not – must have a COVID-19 test done between three and five days before travel. Those who ahven’t been vaccinated should also stay at home and self-quarantine for a week, the embassy urged. Which is why individuals should start working on plans to leave now.

The latest numbers out of India continued to set new records for most cases reported in a single day anywhere in the world. Indian authorities confirmed 379,257 cases over the past 24 hours, while another 3,645 infected patients died, pushing India’s death toll further past 200K to 204,800.

Source: Johns Hopkins

As President Biden dithers about whether to support a WTO motion from India and South Africa asking for a waiver for vaccine IP so developing nations can start producing their own jabs instead of relying upon (and enriching) American pharma giants, corporations like Amazon have been chipping in with aid, with the Bezos-controlled tech giant airlifting 100 ICU ventilators. Private Equity giant Blackstone has reportedly committed $5 million to India relief.

Meanwhile, the scenes at hospitals, crematoriums and neighbors around the country have been described as “like a mass killing” by one activist fighting India’s devastating second wave. According to NBC News, creamtoriums have had to forgo the rituals that Hindus believe release the soul from the body during the cycle of rebirth. And it’s not just crematoriums, Muslim burial yards in New Delhi are running out of space.