Tag: news

It has been a while since Creditex ran a CDS settlement auction of any note for two reasons: CDS no longer is a credible or legitimate method to hedge against default risk (see Greece, Banco Espirito Santo), thus making the stated purpose of CDS irrelevant, and when the default carries with it systematic risk ISDA will simply screw over CDS-holders and change terms whenever it sees fit following a few politically-connected phone calls, at which point good luck collecting on your “insurance.” Which is why the just concluded Argentina CDS settlement auction following its bankruptcy last month, was a welcome reminder of what markets looked like in the BC (Before Central-planning) era.

The headline results were as expected: with the restructured bonds trading modestly over 40 cents, the final price on the CDS settlement was 39.5, with most dealers submitted markets between 38 on the bid side and 42 on the ask.

 

What was more interesting is who the biggest buyers and sellers were.

First the buyers: according to Markit, there were a total of $113 million buy physical requests, offset by $17 million in sell request, leaving a total limit order book of $96 million. Curiously, of this the vast majority was Barclays, which had just under $100 million in bond bids it needed filled. As a reminder, since the dealers intermediate end clients, it is impossible to determine if it was Barclays (i.e., its prop desk) itself that needed the collateral, or its clients. In any event, Barclays wanted it some Argentina bonds…

… and it got them courtesy entirely of JPMorgan. As the table below shows, in the reverse dutch auction, the limit orderbook was filled entirely by JPM which sold 1.9 million at 39.25 and 96.03 million at the clearing price of 39.50.  In other words the entire auction was basically Barclays buying whatever bonds JPM had to sell as a result of residual non-offsetting CDS exposure.

Finally, and as always happens at these reverse dutch auctions, there is always someone who is hoping the counterparties are either idiots, or super squeezed, and will buy bonds at any price. That someone this time was Citi, which would have been delighted to sell 80 million in bonds at a price of 55, with 50 million at 99 cents! Of course, had anyone filled that offer, Citi would have made an automatic 50+ cents per bond with no risk.

Sadly for Citi, there were i) no idiots and ii) no supersqueezed countparties in this auction, which is why JPM, with its far more realistic clearing offer of 39.50 walked away with the cash, and Barclays got all of its bonds. Better luck next time Citi.

via Zero Hedge http://ift.tt/1oDX0SG Tyler Durden

In Citi’s Steven Englander’s latest note, he notes that every major FX trade in place right now is a carry trade in one form or another, differing only in their scope and in the risk they entail. This has 5 significant implications…

 

Via Citi,

This note argues that every major FX trade in place right now is a carry trade in one form or another, differing only in their scope and in the risk they entail.  Consider the following trades that encompass the vast majority of FX trades in place:

1)      In Asia, long CNH, short USD

 

2)      In G3, long USD, short EUR and JPY

 

3)      In G10 long AUD and NZD, short G3

 

4)      Globally, long EM, short G3

In the short term, we think 2) remains the most robust because acutely disappointing economic outcomes will likely induce ECB and BoJ action.  If anything, FX moves are lagging moves in vol-adjusted carry.  Fear of more aggressive Fed tightening is the likely driver of higher volatility but this would push spreads further in favor of the USD, offsetting some of the impact of higher volatility. Hence, these carry trades are not as vulnerable as 3) or 4) to Fed-induced volatility. However, we saw earlier this year that long USD against EUR and JPY is sensitive to generalized position unwinds, at least temporarily.
 
On a 2-4 month horizon 3) and 4) are the  most vulnerable because we expect investors to become much less certain that the Fed pricing pace will be as shallow as the market now expects (link), and they would be hit doubly by any backing up of volatility.  We look to payrolls and FOMC this week and next as potential triggers for an unwind of these trades, but we think there will be more sensitivity once QE is ended and the unemployment rate falls below 6% — most likely in early November.
 
 
Five implications:

a.       Yield advantage is the driver in all these trades, and the yield advantage is often at multi-year highs when adjusted for volatility

 

b.      All these trades have enormous sensitivity to a run-up in asset market volatility (except possibly 1)

 

c.       Long high-beta EM and long AUD, NZD in G3 trades suffer the most on a vol spike

 

d.      EM currencies have further to fall against USD than EUR and JPY to rise against USD in the event of a vol spike

 

e.      The trades are all highly dependent on policymaker intentions – 1) depends on Chinese policymaker tolerance of CNH appreciation and positioning, 2) on explicit easing measures by the ECB and BoJ, 3) and 4) exist only if the Fed normalization path is extremely shallow.

The Trades in detail…

1) Long CNH, short USD

The baby carry trade is in  Asia, where  the perceived low-risk, low-return carry trade is long CNH,  short USD. During my recent Asia visit this was by far the most prevalent trade held by investors and seems to be the default trade for those uncomfortable with EM or G3.
 
Figure 1 shows the 3-mth CNY  less USD rate differential, divided by USDCNH 3-mth implied vol.  This ratio exceeds 1 and is hard to resist when vol-adjusted rate differentials in G10 are typically far less than 0.5.  Moreover, Asian investors feel that Chinese policymakers remain committed to providing stimulus and will not shock investors by pushing the CNY fix in the opposite directions.

2) Long USD, short EUR and JPY

The G3 version of the carry trade is long USD, short EUR or JPY. In Figure 2 we see the US minus japan, 10year yield differential adjusted for USDJPY implied volatility. Note the spike in vol-adjusted carry earlier this year. Even with a pullback from the peak, the current vol-adjusted yield differential is the highest since 2007. The last time the vol adjusted yield differential was this wide, USDJPY was trading in a 110-115 range so there is still some room for JPY weakness, and even more if US yields begin to back up while Japanese yields stay in place.

Embedded in the recent JPY weakness is some expectation that the BoJ will ease policy. With JGB yields almost at all-time lows and JPY under pressure, it looks as if investors are more focused on the BoJ than cancellation of the second sales tax hike. The current level of Citi’s Economic Surprise Index for Japan is at a lower level than at the worst in 2008-2009 (Figure 3).

The ESI is mean reverting almost by construction (it would take an accelerating death spiral in an economy to make the ESI non-stationary). That does not mean that every move is equivalent. The ESI could increase because economic performance outstrips expectations, which presumably would be a JPY positive. It could also increase because expectations dropped sufficiently to match continuing dismal performance. That downward revision to expectations would probably be JPY negative.
 
On the EUR side, vol-adjusted rate differentials are at their highest in 15 years. Moreover, based on the relationships of the last few years, the current vol-adjusted yield spread looks consistent with EURUSD at parity (Figure 4).  Moreover, even the convergence trade has disappeared – only Italy, Greece, Portugal and Slovenia 10-yr sovereign yields are higher than in the US, and for Italy only by a couple of basis points.
 
Bottom line is that there is a mini-carry trade within G3 that is driving USD against EUR and JPY.  It is policy dependent because further policy moves are probably 40-50% priced into JPY and EUR yields, but the trade remains attractive because the EUR and BoJ are increasingly likely to ease further and the risk on the Fed is that it surprises on the aggressive side.

3) and 4) Long high-beta carry, short G3

CitiFX’ s positioning indicator (Figure 5) provides a good summary of the state of positioning play: i) long USD, but primarily versus G10; ii) long EM;  iii) long commodity currencies (green); iv) long APAC and High Yield (purple); v) short G5 ex US.

Figure 6 gives an indication of why investors are so enthusiastic about EM and high yielders in general. Vol-adjusted spreads for Brazil and South Africa are close to the post-2007 highs. Vol-adjusted spreads for NZD are at similar highs, but at far lower levels, comparable to USD vs. EUR. By contrast vol-adjusted spreads for Australia versus the US are at the low end of recent experience, so there may be some sensitivity if Australian data weaken.

*  *  *
Isn’t everything the same trade now?

via Zero Hedge http://ift.tt/1oDX0Ck Tyler Durden

With Samsung stealing the limelight today, and Apple’s stock taking a tumble; the decision was made to roll-out the all-new iPhone6 line-of-desperate-consumers, six days (and nights) before product launch…

 

 

Source: @dcbandor

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It is slow season in the media and things have significantly calmed down on the financial markets as well. It is so quiet you could hear a pin drop, which is tremendously frustrating, because a market without direction is the last thing an investor wants. Investors are being lulled to sleep and in practice that usually leads to unpleasant surprises once tension returns to the markets. We are, moreover, in a sort of transition phase for the large group of retail investors who are getting sick and tired of the fear of a market correction; year after year they waited for a correction worthy of mention which should have followed in the aftermath of 2008. Even more, the most important market indices are at their highest levels… ever!

Investors are suffering from ‘crash fatigue’. They no longer fear a new market correction, because ‘it is not going to happen anyway’. Although their timing and attitude might be questionable – the current bull market has been going strong for more than 5 years – they are happily participating in the stock market. The fact that investors would pick this moment for a large scale change in sentiment is worrisome in our opinion, however. You know as well as we do that everyone is positive at the top of the bull market and, although we would not say that every investor is all-in at the moment, we are getting dangerously close to a consensus.

That is also the opinion of former Fed Chairman, Alan Greenspan. This man is responsible for the expansive monetary policy of the ‘90s, which was at the base of the hefty market correction around the turn of the century. Greenspan knows what he is talking about. In a recent interview with Bloomberg he pointed out that the surge in the stock market will inevitably lead to a strong correction, even more so because the equity risk premium (versus bonds) is not attractive enough. He did going into specifics about the possible timing of this correction, however.

More and more of the world’s top (hedge) fund managers are joining in. It will probably not be a surprise to you that the most critical investors, like Marc Faber, have been underlining this for a while already. It is much more interesting, however, to look at investors who felt positive until recently, among which is Jeffrey Gundlach. The ‘Bond King’ has clearly changed his mind about the markets and he is also one of the best market timers in the financial world. Gundlach has become increasingly cautious about stocks in particular and he feels that the stock market is generously valued in this economic climate. He foresees profits declining in the near future, which does not bode well for share prices. Gundlach also noticed that the masses are increasingly invested in the stock market; never before have investors taken on so much debt in order to buy stocks on the NYSE.

Source chart: Dshort.com

This is also an indicator that seems to have hit its ceiling. When ‘margin debt’ declines, you can expect a strong correction; another great point from Gundlach. However, talking the talk does not equate to walking the walk. That is something we do not see yet in his case. Especially not with regards to stocks. He is taking up a position indirectly by doubling down on a further increase in bond prices, however, which is obviously the area where the Bond King feels best.

A reknowned investor that did take action recently is George Soros. As a speculator, Soros became (in)famous for betting against the British Pound. The fall of the currency turned him into a billionaire and gave him premier status as a speculator. Over the last few years, George Soros was mostly enjoying the rise of the stock market and dabbled a little bit into commodities or commodity related segments (such as gold mining stocks). In his latest fund report it became clear, however, that Soros is increasingly protecting his capital from a future market correction (through put options on the S&P 500). He increased his short position on the S&P 500 index from 299 million USD to 2.2 billion USD, which is an increase of more than 600%. The size of the position within Soros’ total fund was raised from 2.96% to almost 17%! Of course, we have to add that the rest of the billionaire’s portfolio remains strongly invested in stocks. The purpose of this position is to hedge his current positions against a potential (and temporary) bad stretch on the market.

George Soros does have remarkable timing. Do not forget that the S&P 500 recently crossed the 2,000 points level, which was also our 2014 target for the index since the end of last year. From our point of view, there are 2 possible scenarios now. Either the rally pushes on and transforms into a true melt-up as a result of mass buying (from short covering) or the rally dies down and turns into a a swift correction. The former breakout level between 1,500 to 1,600 points would be the next station if that happens. If you read our prognosis for the year you already know the answer: we are cautiously sticking to our favorites and are watching over our comfortable cash position.

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Last Thursday, as bond yields were cratering and the price on the TYZ4 soaring soaring, we made an explicit cautious observation in “A Bearish Sign For Treasurys?” that the latest incarnation of the immortal muppet-slayer, Tom Stolper, manifesting himself this time as Bank of America’s technician MacNeill Curry, decided to go from bearish on the 10 Year as he has been on and off since the start of the year, to bullish.

Specifically, we said that “with the 10Y yield  plunging, BofA’s chief technician, which as is widely known is another words for “momentum chaser” who has over the past year been branded as the new coming of the legendary Tom Stolper thanks to the inverse-accuracy of his calls, has changed his tune, to wit: “the trend in yield is lower.” If there was something that could make us nervous about being long TSYs, this is it.”

And almost as if on demand, the 10 Year proceeded to tumble like a downhill rolling bag of bricks in the hours, not days, following this all too obvious top-tick.

 

But even more amusing, moments ago the same MacNeill Curry has flip flopped yet again and in a note, has just announced that BofA has been stopped out of its “long”

Stopped out of TYZ4 short as US 10yr yields break n/term support. However, more needs to be seen before turning bearish

 

US 10yr Treasury yields rose sharply overnight, breaking key support at 2.448%/124.30+ (Aug-21 bearish extremes) and stopping us out of our long in the process. However, it is too early to say that the medium term downtrend (begun at the Jan-02 high at 3.049%) has run its course. For this to be the case, bears need to see a sustained break of the pivotal 2.5m trendline at 2.476%. Until then the medium term downtrend remains intact

Translation: the coast is again clear to get back long the 10 Year. More importantly, once BofA turns “bearish’ on TYZ4, that will be the time to double down, go all-in and even take a few margin loans out in the process.

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