Gold: $1064.70 down $12.20 (comex closing time)
Silver $13.66 down 20 cents
In the access market 5:15 pm
Gold $1060.00
Silver: $13.66
At the gold comex today, we had an extremely poor delivery day, registering 65 notices for 6500 ounces.Silver saw 82 notice for 410,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 196.86 tonnes for a loss of 106 tonnes over that period.
In silver, the open interest rose by a considerable 3,762 contracts even though silver was down in price by a considerable 23 cents with respect to Friday’s trading. We have an extremely low price of silver and a very high OI coupled with backwardation in silver at the LBMA. (negative SIFO rates). The total silver OI now rests at 168,187 contracts In ounces, the OI is still represented by .841 billion oz or 120% of annual global silver production (ex Russia ex China).
In silver we had 82 notices served upon for 410,000 oz.
In gold, the total comex gold OI rose by a considerable 1619 contracts as the OI rose to 396,354 contracts as gold was up $3.90 in price with respect to Friday’s trading.
We had no changes in gold inventory at the GLD, / thus the inventory rests tonight at 634.63 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. Our 670 tonnes of rock bottom inventory in GLD gold has been broken. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold, after they deplete the GLD will be the FRBNY and the comex. In silver, we had no changes,in silver inventory at the SLV/Inventory rests at 323.509 million oz
First, here is an outline of what will be discussed tonight:
1. Today, we had the open interest in silver rise by 3762 contracts up to 168,187 despite the fact that silver was down in price to the tune of 23 cents with respect to Friday’s trading. The total OI for gold rose by 1619 contracts to 396,354 contracts as gold was up $3.90 in price with respect to Friday’s trading.
(report Harvey)
2 a) Gold trading overnight, Goldcore
(Mark OByrne)
3. ASIAN AFFAIRS
ii)
(courtesy zero hedge)
i) Iranian militiamen stage an anti Turkey protest in Baghdad as Iraq lodges a futile security council complaint:( zero hedge)
ii) It is inevitable that the accident is going to happen between Russia and Turkey(courtesy zero hedge)
iii) Sunday:
( zero hedge)
iv) Turkish lawmaker reports that ISIS received Sarin gas through Turkey and they are assembling these weapons of mass destruction now.
(Sputnik news/Guillland)
what a mess in Sweden with the huge number of asylum seekers into the country:
( Ingrid Carlqvist/Gatestone Institute)
i) Early this morning: for some strange reason, commodity currencies early this morning caught a bid:( zero hedge)
ii)
( zero hedge)
iii) Swiss oil traders caught exporting ISIS oil!!! sure sounds like Glencore:( Sputnik news)
iv)Sure looks like the city of Dubai is in a lot of trouble:
( zero hedge)
v) South Africa’s high cost mines are being saved by the low rand value
i) David Stockman discusses the big decision to be forthcoming on Dec 16.2015. He basically states that the Fed will have trouble raising rates as they must drain a massive 800 billion dollars of treasuries and the location of these treasuries are in the form of collateral which will cause a complete and utter devastation in the financial field
( David Stockman/ContraCorner)
ii) The mouthpiece for the Fed is stating that the Fed is extremely worried that rates will end up right back to zero if they raise it a bit on on Wednesday. It shows that the Fed really does not know what it is doing:
iii) We have been reporting on the huge rise in yields of our junk bonds i.e. the so called triple hooks, the CCC rated bonds. The last night these bond yields were at 17.24% was exactly identical to the week of the Lehman failures!!
iv) And now we have another high yield fund, Lucidus Capital Fund which went into liquidation and thus mortally wounded:
v) Then bang, down went high yield bond prices (higher yields)
“The real question is going to be how many hedge funds go bankrupt,” Jeffrey Gundlach, the Los Angeles-based money manager overseeing $80 bln worth of assets, said. “There’s never one cockroach. There’s never just one portfolio that’s mismarked.”
(courtesy Sputnik news)
vi) James Quinn has it correct:
vii) Late this afternoon Fitch forecasts a default rate of 4.5% on high yield junk. This equates to losses of 66 billion usa.
Let us head over to the comex:
The total gold comex open interest rose to 396,354 for a gain of 1619 contracts despite as gold was up $3.90 in price with respect to Friday’s trading. For the past two years, we have strangely witnessed two interesting developments with respect to the gold open interest: 1) total gold comex collapse in OI as we enter an active delivery month, and 2) a continual drop in the amount of gold standing in an active month. Today, the boys did it again as OI for the front month fell and the above two scenarios continued in earnest. We are now in the big December contract which saw it’s OI fall by 78 contracts from 1911 down to 1833. We had 1 notice filed on Friday, so we lost 77 contracts or an additional 7700 oz of gold that will not stand for delivery in this active delivery month of December. The next contract month of January saw it’s OI fall by 8 contracts down to 647. The next big active delivery month is February and here the OI rose by 344 contracts up to 283,570. The estimated volume today (which is just comex sales during regular business hours of 8:20 until 1:30 pm est) was 130,900 which is poor. The confirmed volume yesterday (which includes the volume during regular business hours + access market sales the previous day was also poor at 160,475 contracts.
December contract month:
INITIAL standings for DECEMBER
Dec 14/2015
| Gold |
Ounces
|
| Withdrawals from Dealers Inventory in oz | nil |
| Withdrawals from Customer Inventory in oz nil | nil |
| Deposits to the Dealer Inventory in oz | nil |
| Deposits to the Customer Inventory, in oz | nil |
| No of oz served (contracts) today | 65 contracts
6500 oz |
| No of oz to be served (notices) | 1768 contracts
(176,800 oz) |
| Total monthly oz gold served (contracts) so far this month | 310 contracts(31,000 oz) |
| Total accumulative withdrawals of gold from the Dealers inventory this month | nil |
| Total accumulative withdrawal of gold from the Customer inventory this month | 156,898.5 oz |
Total customer deposits nil oz
DECEMBER INITIAL standings/
Dec 14/2015:
| Silver |
Ounces
|
| Withdrawals from Dealers Inventory | nil |
| Withdrawals from Customer Inventory | 960,748.290 oz
(CNT,JPM), |
| Deposits to the Dealer Inventory | nil |
| Deposits to the Customer Inventory | 309,352.86 oz
Scotia |
| No of oz served today (contracts) | 82 contracts
410,000 oz |
| No of oz to be served (notices) | 300 contracts
(1,500,000 oz) |
| Total monthly oz silver served (contracts) | 3598 contracts (17,990,000 oz) |
| Total accumulative withdrawal of silver from the Dealers inventory this month | nil oz |
| Total accumulative withdrawal of silver from the Customer inventory this month | 4,421,210.5 oz |
Today, we had 0 deposit into the dealer account:
total dealer deposit; nil oz
we had no dealer withdrawals:
total dealer withdrawals: nil
we had 1 customer deposit:
i) Into Scotia: 309,352.86 oz
total customer deposits:309,352.86 oz
total withdrawals from customer account: 960,748.29 oz
we had 1 adjustments:
Out of CNT:
we had 354,209.390 oz leave the customer account and this landed into the dealer account of CNT
And now the Gold inventory at the GLD:
Dec 14.no change in gold inventory at the GLD/Inventory rests at 634.63 tonnes
DEC 11/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 10.2015/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
DEC 9/no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 8/ no change in gold inventory at the GLD/inventory rests at 634.63 tonnes
Dec 7/another huge withdrawal of 4.23 tonnes of gold/inventory rests at 634.63 tonnes
Dec 4/no change in gold inventory at the GLD/Inventory rests this weekend at 638.80
Dec 3/ a massive withdrawal of 16.oo tonnes of gold heading straight to Shanghai/tonnage rests tonight at 638.80 tonnes
Dec 2.2015: no change in gold inventory at the GLD/inventory rests at 654.80 tonnes
Nov 30/no change in silver inventory at the SLV/Inventory rests at 318.209 million oz
And now your overnight trading in gold and also physical stories that may interest you:
Fed, ECB “Monetary Insanity” Is “Frightening” – GoldCore on Keiser Report – GoldCore on Keiser Report
Max Keiser interviewed GoldCore Research Director, Mark O’Byrne last week and the video was released on Saturday.
Key points and topics covered:
– “Monetary insanity” of ECB and Fed is “frightening”
– “Absolutely nothing has been learned” since financial crisis
– “Financial hypocrisy on a grand scale”
– Ireland was vassal of Bank of England and now ECB
– Ireland needs to get “financial and monetary independence”
– Huge demand for gold and yet prices manipulated lower
– Real unemployment is U.S. probably 15-20%
– Dollar may rally in short term but vulnerable in long term
– Russia, China may monetise gold as geopolitical weapon
– Gold and silver are “hedges for you in local currency terms”
You can watch video here
DAILY PRICES
Today’s Gold Prices: USD 1068.00, EUR 973.96 and GBP 703.67 per ounce.
Friday’s Gold Prices: USD 1067.20, EUR 973.86 and GBP 704.93 per ounce.
(LBMA AM)
Gold in EUR – 10 Years
Gold gained $6.50 on Friday to close at $1078.20, a loss of 0.65% for the week. Silver was down by $0.16 to close at $13.95 a loss of 4.12% for the week. Platinum lost $11 to $841.
end
Austria repatriates 15 tonnes of gold from the Bank of England:
(courtesy GATA)
Austria says it has repatriated 15 tonnes of gold from London
Dec 11 Austria has repatriated 15 tonnes of its gold reserves as part of a plan to hold half its stock of the precious metal within the country’s borders, the Austrian National Bank (OeNB) said on Friday.
The OeNB, which administers Austria’s 280 tonnes of gold reserves, said in May that by 2020 50 percent of the reserves would be kept in Austria, 30 percent in London and 20 percent in Switzerland. Most of its stock is now in Britain.
“By the end of November, the Austrian National Bank brought 15 tonnes of its gold back into its own vaults,” the OeNB said in a statement. A spokesman for the central bank said it had begun repatriating the gold from London in October.
After the repatriation, Austria held roughly 65 tonnes of gold, or about 23 percent of its reserves, on its territory, the spokesman said. Around three quarters, 209 tonnes, were in London, he said, and six tonnes were in Switzerland.
“London and Zurich remain the most significant trading centres for physical gold,” the OeNB said in its statement, a point it has made before in explaining why it kept such a large share of its reserves abroad.
In the decades after World War Two, security concerns also played a part because international trading centres were the best place to make use of the gold if needed in the case of an international crisis, the OeNB said in its statement.
“Geopolitical considerations in the time of the Cold War also played a role,” said the central bank in Vienna, which was only an hour’s drive away from the Iron Curtain that divided Europe for four decades. (Reporting by Francois Murphy; Editing by Tom Heneghan)
END
and they proudly display the tonnes received:
(courtesy zero hedge)
Austria Proudly Shows Off The 15 Tons Of Gold It Repatriated From London
On May 28, the Austrian Central Bank surprised the world when it announced that it too would follow in the footsteps of Germany and the Netherlands, and repatriate half of its sovereign physical gold, currently held almost entirely at the Bank of England, to Austria while transferring a modest portion in Switzerland by the year 2020.
Back then, the central bank headed by Ewald Nowotny said it took the decision after recommendations made by the Austrian Court of Audit in February, which warned of a“heightened concentration risk” linked to storing the majority of its reserves in Britain. At the time, the bank had argued the policy was warranted because London was a major international centre for the gold trade.”
This was the official statement the Austrian National Bank (OeNB) released in May:
In May 2015, the gold reserves held by the OeNB amounted to 280 tons, having remained unchanged since 2007. Austria’s gold reserves are fully owned by the OeNB, which maintains and manages them with utmost care. In line with the OeNB’s current gold storage policy, 17 % of its gold holdings are at present kept in Austria, 80 % in the United Kingdom and 3 % in Switzerland.
Recently, the Governing Board of the OeNB adopted the 2020 gold storage policy following a regular in-house gold strategy and storage policy review, while also considering the recommendations made by the Austrian Court of Audit. The cornerstones of this policy are as follows:
- By the year 2020, 50% of Austria’s gold reserves are to be held in Austria (OeNB and Münze Österreich AG), 30% in London and 20% in Switzerland.
- Starting from mid-2015, the new storage policy will be gradually implemented in keeping with security and logistical requirements.
- A comprehensive review and, if need be, adaptation of the storage policy is scheduled for 2019.
- The OeNB will regularly report on the progress in its upcoming annual reports.
What the central bank did not say, is that by repatriating its gold from the UK, it was implicitly confirming that trust is now very publicly fraying at the highest levels of the international monetary system, with first Germany, then the Netherlands, then Austria, and most recently China, all demonstrating they are moving and/or building up their domestic gold reserves, and withdrawing their gold held at either the NY Fed or the Bank of England, something hardly surprising for those who have read our article explaining What Happens When You Hand Over Your Gold To The Bank Of England For “Safekeeping”.
Which is also why yesterday, with great fanfare, Austria proudly announced to the world that it has moved 15 tonnes of gold from London of its gold reserves as part of its aforementioned repatriation plan.
“By the end of November, the Austrian National Bank brought 15 tonnes of its gold back into its own vaults,” the OeNB said in a statement. A spokesman for the central bank said it had begun repatriating the gold from London in October.
According to Reuters, after the repatriation, Austria held roughly 65 tonnes of gold, or about 23 percent of its reserves, on its territory, the spokesman said. Around three quarters, 209 tonnes, were in London, he said, and six tonnes were in Switzerland.
“London and Zurich remain the most significant trading centres for physical gold,” the OeNB said in its statement, a point it has made before in explaining why it kept such a large share of its reserves abroad.
In the decades after World War Two, security concerns also played a part because international trading centres were the best place to make use of the gold if needed in the case of an international crisis, the OeNB said in its statement.
“Geopolitical considerations in the time of the Cold War also played a role,” said the central bank in Vienna, which was only an hour’s drive away from the Iron Curtain that divided Europe for four decades.
It would appear that despite conditions between the west and Russia deteriorating to levels not seen since the depths of the cold war, Austira is more confident it can withstand the renewed Russian “threat” by storing its gold in house, rather than “trusting” Goldman’s Mark Carney, currently performing his GS alumnus duties as the head of the Bank of England, with possession of its gold.
How times have changed.
* * *
But perhaps what was most surprising about the repatriation is that in order to “prove” the gold is indeed back, the Austrian central bank also released a 3 minute clip showing not only where the Austrian gold is located now:
… but where it is headed:
… how it is measured:
… how it is tested using ultrasound:
… while validating its Rand Refinery serial numbers (read more about the refinery that has processed one third of all gold ever mined here):
… and finally holding a gold welcoming celebration party for media and journalists in its vault room:
The full clip is below.
We congratulate the Austrians on have such access and transparency to their own gold: sadly,for some unknown reason, when it comes to the US gold held at Fort Knox, the secrecy over the past several decades has prevented any member of the media or public to observe the thousands of tons which the US allegedly holds in storage. On behalf of the general population.
We wonder: why do Austrians celebrate the arrival of their gold and televize it for the entire world to see, while the world’s allegedly biggest gold inventory remains a national secret, even, or rather especially, from those to whom it supposedly belongs – the citizens of USA?
Austrian celebrates gold repatriation but really isn’t coming clean
Submitted by cpowell on Sun, 2015-12-13 01:13. Section: Daily Dispatches
8:15p Saturday, December 12, 2015
Dear Friend of GATA and Gold:
Reporting today that Austria’s central bank has produced an explanatory video celebrating its repatriation last week of 15 more tonnes of gold from the Bank of England —
http://www.gata.org/node/16023
— Zero Hedge contrasts this openness with the secrecy the United States continues to weave around its gold reserves:
http://www.zerohedge.com/news/2015-12-12/austria-proudly-shows-15-tons-g…
But don’t cheer the Oesterreichische Nationalbank too much. For at the London Bullion Market Association conference in Vienna in October, the bank’s executive director, Peter Mooslechner, volunteered to a uncurious reporter that the bank is aware of surreptitious interventions in the gold market by other central banks and then shut himself up in his office, or wasshut up there by his superiors, when another financial journalist sought elaboration:
http://www.gata.org/node/15897
Zero Hedge writes that in repatriating more of its gold Austria “was implicitly confirming that trust is now very publicly fraying at the highest levels of the international monetary system.” But that’s not how Austria’s central bank puts it.
No, like other central banks, Austria’s believes that matters determining the valuation of all capital, labor, goods, services, and currencies in the world are really none of the world’s business.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
CPowell@GATA.org
end
(courtesy Koos Jansen)
China’s Gold Army
Submitted by Koos Jansen via BullionStar.com,
Withdrawals from the vaults of the Shanghai Gold Exchange, which equal Chinese wholesale gold demand, in week 46 accounted for 49 tonnes. Year to date withdrawals have reached 2,362 tonnes.
As part of the wide analysis of the Chinese domestic gold market I would like to share that since the seventies there is a special army in China dedicated to gold. It’s called The Gold Armed Police – if you can read Chinese have a look at this Wikipedia page.
It’s no coincidence this army came into existence in 1979, eight year after the US left the gold standard and when China started opening up under the guidance of Deng Xiaoping. As, this was the moment the Chinese slowly started to reform their economy and made the first preparations in their gold market. They knew, among others, the global dollar standard wouldn’t last forever.
On 29 October 1976 representatives of the Chinese central bank and the Federal Reserve (US, Arthur Burns) met in China and discussed international economics. From Wikileaks:
IN INTERNATIONAL ECONOMICS, THE DISCUSSION CONSISTED MAINLY OF QUESTIONS BY THE CHINESE AND ANSWERS BY DR. BURNS, ALTHOUGH THE CHINESE VIEW THAT INFLATION IS A SYMPTOM OF ECONOMIC WEAKNESS CAME THROUGH CLEARLY. THE CHINESE ASKED ABOUT DR. BURNS’ VIEWS OF THE IMF CONFERENCE AND WERE PARTICULARLY INTERESTED IN THE IMF GOLD AUCTIONS, AND THE ISSUANCE OF SDR’S.THE CHINESE ASKED ABOUT THE PROBLEM OF CONTROLLING THE $200 BILLION IN EURODOLLARS, AND GAVE THE IMPRESSION THAT THEY CONSIDERED THE EURODOLLAR MARKET A THREAT TO EXCHANGE RATE STABILITY, WHICH BY IMPLICATION THEY SEEMED TO FAVOR. THEY ALSO ASKED ABOUT COMPARATIVE GROWTH RATES AMONG THE OECD COUNTRIES. AGAIN, THE CHINESE BANKERS WERE WELL INFORMED AND HAD THEIR QUESTIONS WELL PREPARED.
In the quote from Wikileaks we can clearly read the Chinese were interested in gold. However, the Chinese economy was completely centrally planned at the time and they were not a member of the World Trade Organization or the giant exporter of goods they are now. Therefor, I suspect China had little resources to acquire gold – in the seventies China’s foreign exchange reserves were very small – while they urgently needed to increase their reserves.
Initially the Gold Armed Police was established to develop China’s domestic mining industry. China’s domestic mining output grew by an incredible 2,964 % from 1976 until 2014, according to data from the China Gold Association, and this was partially due to gold exploration by theGold Armed Police.
Remember that before 2002 the PBOC had the monopoly on all gold trade in China. Mining output (and potential import) was transferred to the PBOC that set the domestic gold price and distributed the gold to a limited amount of designated jewelry shops or kept the metal for its official reserves. The Gold Armed Police and the PBOC must be closely associated.
Next to exploration the Gold Armed Police was also assigned to guard the mines and to do other tasks. And here is where it becomes interesting. Gold market insider James Rickards has written in The Death Of Money (2014):
A senior manager of G4S, one of the world’s leading secure logistics firms, recently revealed to a gold industry executive that he had personally transported gold into China by land through central Asian mountain passes at the head of a column of People’s Liberation Army tanks and armored transport vehicles. This gold was in the form of the 400- ounce “good delivery” bars favored by central banks rather than the smaller one- kilo bars imported through regular channels and favored by retail investors.
Although Rickards notes the convoy was lead by the People’s Liberation Army I think it’s very likely the Gold Armed Police was involved in this transport that contained monetary gold directed to PBOC vaults. We can speculate the Gold Armed Police is active in distributing the PBOC’s monetary gold into the mainland.
The Gold Armed Police in April 2011, about 100 soldiers from the 7th detachment in Xinjiang.
The other day I spoke to a gold market insider, that likes to remain anonymous, who told me “some central banks send their own airplanes to London to pick up monetary gold” when we were discussing purchases from China’s central bank in the UK. I’m quite sure the PBOC has bought a substantial amount of gold in London in recent years and I suspect the Gold Armed Police is distributing the monetary metal.
So how does the PBOC buy gold in London? Through which proxy do they do they purchase the metal? Well, that’s hard to say. But, if I may freely speculate the Bank Of China is part of this. If we read the Chinese Wikipedia page about the Foreign Exchange Reserves of the People’s Republic of China (not the English page) it states:
?????????????????????????????????????????????????
The FX reserves of the Chinese mainland are State-owned assets and managed by SAFE and the PBOC, the actual business operations are carried out by the Bank of China.
SAFE (State Administration Of Foreign Exchange) is the largest Chinese sovereign wealth fund that manages the PBOC’s foreign exchange reserves.
The Bank Of China is a commercial state-owned bank and LBMA member that can be one of the proxies for the PBOC’s monetary gold purchases around the globe. So, possibly the Bank Of China buys gold in the London OTC market, which is then transported by the Gold Armed Police to PBOC vaults in Beijing.
Below is an article I found on The China Times about the Gold Armed Police:
Source The China Times, Global Edition
China has a military unit dedicated to gold exploration, this unit is the only one of its kind in the world.
The gold exploration unit was established in the beginning of China’s reform and opening up, when the country urgently needed to increase its gold reserves. The unit has found more than 1800 tons of gold so far, helping China become the world’s largest gold-producing country.
China’s annual gold production was merely 4 tons when PRC was founded. After the gold exploration unit of the Chinese People’s Liberation Army was established in 1979, 12 detachments were sent to all over China. The picture shows soldiers from the 7th detachment of the gold exploration unit singing songs on their way in March 2006.
Gold reserves are usually located in remote and inaccessible areas. The picture shows soldiers from the 8th detachment of the gold exploration unit fighting sandstorm in Lop Nur in August 2002.
In 1995, China’s gold production for the first time exceeded one hundred tons, taking the 8th place in the world. More than half of the gold reserves were found by the gold exploration unit. Eight years later, China’s annual gold production exceeded 200 tons. The picture shows a soldiers from the 8th detachment of the gold exploration unit carrying out explosion works in August 2002.
July 2000, soldiers from the 8th detachment panning alluvial gold in Xinjiang. In 30 years, the gold exploration unit has found many large-scale gold deposits, in total found more than 1800 tons of proven gold reserves.
Lop Nur, August 2002, soldiers from the 8th detachment cooking meals in tent, two days later, the tent was swept away by flood.
Lop Nur, August 2002, soldiers from the 8th detachment having lunch together.
April 2011, about 100 soldiers from the 7th detachment carrying out geology and resources survey tasks in Xinjiang.
May 2011, soldiers from the 6th detachment taking a break after long-hours hard work in Qilian Mountain, Qinghai.
Natural gold nugget found by the gold exploration unit in 1983, it contains 1114 grams of pure gold.
1 Chinese yuan vs USA dollar/yuan falls in value , this time to 6.470/ Shanghai bourse: in the green (only after last hr rescue), hang sang: red
2 Nikkei closed down 347.06 down 1.80%
3. Europe stocks all in the red /USA dollar index up to 97.69/Euro up to 1.0986
3b Japan 10 year bond yield: falls to .310% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 121.43
3c Nikkei now just above 18,000
3d USA/Yen rate now well above the important 120 barrier this morning
3e WTI: 34.67 and Brent: 36.73
3f Gold down /Yen up
3g Japan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to .56% German bunds in negative yields from 5 years out
Greece sees its 2 year rate rise to 8.89%/: still expect continual bank runs on Greek banks
3j Greek 10 year bond yield falls to : 8.46% (yield curve inverted)
3k Gold at $1067.80/silver $13.66 (7:45 am est)
3l USA vs Russian rouble; (Russian rouble down 80/100 in roubles/dollar) 71.17
3m oil into the 34 dollar handle for WTI and 36 handle for Brent/ China purchases huge supplies from Saudi Arabia
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning 0.9805 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0772 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England on criminal charges/arrests 10 traders for Euribor manipulation
3r the 5 year German bund now in negative territory with the 10 year falls to + .560%/German 5 year rate negative%!!!
3s The ELA lowers to 82.4 billion euros,
The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Next step for Greece will be the recapitalization of the banks and that will be difficult.
4. USA 10 year treasury bond at 2.15% early this morning. Thirty year rate at 3% at 2.89% /
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Resume Slide After Oil Tumbles Below $35, Natgas At 13 Year Low; EM, Junk Bond Turmoil Accelerates
With the Fed’s “imminent rate hike” announcement just three days away, the tremors not only continue but are getting bigger and more threatening with every passing day.
Overnight, despite the Chinese stock market posting a modest rebound, the Yuan continued to devalue in a less than stealthy fashion, with the offshore yuan falling another 0.24% to 6.5478 per dollar, weakest since March 2011 – the sixth consecutive day currency has declined, longest stretch since April. Meanwhile, the onshore yuan fell 0.06% to 6.4591 per dollar after dropping as much as 0.17% in morning versus the PBOC fixing of 6.4495, also down 0.21%, and the lowest since July 2011 in the aftermath of the PBOC telegraphing it would devalue its currency not just relative to the USD but to a basket of currencies. (Harvey: later the yuan crosses to 6.47 yuan/dollar)
It was not just China: once again the strong dollar panic is touching all the EMs as the rate hike tantrum strikes again, only this time on a very accelerated schedule, case in point:
- KAZAKH TENGE DECLINES 3.55% TO 324.4/USD
- INDONESIA 10-YEAR BOND YIELD SURGES 33 BPS, MOST SINCE JAN 2014
But wait there’s more: moments ago WTI dropped below $35 to the lowest price since Febriary 2009...
… while nat gas dropped to a fresh 13 year low, continuing the carnage of commodities traders everywhere for whom the BTFD moment never comes.
And then, completing the trifecta, moments ago we got news of yet another fund, third in the past three days liquidating, this time Lucidus Capital Partners, a high-yield credit fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, which Bloomberg reports has liquidated its entire portfolio and plans to return the $900 million to investors. As we expected, they are now dropping flies.
* * *
So with just 72 hours to go until Yellen decides to soak up to $800 billion in liquidity, suddenly we have China and the Emerging Market fracturing, commodities plunging, and junk bonds everywhere desperate to avoid being the next to liquidate.
The immediate result of all thse latest developments is that US equity futures, which were up as much as 0.6%, slid and are now red, while the Europe-leading DAX wiped out all gains.
- S&P 500 futures unchanged
- Stoxx 600 up 0.3% to 357
- MSCI Asia Pacific down 1.3% to 128
- US 10-yr yield up 5bps to 2.18%
- Dollar Index up 0.3% to 97.86
- WTI Crude futures down 0.9% to $35.29
- Brent Futures down 1.4% to $37.40
- Gold spot down 0.7% to $1,068
- Silver spot down 0.7% to $13.83
A closer look at markets, shows a week kicking off in Europe and paring some of the sharp moves seen on Friday, with European equities residing modestly in the green (Euro Stoxx: +0.3%). Of note the notable outperformers in Europe have been Investec (+9.4%) and Old Mutual (+7.8%), with both companies benefiting from the newly instated South African finance minister given their exposure to the company and the recent political uncertainty . In terms of the session’s laggard, energy names continue to underperform today amid softness in energy prices, with WTI trading below $35 for the first time since February 2009.
Fixed income markets have moved lower in tandem with the risk on sentiment seen in equities as Bunds spent the morning firmly in the red, while of note, EON IA forwards are pricing in further easing by the ECB in 2016, while today’s excess liquidity printed above EUR 600bIn for the first time for almost 3 years.
“There was a bit too much of a sell-off last week, so the recovery makes sense,” said Otto Waser, chief investment officer at R&A Research & Asset Management AG in Zurich. “The strong rally in October and November wasn’t sustained in December and the magnitude of the selloff was bigger than people thought. How could the Fed surprise? It’s been the most spoken about increase in all financial markets.”
Sorry Otto, this sell-off is far from over.
European Top News:
- RBS CEO Sees Investment Bank Profit 4 Years Away Amid Cuts: CEO aims to resolve most misconduct issues by year-end 2016
- Trafigura Profit Rises to $1.1 Billion on Record Oil Trading: Trader impairs assets by $407 million on distressed markets
- Shell Takeover of BG Cleared by Chinese Antitrust Authority: Paves way for shareholder vote; completion expected next year
- Le Pen’s National Front Shut Out as Hollande Surprises in French Vote: Socialists, traditional right united to block National Front
- Vivendi Won’t Vote on Telecom Italia Share Conversion Plan: To abstain from voting on plan to convert Telecom Italia’s savings shares into ordinary shares
- Shire Offer For Baxalta Up to $55/Shr Makes Sense: Barclays
Asian equity markets traded lower following last week’s 10% declines in crude prices, with sentiment also remaining cautious ahead of the FOMC meeting on Wednesday. As a result, the energy sector weighed on both the ASX 200 (-2.0%) and Nikkei 225 (-1.8%), while the BoJ Tankan survey for Q4 also failed to inspire after Large Manufacturing Index and Capex beat expectations, but outlook figures suggested expectations for deterioration ahead with Large Manufacturing Outlook at an 11 quarter low. Chinese bourses traded mixed with the Hang Seng (-1.5%) index weighed on by losses in Casino, while the Shanghai Comp. (+0.6%) outperformed following encouraging industrial production and retail sales figures which posted 5-month and YTD highs respectively. 10yr JGBs traded higher as demand for the paper is stoked by sharp losses in Asia-Pac bourses, while the BoJ also entered the market to purchase JPY 780b1n in government bonds.
Asian Top News:
- China’s New Yuan Index: Here’s What the Market Needs to Know: Central bank seen setting stage for further depreciation
- Hong Kong Property Foreclosures Seen Doubling in 2016 on Economy: Pace has risen to 80 a mo. from 50-60 in 1H
Rally Hits Wall of Skepticism Among Funds in Tokyo, Seoul: Currency is down ~12% in 2015 as commodities prices fall - Abe’s Growth Target ‘Pie in the Sky,’ Japanese Union Leader Says: Rengo says govt’s hopes for wage gains are unrealistic
- BOJ Said to Consider One-Year Extension of Loan-Support Programs: Would be third extension since Kuroda became governor
- India’s Two-Speed Economy Seen in Debt Upgrades at Smaller Firms: Crisil has 3.2 times more mid-cap upgrades than downgrades
- Alibaba to Buy South China Morning Post for $266 Million: Founder Jack Ma to follow Bezos in buying storied masthead
Commodities have kicked off the week in much the same fashion as last week ended, with prices remaining under pressure, weighed on by a stronger USD . After a 10% fall in prices last week, WTI and Brent futures reside in negative territory heading into the North American crossover, with WTI Jan’16 futures in close proximity to Friday’s low of USD 35.16, while nat gas futures fell to fresh 2002 lows on mild weather in the US. Separately, precious metals have also been weighed on by the stronger USD, with spot gold lower by over USD 6 heading into the North American crossover.
In FX, the strength in USD has dictated play in FX markets, with the greenback gaining against major counterparts EUR and GBP overnight . While separately, on the back of the aforementioned finance minister move, the ZAR has pared back some of Friday’s losses. Commodity currencies have benefitted across the board with the likes of CAD, NZD and AUD all benefitting against the USD after last week’s losses.
Top Global News
- Investors See More Carnage Amid Third Avenue Contagion Risk: Minerd says 15% of high-yield funds may face high withdrawals
- Third Avenue Said to Part Ways With CEO David Barse: WSJ
- Third Point’s Loeb Said to Seek Removal of Dow Chemical CEO: Activist investor said to question timing of DuPont merger
- Micron Technology Agrees to Buy Rest of Inotera for $3.2b: Offer is worth NT$30 a share for 67 percent not owned already
- AstraZeneca Explores Deal With Acerta to Gain Cancer Drug: Deal would give Astra potential blockbuster drug for blood cancers
- Oil Sinks to Lowest in Almost 7 Years as Iran Vows More Supply: Speculators raise bearish bets on WTI to all-time high
- U.S. Natural Gas Falls to Lowest Intraday Level Since 2002
- The Five Key Decisions Made in the UN Climate Deal in Paris: Envoys set goal to cap temperature rise below 2 degrees C
- BTG Avoids Fire Sale as $1.5 Billion Credit Lifeline Buys Time: struggling firm said to reject offer for Banco Pan
- Cheniere Replaces CEO Souki Who Icahn Says Had Divergent Vision: Co-founder cut stake by 1/3, leaves LNG co. after 19 yrs
- Pep Boys Accepts Higher Bridgestone Offer After Icahn Counterbid: Accepted $15.50/shr bid
BUlletin Headline Summary from RanSquawk and Bloomberg
- The strength in USD has dictated play in FX markets, with the greenback gaining against major counterparts EUR and GBP overnight
- The week has kicked off in Europe in a paring of some of the sharp moves seen on Friday, with European equities residing firmly in the green
- On a light day in terms of economic releases, focus may fall on scheduled comments from BoE’s Shafik and ECB’s Draghi and Costa
- Treasuries decline overnight after Friday rally that pushed yields across the curve to multi-month lows amid rout in high yield, commodities; all eyes on Fed, with statement set for 2pm on Wednesday.
- Lucidus Capital Partners, a high-yield credit fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, has liquidated its entire portfolio and plans to return the $900m it has under management to investors next month, the company said Monday
- With the Fed set to push the lift-off button in two days, financial markets may have already overshot in betting on a split in U.S. and euro-area monetary policies even as the ECB extends stimulus, according to Deutsche Bank and UBS
- Oil extended declines, with WTI falling below $35/bbl for the first time since 2009, as Iran pledged to boost crude exports, bolstering speculation OPEC members will exacerbate the global oversupply
- It’s hard to know which would be worse for U.S. equity investors right now: a contraction in valuations, or if stocks were left to rely on earnings growth to push them higher. Both are likely outcomes of this week’s Fed meeting
- Donald Trump has tapped into a cohort of Americans who have experienced the uglier side of a grinding, decades-long economic transformation; middle-class households are the minority for the first time since at least 1971 while inequality has soared to a 45-year peak
- South Africa’s government was left trying to shore up credibility after President Jacob Zuma’s debacle over who should run the finance ministry called into question his ability to oversee the economy
- In the second round of France’s regional elections, voters from the left and the traditional right ganged up to deliver a series of defeats nationwide to the National Front
- $32.2b IG priced last week, $225m HY. BofAML Corporate Master Index OAS +4bp to +171, YTD range 180/129. High Yield Master II OAS +39bp to new YTD wide +710, YTD low 438
- Sovereign 10Y bond yields higher. Asian stocks mixed, with Japan lower, China higher. European stocks and U.S. equity- index futures decline. Crude oil, copper, gold higher
US Event Calendar
- Economic Data
11:00am: U.S. to announce plans for auction of 4W bills - 11:30am: U.S. to sell $28b 3M bills, $26b 6M bills
DB’ Jim Reid completes the weekend wrap
There are so many balls in the air at the moment, especially for this late stage and normally sleepy part of the year. This week we’ll likely have the first US rate hike for 9 years, we’ve had a weekend where the China data showed signs of stabilisation and we start the week with a lot of debris to get through in the US credit market after the story we discussed on Friday about the mutual fund halting withdrawals at a HY credit fund. Since then we’ve also seen news of a credit hedge fund suspending redemptions in a $400m fund over the weekend adding to the gloom.
So straight to the US HY news. For sentiment this is clearly bad news with Friday a bruising day (see below). This story has echoes of the sub-prime fund suspensions that hit Bear Stearns and BNP in June and August 2007 respectively. We should note though that it took over a year for the Lehman default to come through (September 2008) and for the US economy to enter recession. We would also say that the cash high yield market is a different beast to the complicated and highly levered structured credit products that destroyed markets and helped contribute to the GFC.
Nevertheless similar timings to the Bear Stearns/BNP story would fit in with our long-term view that 2017 could likely be the next big problem year for financial markets and the global economy. This view is further fleshed out in our 2016 Outlook this morning which is called ‘Late Cycle… But How Late?’
Clearly the risks are that the credit market drags us there sooner. Indeed in the note we go through different variables showing that the US looks late cycle from a macro and micro basis. However many of these suggest we’re late cycle rather than at the end and what keeps us optimistic on Europe is that it looks well behind the US credit cycle for now and with fairly attractive valuations. We expect EUR non-fin IG to provide total and excess returns of 1.6% & 2.3% respectively in ‘16. The equivalent numbers for GBP IG are 2.1% & 3.7% and for EUR HY 5.5% & 5.8%. EUR HY defaults will edge up to 3%. These forecasts look optimistic but in spread terms only take us back to August/September 2015 levels. It seems highly unlikely we’ll get there without periods of wider spreads though. In addition given that credit market liquidity is likely to cause huge problems when the credit and economic cycle both end we would have sympathy for those prepared to forgo a positive 2016 in order to reduce positions that are going to be more difficult to unwind quickly ahead of more difficult times. So dilemmas when you’re at late cycle in an illiquid asset class.
The big issue for global financial markets is whether this US high yield stress is enough to turn the economy. At the moment in the US (and other parts of the world) we see a rare divergence between manufacturing and the service economy. The former being dragged down by China/EM and commodity woes and with a much higher influence (constituents wise) on the US HY market than the US economy, equity markets and European credit markets. If the service sector can withstand the turmoil in US credit then this shockwave can be contained.
One area to watch carefully for this remains China. Over the weekend we finally had some better news following the release of the November economic activity indicators. Retail sales rose two-tenths last month to an above market +11.2% yoy (vs. +11.1% expected), setting a ten-month high in the process. Industrial production was up a robust six-tenths to +6.2% yoy (vs. +5.7% expected) and while fixed asset investment was unchanged at +10.2% yoy, it still came in a bit above expectations of +10.1%. DB’s Zhiwei Zhang noted that these indicators suggest positive momentum ahead, highlighting in particular that planned investment for new projects and total funds available for FAI were both up strongly last month. This pickup is consistent with Zhiwei’s expectation that GDP growth will rebound to 7.2% in Q4. Beyond this Zhiwei still expects growth to slow next year and is forecasting GDP growth of 7.0% for 2015 and 6.7% in 2016. He still expects a small positive fiscal impulse in 2016 and continued loosening of monetary policy with four RRR cuts (one per quarter) in 2016 and two interest rate cuts (Q3 and Q4 2016).
Also generally plenty of buzz was the news out of the PBoC on Friday of the publishing of a new trade weighted exchange rate index for the Renminbi. The statement released said that the intention of this is to ‘shift how the public and the market observe the RMB exchange rate movements’ and that in their view ‘the bilateral RMB/USD exchange rate is not considered a good indicator of the international parity of tradable goods’. The statement goes on to say that it would be more appropriate to measure the performance of the RMB against both the US Dollar and also the basket of trade weighted currencies. The report attached below from our China Economists highlight some key questions emerging from this latest move. They expect the new basket of currencies to be a more explicit reference in setting the value of the RMB in the future and believe that this move implies that, if the US Dollar appreciates against some other currencies, the PBoC will likely tolerate some depreciation of the RMB against the US Dollar as long as its value against the basket of currencies remains stable. Most importantly, they see this as a signal that China does not intend to engage in competitive devaluation. That is, the RMB is actually likely to appreciate against the other EM currencies if the US Dollar strengthens globally. There will be some with more negative views on this though, viewing it as paving the way for a devaluation as soon as they feel able to justify it. At least now the market is being better prepared for the scenario than it was in August.
The negative tone from Friday has carried over into most of Asia this morning where equity markets are largely trading in the red. The Nikkei has fallen -1.91%, while the Hang Seng (-1.01%), Kospi (-1.01%) and ASX (-1.54%) are also lower. Credit markets have followed up with material moves wider too. Itraxx indices for Asia and Australia are +8bps and +6bps wider respectively. Bucking the trend however are markets in China, seemingly buoyed by the weekend data. The Shanghai Comp is +0.54% while the CSI 300 is up a similar amount as we go to print. Meanwhile, the PBoC set the onshore Yuan 0.21% weaker this morning, the sixth consecutive day of weakening. The fix was moved to the lowest mid-rate valuation since July 2011 having weakened for the fifth consecutive week last week.
Datawise this morning the only release of note has been out of Japan where the Q4 Tankan Survey is out. The data was reasonably marginal, with no change to the indices for large manufacturers (+12), large non-manufacturers (+25) and small manufacturers (0). The only improvement in fact came for small non-manufacturers (+5 from +3) although all came in slightly ahead of expectations. In contrast the outlook surveys for all indices were a little more disappointing than expected, declining broadly from the Q3 survey.
It shows how much is going on that it’s taken us 1,300 words to get to the main event of the week – the highly likely Fed rate hike on Wednesday. This time last year we were convinced that the Fed wouldn’t raise rates in 2015. We’ll it looks like we’ll be proved 15 days wrong. However with all that’s going on in the world and with global nominal growth so low, it’s hard for us to imagine they’ll get very far in their hiking cycle. We suspect that the terminal funds rate will be lower than the market expects and certainly lower than the Fed expect. Assuming they do hike and that the US HY story doesn’t escalate quickly and stop them in their tracks the main story will be how dovish they make the hike. It’s hard to think they’ll be hawkish given the current global uncertainty and the carnage in the $1.3tr US HY market.
Back to Friday and recapping those sharp moves in risk assets that we mentioned earlier. The end result for US credit was a huge widening for CDX IG by +8.5bps. CDX HY finished down nearly 2pts which was the second weakest day this year. US HY energy spreads finished +56bps wider at 1240bps and a fresh record wide. That was the largest single day move wider in spread terms this year by a decent margin (next nearest being +45bps in August). Meanwhile, two of the largest and most closely followed US HY ETF’s closed at their lowest levels since 2009.
While still under plenty of pressure on Friday, the moves were less severe in European credit with Main and Crossover finishing +4.5bps and +23bps wider respectively. The moves in credit largely overshadowed the falls for most major equity bourses on Friday. The S&P 500 capped off a tough week by closing down -1.94%. The index finished -3.79% for the week, marking only the second down week since September. It was however the second-worst weekly return this year. Prior to this in Europe the Stoxx 600 (-2.04%) closed down for the eighth time in the last nine days.
The US HY moves are clearly weighing on sentiment but it’s the compounding effect on this from more steep losses for Oil which is hard to ignore. Friday saw WTI close at its lowest level since February 18th 2009 after tumbling -3.10% to close below $36. The moves in Brent were even more extreme, closing down -4.53% and a shade below $38 which is the lowest close now since December 24th 2008. Both have weakened around 1% further this morning. It wasn’t much better for Natural Gas on Friday which closed below $2 and at one stage traded down below those 2012 lows.
The risk off tone meant we saw a decent safe-haven bid for Treasuries on Friday, with yields plummeting south in a hurry. The benchmark 10y finished down -10.3bps at 2.128%, the lowest level since the end of October. 2y yields finished nearly -7bps lower at 0.877%. On a more positive note, the US dataflow was relatively constructive on Friday. Despite headline retail sales for November rising less than expected (+0.2% mom vs. +0.3% expected), there were beats for all of the core readings. The ex-auto (+0.4% mom vs. +0.3% expected), ex-auto & gas (+0.5% mom vs. +0.4% expected) and control group component (+0.6% mom vs. +0.4% expected) all coming in above market. Headline PPI last month was also up a better than expected +0.3% mom (vs. 0.0% expected), while the core print was in-line at +0.1% mom. Business inventories were a touch softer than expected however at 0.0% mom for October (vs. +0.1% expected).
ASIAN AFFAIRS
(courtesy zero hedge)
China’s Currency Continues To Tumble As AsiaPac Credit Markets Plunge, EM Stocks Lowest Since 2009
Following weakness in the middle-east and as WTI prices slide back into the red (on the heels of record speculative shorts in crude oil), Asia-Pac stocks are opening to the downside (but only modestly). On the bright side, the ZAR pocalypse has been delayed briefly as the Rand is rallying on the back of Zuma hiring a new finance minister. On the dark side, offshore Yuan continues to plummet, down 6 of the last 7 days (down 14 handles!) and the Yuan fixed weaker for the 6th day in a ro wto July 2011 lows. and signaling more turmoil ahead of The Fed’s decision. AsiaPac credit markets are gapping notably wider, EM stocks down 9th day in a row to 2009 lows, and EM FX is plunging.
AsiaPac credit markets are gapping wider… Worst day in over 2 months..
- *JAPAN ITRAXX INDEX CLIMBS 5.25BPS TO 79BPS
- *AUSTRALIA ITRAXX INDEX RISES 7.9BPS TO 135BPS
- *ASIA ITRAXX INDEX RISES 6.5BPS TO 149.5BPS
Offshore Yuan was extending recent weakness into the Fix…
Earlier we asked…
And the answer is… yes
for the 6th day in a row – and in growing size – PBOC fixed the Yuan weaker to its weakest since July 2011
The Middle-East closed weak…
As Oil faded…
After Speculative crude shorts hit a new record high…
Japanese bond futures price just hit a record high…
And Nikkei plunged as China came to life…
The ZARpocalypse has been delayed a little, after South Africa’s president Zuma reappointed Pravin Gordan as finance minister, replacing David van Rooyen who was appointed 5 days ago only to unleash a record collapse in the Rand. It remains to be seen if the market will stabilize after an initial kneejerk spike higher in the ZAR.
As Zuma hired a new “cooperative” finance minister.. which rallied the South African Rand briefly… but even that is fading fast now…
Other currencies are turmoiling…
- *RUPIAH FALLS 0.9% VS USD, SET FOR BIGGEST DROP SINCE OCT. 29
MSCI AsiaPac (MXAPEXA) is drifting lower…
- *INDIA’S NIFTY FUTURES DROP 0.8% IN SINGAPORE
- *FTSE CHINA A50 DECEMBER FUTURES DECLINE 1.7% IN SINGAPORE
- *TAIWAN’S TAIEX INDEX FALLS 0.7% to 8,058.67 AT OPEN
- *SINGAPORE’S STRAITS TIMES INDEX FALLS 0.5% TO 2,819.78 AT OPEN
- *S.KOREA KOSPI INDEX FALLS 1.5%; SAMSUNG ELECTRONICS DROPS 2%
And EM is getting hammered…
- *MSCI EMERGING MARKETS INDEX FALLS FOR 9TH DAY
- *MSCI EMERGING MARKETS INDEX HEADS FOR LOWEST CLOSE SINCE 2009
Metals are all lower…
- *COPPER OPENS 0.5% LOWER AT $4,680.00 A TON IN LONDON
- *NICKEL OPENS 0.2% LOWER AT $8,680.00 A TON IN LONDON
- *ZINC OPENS 0.2% LOWER AT $1,549.00 A TON IN LONDON
There is some good news… China’s Warren Buffett is back from the dead…
- *FOSUN CHAIRMAN GUO SAID TO ATTEND INTERNAL CONFERENCE
- *FOSUN’S 6.875% 2020 BONDS JUMP 4.8 CENTS TO 96.8 CENTS ON DLR
But…
- *FOSUN INTL FALLS 13.5% AFTER CHAIRMAN GUO ASSISTED PROBE
And that is not helping Chinese stocks… at 2-week lows…
Charts: Bloomberg
For now US equity futures are flat.
Market Panics As “China’s Warren Buffett” Detained In “Richter Scale 9 Event”
As several CSRC officials have learned over the past four months, being a “connected guy” vis-a-vis the Politburo does not necessarily mean you are immune when Xi and the Party decide it’s time to make an example of a few “chickens” in order to scare some “monkeys.”
China’s sweeping crackdown on sellers, “manipulators”, frontrunners, financial journalists and anyone else “suspected” of acting in such a way as to sow fear and uncertainty in the wake of the dramatic meltdown in Chinese equities that unfolded over the summer has ensnared money managers, high profile executives, and government officials alike. Earlier this week, it reached a crescendo with the disappearance of Guo Guangchang, known to some as “China’s Warren Buffett.”
As we reported on Thursday, the Fosun chief was “unreachable” according to the company which said only that it was “handling the situation.”
For anyone familiar with Beijing’s “kill the chicken to scare the monkey” campaign, it was easy to venture a guess as to what might have happened. While it seemed obvious that Guo had been “disappeared” by the Party, it wasn’t as yet clear what he was ultimately suspected of doing “wrong.” “Whether Beijing is questioning Guo about his habit of eschewing investments in China in favor of deploying capital overseas or whether Fosun did something ‘wrong’ in the markets during the selloff is hard to know,” we said.
We now have a bit more in the way of color regarding Guo’s detention and sure enough, he’s being “held in connection with an investigation.” In a statement, Fosun did not divulge Guo’s whereabouts, saying only that he’s helping with “certain investigations carried out by the mainland judicial authorities” and that he is still able to oversee “major matters” pertaining to his businesses.
As FT notes, “rumours of Mr Guo’s disappearance began to circulate in China on Thursday when influential financial publication Caixin cited unconfirmed reports that police had detained him when he arrived in Shanghai on a flight from Hong Kong.” Subsequently, business partners have only been able to establish “minimal contact” – his family has not been able to reach him.
As usual, there’s no word on whether Guo is in fact the subject of the investigation. If you’ve followed the witch hunt – which we recently learned is being run by Fu Zhenghua, a former Beijing police chief responsible for orchestrating an infamous prostitution bust, a campaign against “popular bloggers whose sometimes anti-establishment comments drew the ire of party leaders,” and a decree prohibiting police officers from drinking alcohol outside of their homes – China likes to keep the explanations as vague as possible presumably for the chilling effect the ambiguity has on the rest of the market.
Guo, who earlier this year called himself an “apprentice” of everyone’s favorite octogenarian from Omaha, is worth nearly $8 billion, a fact which may have landed him in Xi’s crosshairs. “As China’s economy slows after three decades of furious expansion, conspicuous wealth has become suspect,” WSJ says, adding that “uncertainty about his situation has added to a chill in finance circles.”
As for the wider implications of Guo’s arrest, consider the following from FT:
His disappearance will fuel anxieties in the private sector that the anti-corruption crackdown launched by President Xi Jinping three years ago is being extended to high-profile entrepreneurs and the prime beneficiaries of China’s decades of rapid growth. It initially focused on ensnaring senior members of the government and military and financiers and is now broadening to prominent businesspeople in Shanghai.
Significantly, FT also suggests that “[Guo’s] case threatens to accelerate the pace of capital flight out of China as the country’s wealthy elite scramble to shift their assets offshore and out of reach of the Chinese authorities.”
“This is Richter scale 9 for the private sector in China,” one observer who tracks China’s wealthiest people said.
Guo is also well connected in the Politburo. Here’s The Journal:
In August, the tycoon was named during the sentencing for corruption of a former senior Communist Party member in Shanghai who had run a government-owned dairy company. Mr. Guo had granted the man favors for unspecified benefits, according to China’s official Xinhua News Agency, which said that Mr. Guo wasn’t accused of wrongdoing. Fosun issued a statement at the time, saying Mr. Guo supported China’s anticorruption push.
Like many other entrepreneurs in China, Mr. Guo has also remained close to Chinese leaders with positions on numerous official bodies, while some of Fosun’s businesses have overlapped with government priorities.
He has served as a deputy to China’s legislature, the National People’s Congress, as well as represented Shanghai on a high-level government advisory body called the Chinese People’s Political Consultative Conference.
“In March 2012, he met Mr Xi as he was poised to take over as the country’s top leader, and urged him to enact a series of economic reforms, including greater court protection for insurance companies, increased lending by non-bank financial institutions and greater scope for private equity businesses to operate,” FT adds.
As we mentioned on Thursday, Fosun spent more than $6 billion buying stakes in 18 overseas companies between February and July. Here’s a snapshot:
And here’s an org chart:
Due to the fact that Guo has so much influence over the company, his absence (especially if he ends up being detained for a prolonged period) could well have a serious impact, something which WSJ notes was “illustrated in trading Friday when [a] trading halt for its primary business triggered selling in related stocks and bonds.”
In other words, it’s possible that this entire effort becomes self-defeating for Xi. If the widening probe ends up triggering trading halts and harrowing declines in the assets connected to the targets of the crackdown, then Beijing is simply fostering the type of instability it claims to be stamping out.
Furthermore, if the country’s wealthiest people start to get the idea that they too will be targeted and brought up on trumped up charges, then you can bet they will move their money out of the country by any means necessary and no UnionPay POS mointoring scheme is going to stop them. Obvisouly, just about the last thing China needs to be doing right now is creating more excuses for rich Chinese to skirt capital controls just as the CFETS telegraphs a much larger devaluation for the yuan on the horizon.
* * *
Bonus color from Deutsche Bank
Given that the company responded promptly in the past couple of episodes, we think any delay this time could be taken more negatively by the investors. Separately, it seems China has learnt its lessons from the Kaisa episode and hasn’t lifted the corporate veil in such cases, clearly differentiating between the management vs. company operations. In almost every instance since Kaisa, Chairmen/founders have resigned, letting new management run the operations. We need to be mindful that Fosun is one of China’s largest private sector enterprises and the repurcurssions of a Kaisa-like episode could be huge for China Inc.
Fosun 20s are marked around 15 points lower at ~90 (mid, 10% ytm) amidst thin liquidity, at the time of writing. This is a bit more than the roughly 10 point drop we have seen in recent times in the USD bond space in similar situations (Wuzhou being the latest). Our base case and gut feel at this stage is that the company should eventually be fine. Key risks include resignation of Mr. Guo as Chairman and possible breach of bank loan covenants (though we expect this to be waived, if at all), black box nature of company’s operations, etc.
end
EUROPEAN AFFAIRS
Meanwhile over in Germany, things got a little nasty
(courtesy zero hedge)
Tear Gas, Water Cannons Deployed In Germany As Leftists, Neo-Nazis, Police Clash
One thing you might have noticed if you’ve followed the short history of Germany’s migrant “miracle” is that citizens’ celebratory mood (characterized initially by the “sweets, toys, and hugs” Syrian refugees received upon arriving in Germany after completing the increasingly arduous Balkan route) has gradually been replaced by a creeping skepticism towards the asylum seekers and towards the “iron chancellor’s” open-door policy for refugees.
Just two days ago, we highlighted the following graphic from WSJ which we called “the scariest chart for Angela Merkel” (TIME magazine’s recently crowned person of the year):
And here’s a look at the political context:
Even before the Paris attacks and the subsequent bomb scare in Hanover, the tide was already turning in terms of public sentiment.
Put simply, it’s not clear that Germans understood what the numbers meant until they came face to face with the influx.
None of this is to say that there aren’t still large parts of the German electorate that support Merkel’s “yes we can” approach, it’s simply to say that reality is beginning to sink in regarding what it means to take in one million people in the space of just six months when you are a country whose entire population is just 81 million.
Some groups have been against the open-door approach from the very beginning. PEGIDA (which stands for Patriotic Europeans Against the Islamization of the West), for instance has regained much if not all of the momentum the movement lost earlier this year when Lutz Bachmann posted a picture of himself dressed as Hitler on Facebook with the caption “He’s Back” (read more about recent PEGIDA rallies here).
On Saturday, we got the latest example of social and political unrest in Germany when an attempt by leftists to disrupt right wing demonstrations turned violent. AsRT recounts, “about 150 members of different far-right organizations marched through the southern part of Leipzig. They included the neo-Nazi party Die Rechte (the Right), xenophobic organization Offensive für Deutschland (OfD) (Offensive for Germany), and a division of the PEGIDA movement called Thugida.”
Things apparently turned ugly when protestant pastor and youth worker Lothar Konig, 61, showed up with his “loudspeaker van.”
Here’s more from Deutsche Welle:
In 2011, König, had denied similar alleged transgressions when resisting far-right extremists in Dresden.
The clashes on the fringe of a leftist counter-rally were described by Leipzig’s Social Democrat (SPD) mayor Burkhard Jung as “shocking.”
“That is open street terror,” Jung said, adding that “criminals” had discredited important, peaceful protest against neo-Nazis.
On Saturday, the neo-Nazis had intended to march through Leipzig’s alternative lifestyle district of Connewitz. But authorities refused them entry, citing safeguards needed for a pre-Christmas market and concert.
During the violence in Südvorstadt rubbish containers were set ablaze, a bus stop demolished and windows broken.
A police spokeswoman said masked persons in leftist ranks had attacked police “massively” during the rally by “a thousand violently-inclined leftist autonomists.”
In the early hours of Saturday car tires and rubbish containers and the roof of a warehouse had been set on fire.
The Left party said one of its newly set up offices had been attacked by right-wing extremists, resulting in 5,000-euros worth of damage.
So apparently, the neo-Nazis weren’t the root cause of the problem here although we’re reasonably sure that the leftists would argue that any time neo-Nazis stage a march they’re bound to cause trouble due simply to the fact that they identify which a movement that’s had… how should we put this… a rather checkered history in Germany.
In any event, police brought out the tear gas and water cannons as protesters set the streets ablaze:
Elsewhere in Germany, anti-migrant sentiment is becoming readily observable. As Deutsche Welle goes on to report, “asylum seekers arriving at new container-style shelter in Saxony’s town of Jahnsdorf were confronted by 30 people including six persons who threw stones and explosive crackers at their bus,” on Thursday, the same day that the “children of refugee families were attacked by fellow school pupils in the town of Wurzen near Leipzig.”
Because we couldn’t imagine a more accurate way to describe the situation (and indeed we’ve been saying this for months), we’ll simply close by quoting Aydan Özoguz, from the German government’s commission for the integration of foreigners, who says he fears the country is descending into a “xenophobic abyss.”
(courtesy zero hedge)
Thousands Of Militiamen Stage Anti-Turkey Protests In Baghdad As Iraq Lodges Security Council Complaint
“They can resort to the U.N. Security Council, that is their natural right, but this is not an honest step,” Turkish President Tayyip Erdogan said on Friday, referencing Baghdad’s move to appeal to a “higher” authority in an increasingly tense standoff with Ankara stemming from the latter’s decision to send several hundred troops and 25 tanks to Bashiqa (just northeast of Mosul) a week ago.
Turkey contends that the deployment is part of an agreement between the two countries that allows for Turkish soldiers to assist in training Iraqi and Peshmerga fighters as they battle ISIS. Iraq doesn’t seem to remember much about the alleged partnership.
Earlier this week, Turkish PM Ahmet Davutoglu said Ankara has no intention of withdrawing the troops and even went so far as to suggest that Baghdad was being “provocative” by questioning Turkey’s motives.
We of course have suggested that one explanation for Turkey’s deployment is that Erdogan is keen on having an expanded military presence in northern Iraq now that some rather inconvenient questions are being asked about his family’s role in facilitating the flow of illicit ISIS crude from oil fields in Iraq and Syria to Ceyhan.
Additionally, it’s worth noting that the deployment comes as controversial Iraqi lawmaker Hanan Al-Fatlawi accuses John McCain of planning to insert some 100,000 troops in the country to include 10,000 US soldiers and 90,000 from Saudi Arabia, Qatar, UAE, and of course, Turkey. To be sure, 350 is a long way from 90,000, but the point is, Turkey is suddenly determined to have boots (and tank tracks) on the ground near Mosul and it’s not entirely clear why.
Last Sunday, Baghdad demanded that Ankara pull its forces out with Abadi issuing a 48 hour ultimatum. When Turkey refused, Russia raised the issue with the Security Council. Iraq’s UN ambassador Mohamed Ali Alhakim subsequently told reporters that Baghdad and Ankara “are solving it bilaterally.” “We have not yet escalated it to the Security Council or to the United Nations,” he added.
That was on Tuesday. By Friday, a letter emerged which indicates that Alhakim has indeed “escalated” the matter after losing patience with the Turks. “We call on the Security Council to demand that Turkey withdraw its forces immediately … and not to violate Iraqi sovereignty again,” he wrote, in a letter addressed to U.S. Ambassador to the United Nations Samantha Power, president of the Security Council (who you might recall is fond of tweeting out foreign policy).
“This is considered a flagrant violation of the principles of the U.N. Charter, and a violation of Iraqi territorial integrity and sovereignty of the state of Iraq,” the letter continues.
“Iraq worked on containment of this issue by diplomatic means and bilateral talks, but these efforts did not succeed in convincing Turkey to withdraw its occupying forces from Iraqi territory,” Alhakim told Power.
“The Turkish military is helping to train local Iraqi volunteers and Kurdish peshmerga who arepreparing for a long-anticipated offensive to retake Mosul, a major northern city seized by Islamic State more than a year ago,” Reuters says, parroting the official line.
Note that no one is “preparing” to retake Mosul, at least not where “preparing” means an offensive is imminent. Additionally, it’s bizarre that the Western media continues to insist that the Turks are on some kind of legitimate training mission. Baghdad clearly wants them out and therefore, their presence is illegal – by definition. To the media: The fact that Erbil is ok with it doesn’t count, just like it’s technically not ok that the KRG siphons off some 600,000 b/d of Iraqi crude without SOMO’s permission.
“Iraq’s government has ordered the closure of its commercial office in Istanbul, according [and] authorities may take ‘tougher steps,’ including cutting trade links with Turkey,” Bloomberg said on Thursday, adding that “total bilateral trade amounts to about $11 billion a year.”
So it would appear that Ankara is once again set to Plaxico itself economically for the sake of achieving a set of military and geopolitical goals that remain shrouded in relative secrecy (even as Erdogan’s brazen actions are slowly revealing his true nature to the world).
Meanwhile, Iraq’s Shiite militias have taken to the streets of Baghdad to protest Turkey’s occupation and what they believe is an insufficiently forceful response from the Iraqi government. “Thousands of protesters, most of them members of Iraq’s Shiite paramilitary forces, gathered in downtown Baghdad on Saturday demanding the pullout of Turkish troops from the country,” Sputnik reports, citing TV Alsumaria.
“As the leader of a military brigade, I am not fully satisfied with the government’s action, and we are here to say that Iraq’s patience has run out,” said Ali Rubaie, a commander.
“But we are not here to doubt the ability of our commander-in-chief, and as a brigade we are ready,” Rubaie added.
Note that earlier this week, Iran’s militas threatened to target the Turkish troops and drive them out of Iraq. “Crowds of young men in military fatigues chanted against Turkish ‘occupation,’ vowing they would fight the Turkish troops themselves if they do not withdraw,”AP reported on Saturday morning. “The demonstration, called for by the umbrella group of Shiite militias in Iraq whose power rivals that of the Iraqi army, was attended by militia leaders and some Shiite politicians.”
“Turkish interests in Iraq will now be a legitimate target because of Turkey’s assault on Iraqi territories,” Kata’ib Sayyid al-Shuhada, one of the Shia militias of the Popular Mobilisation said in a statement, earlier this week. Similarly, Harakat al-Nujaba called Turkey “a terrorist state.” You’re reminded that these groups have a reputation for fearing no one other that Khamenei himself.
The Security Council was not expected to call an emergency meeting over the weekend.
The takeaway here is that the situation is about to reach a boiling point and the Iraqi regular army has neither the capability nor the will to stop the militias from attacking the Turks. In fact, as we’ve documented extensively (see here for instance), some divisions report to the militias’ chain of command rather than to Baghdad.
It would be interesting to be a fly on the wall when the Security Council does finally take up the issue considering recent calls from Hakim al-Zamili (who, like Hanan Al-Fatlawi, is an influential and controversial Shiite lawmaker) for “direct Russian military intervention” to “solve” the Turkish problem.
Note the similarity to Syria here. If Iran’s Shiite militias were to end up pushing north in Iraq under cover of Russian airstrikes you would have the exact same set up as you have in western Syria: Tehran and Moscow driving north towards Turkey with a large ISIS-held city in between.
end
It is inevitable that the accident is going to happen between Russia and Turkey
(courtesy zero hedge)
Russian Missile Destroyer “Fires Warning Shots” To Avoid Collision With Turkish Vessel
Another day, another military escalation between Russia and Turkey, this time not in the air, but on the water in the northern part of the Aegean sea, where the crew of the Russian “Smetlivy” destroyer was forced to use firearms on Sunday to prevent a collision with a Turkish seiner vessel according to a statement by Russia’s Ministry of Defense.
The full statement from Russia’s Defense Ministry read that “the crew of the Russian patrol ship Smetlivy which was located 22 kilometres from the Greek island of Lemnos in the northern part of the Aegean Sea avoided collision with a Turkish seiner.”
The crew of the Kashin-class guided missile destroyer Smetlivy spotted the Turkish fishing trawler some 1,000 meters from the Russian warship early on Sunday morning, the ministry said. The ship was sailing towards the destroyer and ignored calls for radio contact and other attempts to communicate.
The destoyer’s morning crew spotted an approaching Turkish ship at a distance of approximately one kilometer. The seiner did not get on the air for radio contact with the Russian ship and did not respond to signal lamps or flairs.
Upon the Turkish seiner’s dangerously close approach to “Smetlivy” at a distance of 600 meters, the Russian partol ship fired a shot beyond the hitting range of the fireamrs to avoid collision.
The ministry said the Turkish fishing ship changed course after that and kept about 540 meters from the Smetlivy, but didn’t contact the Russian warship.
“Russian Deputy Defense Minister Anatoly Antonov has summoned the military attaché of the Turkish embassy in Russia in connection with the incident in the Aegean Sea,” the statement said.
Muzaffer Gecici, who is the owner of the Turkish fishing vessel Geciciler Balikcilik, howeverflatly denied the Russian claims saying that his boat and the Russian warship had a distance of at least 1 mile (1.6 km), speaking to the Turkish media.
He also stated that the Russian warship was not on the move and nobody heard any warning shots from the destroyer, adding that his vessel is technologically well-equipped and that he has already given footage from the incident to the Turkish Coast Guard.
Meanwhile, the Russian ministry has released another statement after it summoned Turkey’s military naval attache in Moscow, Rear Admiral Ahmet Gunes, saying that the Russian Deputy Defence Minister Anatoly Antonov had “a conversation” with Gunes. The statement has also claimed that the Turkish vessel, which is a small civilian fisher boat, was able to provoke the Russian military guard ship Smetlivy.
“Just by good fortune, the tragedy had been avoided,” the statement kept claiming.
For now there is no official (or unofficial) closure of the Bosphorus to Russian shipping, however as noted previously, this does remain a key Turkish trump card, one which however Putin would promptly read as an declaration of war by Erdogan, and as a further reminder, the bloody Russo-Turkish was of 1828 was sparked by nothing less than the closure of the Dardanelles Strait to Russian ships.
end
Sunday:
Bourses all head southbound! (Stocks in the middle east trade on Sunday and most do not trade on Friday)
(courtesy zero hedge)
Middle-East Opens Weak: Dubai Stocks Slump To 2-Year Lows As Financials Tumble
Following Friday’s further freefall in crude oil prices, The Middle East is opening down notably. Abu Dhabi, Saudi, and Kuwait are lower; Israel is weak and UAE and Qatar are tumbling, but Dubai is worst for now. Dubai is down for the 6th day in a row (dropping over 3% – the most in a month) extending the opening losses to 2-year lows. The 11% drop in the last 6 days is the largest since the post-China-devaluation global stock collapse. Leading the losses are financial and property firms.
In a replay of August, Middle-East equity markets are tumbling as China allows the Yuan to weaken…
Sending Dubai stocks to 2 year lows and breaking critical support…
Financials and property firms extend and accelerate their recent losses…
Charts: Bloomberg
Read more: http://sputniknews.com/middleeast/20151214/1031703932/daesh-sarin-turkey.html#ixzz3uJX5Ch6D
Components of the deadly nerve agent sarin were shipped to the Islamic State labs through Turkey, a Turkish lawmaker told RT news channel on Monday.
MOSCOW (Sputnik) — Eren Erdem, of the opposition Republican People’s Party (CHP), addressed the parliament last Tuesday saying the government had failed to probe the shipment, and spoke to RT about a possible cover-up.
“Chemical weapon materials are being brought to Turkey and being put together in Syria in camps of ISIS [IS or Daesh in Arabic] which was known as Iraqi al-Qaeda during that time,” Erdem said.
A Turkish criminal case into illegal shipments was unexpectedly closed earlier, despite abundant evidence which included wiretapped phone conversations between Daesh representatives and unnamed Turkish nationals.
Turkish security forces conducted raids and arrested 13 people in the case. All suspects were later cleared of charges, and the shipment took place immediately, Erdem claimed.He said there was evidence that Turkey’s Mechanical and Chemical Industry Corporation, a state-run group of factories that produce chemical weapons for the military, was involved.
Sarin is a lethal gas, classified by the United Nations as a weapon of mass destruction. The Syrian government has been blamed for sarin attacks on civilian population in the past, leading to a UN-brokered deal that saw all precursor chemicals for sarin removed from Syria.
Read more: http://sputniknews.com/middleeast/20151214/1031703932/daesh-sarin-turkey.html#ixzz3uJWU9fXn
Read more: http://sputniknews.com/middleeast/20151214/1031703932/daesh-sarin-turkey.html#ixzz3uJW1cT3T
Sweden Is In Shambles, Police Warn “Evil People Know What To Do When They Come Here”
Submitted by Ingrid Carlqvist via The Gatestone Institute,
- In Sweden, only the people who say they are not applying for asylum are checked.
- To avoid having to show any papers, a terrorist going to Sweden to commit acts of terror only has to tell the border police that he is seeking asylum. He will immediately be driven to the closest Immigration Service facility. And while the Immigration Service tries to figure out who he is, he can plan his attacks in the peace and quiet of the Swedish countryside.
- “The truth is that persons with evil intent know exactly what to do when they come here. That information spreads like wildfire. These new border controls are there for the sole purpose of reassuring the public. They have absolutely no effect on the influx of migrants.” — Border policeman at the Öresund Bridge (between Denmark and Sweden).
- Despite many Swedes drawing a sigh of relief when the government announced that immigration was to be limited, the new policy does not really entail any difference at all.
In spite of the supposedly tighter asylum rules announced November 24, chaos rules in Sweden. So far, in 2015, 150,000 asylum seekers have been registered; but as there is nowhere to house them, people are sleeping in tents, on cardboard boxes in exhibition halls, and even on the street. Many run away from the Immigration Service facilities. More than22,000 people are supposed to be deported but refuse to leave. Swedes are understandably terrified that terrorists might be hiding among the refugees. The police are busy with pointless border controls and cannot attend to their normal work. It is not an exaggeration to say that in this situation, Sweden has lost track of pretty much everything.
 Some homeless migrants now sleep on the street in Sweden. (Image source: Expressen video screenshot) |
Even the asylum seekers are complaining. On a Swedish public television program,Uppdrag Granskning, aired on December 2, Salwa, a mother of young children, told the reporter how she is forced to live in an asylum house along with men she called “bad people.” When the reporter explained to Salwa that 10,000 new asylum seekers arrive every week, and this was why everything was topsy-turvy, she replied: “Then close the borders. Stop taking in more people. If you have ten guests in your house and there is not enough room, would you still take in ten more?”
Sweden’s Social Democrat Prime Minister, Stefan Löfven, said in an interview last April with the daily Sydsvenskan,
“There is no limit [to the number of refugees Sweden can accept]. We will accept refugees according to the conventions that bind us. We have done it before. In the early 1990s, many came from the former Republic of Yugoslavia. Today, they are a natural part of the Swedish society. They contribute a lot.”
So, when Prime Minister Löfven and Vice Prime Minister, Åsa Romson (Green Party) presentedtheir new, tougher immigration policy on November 24, it sent shockwaves through the Swedish establishment. Journalists, who never asked the governing politicians a single critical question about their affinity for open borders, now appeared stunned — despite one authorityafter another, during the last few months, having warned of an imminent systemic collapse.When Romson started crying during the live press conference because, she said, she was “forced” to be a part of the tightening of the world’s most generous immigration policy, everyone believed that these new immigration rules must be for real.
The message conveyed to the Swedish people on November 24 was that the borders were now essentially being shut; that Löfven had discovered there was a limit. The political party most critical of immigration policy, the Sweden Democrats (Sverigedemokraterna), declaredvictory. Its party leader, Jimmie Åkesson, immediately reached out to the Conservatives (Moderaterna) and the Christian Democrats (Kristdemokraterna), offering to bring down the government and form a new one together with them. This invitation was immediately declined. The reply should probably be viewed in the light of all seven parties in Parliament having vowed never to co-operate with the “xenophobic” Sweden Democrats.
It does not matter, therefore, that the other parties have now adopted much of the Sweden Democrats’ policies, or that many Conservatives actually want to take them even further and could easily get them through Parliament by forming a government with the Sweden Democrats.
An outsider may get the impression that every party in Sweden is now competing over who can suggest harsher austerity measures. The Conservatives say they want, among other things, to stop people who are coming from other EU countries from applying for asylum in Sweden. The Conservatives also say they want new measures for deporting those who have had their application rejected. The government is already negotiating with Afghanistan to try to persuade it to take back some of the many Afghans (36,261 in total; 20,947 supposedly “children”) who applied for asylum in Sweden this year.
So far, no journalist in the mainstream media seems to have discovered that the new border controls — implemented because the government evidently decided there is “a serious threat to public order and safety in the country” — have had no discernible effect. The media still give the public the impression that asylum seekers areactually stopped at the border, and that, as the Minister for Justice and Migration, Morgan Johansson, announced, all border crossings will be controlled before Christmas.
As noted last month, however, to avoid having to show any papers, a terrorist going to Sweden to commit acts of terror only has to tell the border police he is seeking asylum. He will immediately be driven to the closest Immigration Service facility. While the Immigration Service tries to figure out who he is, he can plan his attacks in the peace and quiet of the Swedish countryside. And as it takes the Immigration Service 222 days, on average, to establish a plausible identity, he need not be in any hurry.
One person who has grown tired of this whole charade is actually one of the Border Police at the Öresund Bridge (between Denmark and Sweden). He told Gatestone Institute that every day, the new controls cause a number of people — many of whom had planned on passing through Sweden to seek asylum in Finland or Norway — to return to Denmark of their own volition. But, he said, it is rare that someone refuses to show identification or apply for asylum, and thus be turned down.
“The truth is that persons with evil intent know exactly what to do when they come here,” he said.
“That information spreads like wildfire. These new border controls are there for the sole purpose of reassuring the public. They have absolutely no effect on the influx of migrants. The public is given a completely erroneous picture of what we are doing. They do not understand that we spend enormous amounts of time checking Swedish and Danish commuters. If we do not, the press goes crazy and starts screaming about discrimination.
“It seems as if those in power do not want the people who are here illegally to be deported. They give them free health care, free dental care, and schooling for their children. It is mixed messages all the time. I think they need to make up their minds about what they want. These controls mean nothing. They are just a formality to make everything look good and avoid discriminating against anyone. We should put our time and effort where they are needed.”
When asked by Gatestone why the police were allocating enormous resources to border controls that in fact do not amount to anything, the Press Officer at the Swedish National Police Agency (Rikspolisstyrelsen), Stephan Ray, stated that he did not have time to discuss it because he needed to go to the bathroom; then hung up the phone.
An expert on international law, who asked to remain anonymous, told Gatestone that he could no longer understand what the government was thinking by allowing potentially dangerous people into Sweden. Nowhere in any international conventions, he said, does it say that the right of asylum takes precedence over the security of a country’s own population. The most reasonable thing to do, he said, would be to establish fenced-in refugee camps near the borders and not let the asylum seekers out until it was determined that they were not terrorists or war criminals: “According to the Refugee Convention of 1951,” he said, even if people are war criminals and risk facing the death penalty at home, a country has the right to send them back.”
Even so, convicted murderers and war criminals — happily for them — get to stay in Sweden. The rule is that no one risking the death penalty or persecution in their home country will be sent back. This includes even people who have committed capital crimes in Sweden and been sentenced to deportation. It is uncertain that the IKEA-murderer, Abraham Ukbagabir, can be deported to Eritrea after serving his time in prison. There are, apparently,“hindrances” to enforcing deportations to Eritrea. Recently, the alternative-media site, Nyheter Idag, revealed that, as there are “hindrances” to deporting people to Syria, terrorists discovered to be Islamic State combatants seeking asylum will get to stay in Sweden.
When Gatestone asked the Immigration Service why it was more concerned about the safety of foreign citizens than the lives of Swedish citizens, Matilda Niang of the Immigration Service press office replied that it would be inhumane to lock up asylum seekers until their identity had been established. “A lock-up,” she said, “would also affect asylum seekers who did not commit any crimes.”
So, despite many Swedes drawing a sigh of relief when the government announced that immigration was to be limited, the new policy does not really entail any difference at all.
No sitting politician has yet expressed doubt about the wisdom of turning Sweden from a Swedish country into a multicultural one, and none has yet said the policy of importing migrants needs to stop.
It may well be that the government’s measures are only a facade, designed to soothe the Swedish people, in the hope of relieving some of the pressure.
Among these new measures are:
- A moratorium on permanent residency status. From now on, a residency status is valid for three years, with an option for a one-year extension. Permanent residency is given only to persons who, after this time, are able to support themselves financially.
- Stricter limits on bringing in relatives.
- Tightening demands on self-sufficiency and the ability to support financially one’s own family.
- Medical determination of so-called unaccompanied refugee children.
- Identity checks on all public transport: everyone on a ferry, train, or bus to Sweden must show a passport or a driver’s license.
The temporary residency is a message that will reach migrants quickly. Whether or not this means that fewer people will get to stay is doubtful. Nothing prevents the government from transforming the temporary residencies into permanent ones after the four years expire. There will also be the problem of what to do with migrants who do not leave at that point. Medically determining the age of the many Afghans who claim to be under 18, in order to get a fast track on their asylum application, might have some effect. Sweden’s failure to age-test asylum seekers has led to an avalanche of “bearded children.” Each week, over 1,000 “children” arrive, of whom 80% come from Afghanistan. In Denmark, where age-testing has been routine, it turned out that at least 50% of these so-called children were in fact adults; and in Norway and Finland, this number was 66%.
About 75% of all the “children” who apply, are granted asylum in Sweden. It is therefore extremely popular, when seeking asylum, to claim to be under 18. In 2013, 4,000 arrived. In 2014, the number was 7,000; and during the first eleven months of 2015, astaggering 32,180 “unaccompanied refugee children” sought asylum in Sweden. More than half were from Afghanistan; the second largest group was from Syria, followed by Eritrea and Somalia. About 2,000 were girls.
A few days after the announcement of Sweden’s new asylum rules, the influx of migrants slowed significantly. On November 28 and 29, from a peak of about 1,500 a day, only 392 and 375 people, respectively, were registered. Most were from Afghanistan, Syria and Iraq. The next day, however, the number of applications once again jumped to more than 1,000.
An intelligence analyst at the Immigration Service, Anders Westerlund, told the dailyAftonbladet that the decline was most likely due to fewer refugees arriving on the Greek isles from Turkey. “We also see that tougher border controls in the Balkans, and the cold weather, are keeping people from coming to Europe,” he said. “Winter is coming, and that makes the journey riskier.”
Meanwhile, police are swamped with pointless border controls and cannot do their usual work, and criminals roam the streets.
District Attorneys [DAs] apparently have so little to do, that they recently promised to supply the Immigration Service with 30 underemployed DAs. The Immigration Service, despite having recently hired another 1,200 employees, is, of course, struggling to cope with the current situation. In total, Immigration Service staff wages cost the Swedish taxpayers 250 million kronor (about $29,000,000) a month, or about 3 billion kroner (about $350,000,000) a year.
“We can lend them 30 DAs and clerks,” chief prosecutor Solveig Wollstad said in an interview with Gatestone, “because our influx of cases has gone down. The police are busy doing other things, such as fighting terrorism and taking care of migrants.”
When asked if the situation was possibly due to crime going down, Wollstad said, “No, no, no. The decrease is due to the police working so much with other things, such as preventing terror and dealing with the refugee flow. More police are needed at the borders now. Sweden is in crisis. It is not just us who are lending out staff: it is also the National Courts Administration, the Enforcement Authority, the Prison and Probation Service and a number of other authorities.”
In short, the only discernible effect of the “humanitarian superpower’s” new asylum rules is that the Swedish police are busy checking the identities of people who do not want to seek asylum in Sweden, and therefore lack the resources to apprehend criminals.
“As long as the ingrained rhetoric in Sweden is viewed as a manifestation of divinity and goodness,” writes Associate Professor of Business Administration and author Jan Tullberg in a recent article, “political ineptness will continue paralyzing the country.”
end
Commodity Currencies Are Soaring As Crude, Stocks Bounce
In an effort to wrestle S&P 500 to VWAP, to enable panicking professional sellers out, a sudden bid for crude oil and commodity currencies appeared shortly after 8amET…
S&P ramp to VWAP…
On the back of all things commodity-related…
Some context for the sudden bid in FX…
Now that VWAP has been hit, we wonder what happens next?
Charts: Bloomberg
(courtesy zero hedge)
NatGas Bloodbath Accelerates Amid LNG Glut Worse Than Oil
- With Nattie down 6% in early trading, the most in 2 months, pressing to new record lows…
OilPrice.com’s Nick Cunningham warns, while the glut in oil is expected to continue for the next year or so before balancing in late 2016, the pain for liquefied natural gas (LNG) could be just beginning…Building LNG export terminals is a long-term proposition. It can take years to develop a greenfield project, bringing a lump of new capacity online long after the project was initially planned, exposing developers to the possibility that market conditions could change in the interim. It is not unlike a conventional oil project, such as an offshore well, which also can take years (as opposed to a much shorter lead time for shale drilling).But there is a major difference between oil and LNG: the market for LNG is much smaller and less liquid (no pun intended). In other words, a handful of new LNG export terminals can significantly alter the supply/demand balance.That is exactly what is currently unfolding. Several years ago, spot prices in Asia for LNG spiked, particularly following Fukushima nuclear meltdown. Japan’s demand for LNG skyrocketed. At the same time, the shale gas revolution was unfolding in the U.S., and rock bottom prices opened up a window of opportunity to ship American gas to Asia. But it wasn’t just the U.S. – LNG export terminals proliferated around the world, particularly in Australia.There were so many projects planned at the same time, and the first batch started to come online this year, with many more nearing completion in 2016 and 2017.The rush of new supply is hitting the market all at the same time. Not only would such a rush in supply have pushed down prices on their own, the timing is actually really unfortunate for LNG exporters. Economies in East Asia are slowing, leaving a shortfall in demand. Japan, the largest LNG importer, is seeing its economy stagnate. China’s growth has slowed significantly.As a result, JKM spot prices – the LNG marker for East Asia – are trading at $7.28 per million Btu (MMBtu) for December delivery, down nearly two-thirds from early 2014 prices.Many LNG exporters have their cargoes signed up under long-term contracts on fixed prices. But usually not all of a given supplier’s capacity has secured buyers. The leftovers are sold on the spot market. With prices so low, spot sales are garnering much lower revenue.
Next year may be worse than this year, and 2017 could be yet even worse. “From having been an import basin, Asia will next year be going to have excess supplies and worse so in 2017,” David Hewitt of Credit Suisse told Reuters.
New export terminals will add 14 to 15 million tonnes of annual LNG capacity (mtpa) to the spot market over the next year. But that extra supply is running into a wall of stagnating demand. Japan’s LNG imports dropped by 12.8 percent in November, year-on-year. South Korea’s level of imports are at their lowest levels in six years.
Credit Suisse’s David Hewitt says that spot prices could drop to $5/MMBtu over the next few months, and even dip to an “eye-watering low” of $4/MMBtu at some point in 2016.
Again, oil markets are expected to see the supply overhang come into balance on a much shorter time horizon, perhaps by late 2016 or 2017. But the LNG market, with a much smaller demand base around the world, has much bigger problems. New regasification terminals will add new demand for LNG over the next few years, and demand is expected to jump by 50 mtpa by 2020. That is a substantial increase in expected consumption. The problem? New supplies will add 120 mtpa in LNG export capacity over the same timeframe, dwarfing even the most bullish cases for demand.
The excess supplies are beginning to change the LNG trade. The spot market is growing dramatically, as extra cargoes are resold to willing buyers. This is undermining long-term contracts, and also starting to change the practice of linking prices to crude oil prices. Singapore is launching an LNG futures market, which will accelerate these forces and bring more transparency to the trade. The market is becoming more liquid, offering more opportunities for buyers, at lower prices. That is great for the LNG consumer.
But the glut, set to worsen next year and the year after that, is terrible for gas producers or LNG exporters.
- end
Sure looks like the city of Dubai is in a lot of trouble:
(courtesy zero hedge)
Dubai Crude Price Crashes To Lowest Since 2004, Stocks Hit 2 Year Lows
Dubai Light Crude prices have plunged overnight, crashing the spot price below the 2008 lows for the first time, to its lowest since 2004. This is continuing to weigh on Dubai’s once-exuberant equity market which just hit fresh 2-year lows as financials and property companies plunge.
Worst in 11 years…
Driving the exuberant money-chasers out of the nation’s stock market.. (and do not forget we market the top in 2014 when a company that actually did nothing saw its IPO oversubscribed 36x)…
And finally this is why all of this is a problem… when there is no equity to back that ‘skyscraper’ of debt, the contagion will spread.
One supports the other… and vice versa.
Though we do note that Dubai’s crude is not the lowest priced…
Charts: Bloomberg
The Swiss oil traders caught exporting ISIS oil sure sounds like Glencore:
(courtesy Sputnik news) and special thanks to Robert H for sending this to us.
Dirty Business: Swiss Oil Traders Caught Exporting Daesh-Extracted Oil
Swiss oil traders might have gotten themselves into some trouble after it was revealed that they regularly imported oil from terminals in Turkey, where Daesh, also known as ISIL/ISIS, sold their illegal oil supply, the Swiss newspaper Le Matin reported.
The newspaper obtained documents showing that several major Swiss petroleum trading companies exported oil from the Turkish city of Ceyhan, one of the places in the country where Daesh-extracted oil was sold.
“The risk [of Swiss companies importing Daesh-oil] is very high,” said Jean-Charles Brisard, a French expert on terrorism financing, according to Le Matin.
As Daesh sold oil for a cheaper price than its official market price, many customers didn’t mind buying it, although there was an official ban to purchase oil from Daesh-controlled territories.
Once oil was brought to Turkey, it was transported to various ports across the country, including Ceyhan, which is a gateway to the Mediterranean Sea. From there it was available to international customers, the newspaper reported.An investigation carried out by Le Matin shows that several Swiss companies recently purchased oil from the port of Ceyhan.
Previously, it was reported that Daesh transports oil and petroleum products to Turkey using a complex system that involves a wide network of middlemen.
Turkey has long been the main destination for petroleum products, stolen by Daesh from numerous oilfields in Iraq and Syria. In early December, the Russian Ministry of Defense released satellite images showing columns of trucks on their way from the territories controlled by the militants to Turkey.
end
The Nasdaq up 18.77 or 0.38%
Credit Carnage & Contagion Sparks Panic… Buying Of Stocks
Today…
Today’s focus was on credit markets – rightly – as the contagion spread to IG markets…
But it started when China devalued the Yuan yet again…for the 6th day in a row – and in growing size – PBOC fixed the Yuan weaker to its weakest since July 2011
And The National Team stepped in to save Chinese stocks again…
The equity market “went nuts” just after 10am ET this morning with a wild algo seeming wreaking haov in S&P Futures and the VIX ETF complex…
But, despite the carnage in credit, VIX was crushed in an effort to prove to ‘mom-and-pop’ that everything is awesome…
But USDJPY did the heavy-lifting as stops were run to 121…
Leaving stocks soaring into the close (Trannies and Small Caps remained red)…
Year-to-Date, it’s ugly with only Nasdaq holding any gains…
And the last time this kind of vol hit, The Fed folded…
Trannies entered a bear-market (down 21% from the highs)…
Stocks and credit did not agree...
Treasury yields rose notably today (China selling? or liquidation flows from bond redemption requests)
The US Dollar closed unchanged against the majors – dumping into the European close and rallying all the way back this afternoon…
Commodities were mixed today but as the USD rallied after Europe’s closed so they all leaked lower (despite crude’s exciting algo ramp this morning)…
Crude prices rebounded… running stops at the lows and highs…
After Speculative crude shorts hit a new record high…
Charts: Bloomberg
(courtesy David Stockman/ContraCorner)
December 16, 2015—–When The End Of The Bubble Begins
by David Stockman • December 12, 2015
They are going to layer their post-meeting statement with a steaming pile of if, ands & buts. It will exude an abundance of caution and a dearth of clarity.
Having judged that a 25 bps pinprick is warranted, the FOMC will then plant itself firmly in front of the great flickering dashboard in the Eccles Building. There it will repose to a regimen of “watchful waiting”, scouring the entrails of the “incoming data” to divine its next move.
Perhaps the waiting won’t be so watchful as all that, however. What is actually coming down the pike is something that may put the reader, at least those who have already been invited to join AARP, more in mind of that once a year hour-long special broadcast by Saturday morning TV back in the days of yesteryear; it explained how the Lone Ranger got his mask.
Memory fails, but either 12 or 19 Texas Rangers rode high in the saddle into a box canyon, confident they knew what was around the bend. Soon there was a lot of gunfire and then there was just one, and that was only because Tonto’s pony needed to stop for a drink.
Yellen and her posse better pray for a monetary Tonto because they are riding headlong into an ambush in the canyons of Wall Street. To wit, they cannot possibly raise money market interest rates—-even by 75 bps—-without massively draining liquidity from the casino.
Don’t they know what happened to the $3.5 trillion of central bank credit they have digitally printed since September 2008? Do they really think that fully $2.8 trillion of it just recycled right back to the New York Fed as excess bank reserves?
That is, no harm, no foul and no inflation? The monetary equivalent of a tree falling in an empty forest?
To the contrary, how about recognizing the letter “f” for fungibility. What all that “excess” is about is collateral, not idle money.
The $2.8 trillion needed an accounting domicile—so “excess reserves” was as good as any. But from a financial point of view it amounted to a Big Fat Bid for existing inventories of stocks and bonds.
Stated more directly, Wall Street margined the Fed’s gift of collateral, and did so over and over in an endless chain of rehypothecation.
So that’s why December 16th will be the beginning of the end of the bubble. If the Fed were to actually raise money market rates the honest way, and in the manner employed by central banks for a century or two, it would have to drain cash from the system; and it would have to do so in the trillions in order to levitate the vast sea of money it has pinned to the zero bound.
Yet actually raising money market rates the honest way would amount to the opposite of what has gone before. That is, it would become the Big Fat Offer, triggering a selling stampede in the casino.
The front-running smart money of the bubble’s inflation phase would become a bow-wave of retreat; and the hypothecated chains of collateral would morph into a monetary black hole of margin calls and liquidations.
So the Keynesian monetary plumbers of the Eccles Building will try something truly stupid. That is, they will try to levitate the entire sea of money-like liabilities they have conjured over the last two decades, but especially since September 2008, mainly by paying higher rates of interest to banks on those $2.8 trillion of so-called excess reserves.
Well now. Will higher IOER (interest on excess reserves) cause money market funds to pay more to their long-suffering investors; or cause the repo rate on trillions of government and other fixed income securities to rise in sympathy; or lift the rate on short-term CP and the multiple other forms of wholesale money?
No it won’t. The Fed is fixing to call a rate rise but its preferred tool is powerless to make it happen. The so-called IOER scheme has always been a pointless crony capitalist sop to the Fed’s banking system constituency, anyway.
After all, we do not (yet) pay prisoners to stay in jail, but paying banks on idle reserves amounts to the same thing. Just where were they going?
The truth is, IOER payments were designed to compensate the banks for the regulatory cost of capital required to be set-aside against these assets under the new rules. So the banks got their capital costs subsidized and Wall Street got more fungible collateral in the bargain.
Yet wait until the cowboys on Capitol Hill figure this out. In not too many months down the road, the $100 billion per year of so-called “profit” which the Fed remits to the US Treasury will largely disappear, leaving one of many gapping holes in the Federal deficit that are lurking just around the corner.
That’s because even 100 basis points of IOER would cost $30 billion a year. On top of that there is also the mega-risk that prices of the $4.4 trillion of Treasury and GSE debt owned by the Fed will keep heading south, requiring it to carve out “reserves” from its earnings to offset the balance sheet losses.
The whole maneuver is a world class scam anyway, and indicative of the lunacy which passes for national policy. The Fed’s $98.7 billion of “profits” last year was generated by the $116 billion of interest paid to it by the US treasury and the GSE’s——less a goodly rake-off for system expenses and salaries and for funding contract research by say 85% of the monetary economists in the US who don’t already work for Wall Street.
Click to enlarge. (Source: The Federal Reserve.)
In any event, Congress will surely blow its top if the Fed uses up this $100 billion “deficit reducer” by paying IOER or other forms of bribes aimed at make pretend interest rate raising.
For instance, another so-called tool to effectuate rate normalization is the TDP or term deposit facility. Under that particular gem, banks may offer cash to the Fed for seven days in return for an interest rate that would presumably be above the money market rate or say 30 bps after Wednesday.
Now isn’t that brilliant! The regulated banks are drowning in excess liquidity—-so sopping up cash seven days at a time will not constrain their ability to lend in the slightest.
Nor would it elevate the money market rate of interest unless the Fed issues a humungous open-ended tender to the banking system to take any and all deposits offered. Exactly thereupon, however, the number of histrionics-filled hearings on Capitol Hill would be limited only be the number of TV crews available to cover them.
It would be perceived as, and in fact would be, a massive subsidy to the banking system. That is, a reward for not lending to main street America.
At the end of the day, the Fed will not be able to bribe the money market higher in a manner that is politically feasible. So it will be forced to repair to the old fashioned recipe——-draining cash from the Wall Street dealer markets.
Even on this matter, however, these Keynesian fools can’t manage to be honest about what they will be doing. They will offer up another tool called RRP or reverse repo; it will be described as an instrument to manage market liquidity in a manner consistent with its measured journey toward normalization.
Folks, RRP is nothing more than selling bonds with your fingers crossed.
Once they get started down this path in earnest, they will either keep rolling the RRPs, which is the same thing as selling down their $4.5 trillion inventory of treasury bonds and GSEs, or they will relent and admit the whole interest rate raising gambit had been a blithering failure.
When the US economy joins the worldwide slide into deflationary recession some time next year, this will all be academic anyway. But in the interim you haven’t seen nothing yet in terms of Fedspeak gibberish and cacophony.
Within no time the hapless 19 Federal Reserve Rangers will be debating about whether they have actually tightened in the first place; and whether any actual liquidity that they drain from Wall Street via TDF or RRP is meant to be permanent or just a short-term market “smoothing” maneuver.
This much can’t be gainsaid. The combination of encroaching recession and even moderate liquidity draining moves will be enough to trigger Wall Street fainting spells, like those of this past week, and with increasing amplitude and frequency.
The fact, that the junk bond market is already falling apart and CCC yields have soared back to 17% is not just due to an isolated bust in the shale patch; its a warning that the hunt for yield that massive central bank financial repression triggered in the financial markets is about ready to become a stampede for the exists.
So get ready for the monetary gong show which starts next week.
Today’s Commerce Department report on total business sales and inventories further confirmed that the inventory to sales ratio is now decidedly in the recession red zone. This means that the Fed’s liquidity draining moves will join hands with rising risks of recession.
Can the third great bubble of this century survive a Fed that finally wants to get off the zero bound after its way too late, but can’t do it anyway without a massive crash inducing cash drain from Wall Street? And in the teeth of the next recession to boot?
Yes, the end of the bubble does begin on December 16th.
Hilsenrath Just Reset Market Expectations: “Fed Is Worried Rates Will End Up Right Back At Zero”
Two weeks ago, we predicted that if the same September storm clouds return, and if December, which is increasingly looking as shaky as August as a result of a return of China deval fears, soaring dollar concerns and – the cherry on top – the collapse in junk bonds, forcing the Fed to have some literally last minute concerns about a rate hike, then the Fed’s official mouthpiece, Jon Hilsenrath will be very busy…
… as he scarmbles to realign market expectations of a rate hike “because the economy is oh so strong“, with the reality that a rate hike may just unleash the next Lehman event of the past 8 years.
It looks like Hilsenrath indeed had a very busy weekend with his Fed “sources”, as he attempts to readjust the market consensus for a December rate hike lower, warning that the Fed’s “big worry is they’ll end up right back at zero.”
For some inexplicable reason, he also adds that “Federal Reserve officials are likely to raise their benchmark short-term interest rate from near zero Wednesday, expecting to slowly ratchet it higher to above 3% in three years. But that’s if all goes as planned.” Well, just how many things can take place in the next 72 hours that derail the Fed’s “planning?” And just what kind of lift-off is this, if the Fed’s decision is quite literally dependent on daily market, pardon economic, fluctuations?
It was not immediately clear what the answer to these questions is. What Hilsenrath did answer, however, is why and how the Fed will proceed to cut rates right back to zero. Here is Hilsy:
Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854.
Sounds an awful lot like setting the stage for an imminent, and confidence destroying, rate cut unleashed by, drumroll, the Fed’s own rate hike. In fact, so likely is that the Fed’s rate hike will be the catalyst for the Fed’s next easing cycle, that practically nobody has any doubt:
Among 65 economists surveyed by The Wall Street Journal this month, not all of whom responded, more than half said it was somewhat or very likely the Fed’s benchmark federal-funds rate would be back near zero within the next five years. Ten said the Fed might even push rates into negative territory, as the European Central Bank and others in Europe have done–meaning financial institutions have to pay to park their money with the central banks.
Traders in futures markets see lower interest rates in coming years than the Fed projects in part because they attach some probability to a return to zero. In December 2016, for example, the Fed projects a 1.375% fed-funds rate. Futures markets put it at 0.76%.
Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level. That includes central banks in the eurozone, Sweden, Israel, Canada, South Korea and Australia.
“They effectively have had to undo what they have done,” said Susan Sterne, president of Economic Analysis Associates, an advisory firm specializing in tracking consumer behavior.
Here is the bigger problem: what the Fed has done – which is very little for the actual economy – is to push the S&P from 666 to 2100. It is the undoing of that most market participants are terrified about, and what will be to most, very unpleasant.
The pre-emptive excuses continue:
The Fed has never started raising rates so late in a business cycle. It has held the fed-funds rate near zero for seven years and hasn’t raised it in nearly a decade. Its decision to keep rates so low for so long was likely a factor that helped the economy grow enough to bring the jobless rate down to 5% last month from a recent peak of 10% in 2009. At the same time, waiting so long might mean the Fed is starting to lift rates at a point when the expansion itself is nearer to an end.
Ms. Sterne said the U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods. She’s worried it doesn’t have engines for sustained growth. “I call it late-cycle,” she said.
Actually, there is one time when the Fed waited this long to tighten conditions, in fact waited too long: the economy was already in recession. That was back in 1936. What happened next was the second part of the Great Depression and a 50% collapse in the Dow Jones.
Hilsenrath’s odd litany of preemptive excuses continues:
Several factors have conspired to keep rates low. Inflation has run below the Fed’s 2% target for more than three years. In normal times the Fed would push rates up as an expansion strengthens to slow growth and tame upward pressures on consumer prices. With no signs of inflation, officials haven’t felt a need to follow that old game plan. Moreover, officials believe the economy, in the wake of a debilitating financial crisis and restrained by an aging population and slowing worker-productivity growth, can’t bear rates as high as before. Its equilibrium rate–a hypothetical rate at which unemployment and inflation can be kept low and stable–has sunk below old norms, the thinking goes.
That means rates will remain relatively low even if all goes as planned. If a shock hits the economy and sends it back into recession, the Fed won’t have much room to cut rates to cushion the blow.
This goes to the question of what r* is, or the Equilibrium Real Interest rate, one which aswe showed last week, is almost entirely a function of nominal US economic growth rate (very low) and consolidated debt/GDP (at 350%, it’s very high). Under current conditions, it is either negative or just barely in the positive, suggesting any Fed rate hike will be followed by an immediate rate cut, something Hilsenrath just acknowledged.
The excuses continue:
Among the risks to the economy are financial booms that could turn to busts. One is in commercial real estate. Another in junk bonds is already fizzling. Each of the past three expansions was accompanied by an asset price bust–residential real estate in 2007, tech stocks in 2001 and commercial real estate in the early 1990s.
Normally in a recession the Fed cuts rates to stimulate spending and investment. Between September 2007 and December 2008 it cut rates 5.25 percentage points. Between January 2001 and June 2003 the cut was 5.5 percentage points, while from July 1990 to September 1992 it was 5 percentage points.
If the Fed wants to reduce rates in response to the next shock, it will be back at zero very quickly and will have to turn to other measures to boost growth.
Yup: such as QE4 and NIRP, which are inevitable, but which the Fed wants to “hike” rates first just so it has the alibi to unleash even more easing. And now even Hilsenrath is warning that this is the endgame:
Fed officials worry a great deal about the risk. The small gap between zero and where officials see rates going “might increase the frequency of episodes in which policy makers would not be able to reduce the federal-funds rate enough to promote a strong economic recovery…in the aftermath of negative shocks,” they concluded at their October policy meeting, according to minutes of the meeting.
In short, the age of unconventional monetary policy begun by the 2007-09 financial crisis might not be ending.
Coming from Hilsenrath, it does not get any clearer than that.
The Coincidences Are Just Too Eerie: This Is The Last Time CCC Yields Were Here And Rising
Yesterday, we highlighted the all too eerie coincidence that the very first hedge fund (not mutual fund) to gate investors late on Friday, was operated by none other than the two former heads of distressed/high yield trading of the bank that started it all, Bear Stearns.
Today, things get even eerier, because while we already have the Bear Stearns link, an even more curious coincidence emerged when according to the BofA-Merrill index of “CCC and below” bond yields, the index just hit 17.24%, soaring nearly 2% in just the past two weeks, and rising fast.
When was the last time the same index was at precisely 17.24% and rising? The answer: the weekend Lehman Brothers filed for bankruptcy (check for yourselves: on Sept 15, 2008, the closing effective yield was 17.27%).
What happened next? This.
And while no bank has blown up this time (to the best of our knowledge) the irony is that the catalyst driving the long, long overdue blow out in yields is the trifecta of plunging oil, the soaring dollar, and of course, fears about the tightening financial conditions as a result of the an “imminent” rate hike.
In other words, the Fed.
And while history rhymes, it usually does so in very ironic ways, and we can’t wait to find out if indeed Yellen’s first rate hike in 9 years this Wednesday unleashes a Lehman-like neutron bomb that leads to the full collapse of the junk bond market first, and then the shockwave spreads across all asset classes leading to the same financial devastation witnessed at the end of 2008, unleashing the longest period of “free capital markets” central planning the world has ever seen.
Another High Yield Domino Falls As $900 Million Lucidus Capital Liquidates
Last week, the world began to wake up to the fact that all of the “Chicken Littles” screaming that the sky is falling in high yield were right.
There was Third Avenue which announced it would gate investors in a $788 million mutual fund on the way to liquidating over the next several months (as though liquidity is set to return any day now in HY) and then in short order, the “venerable” Stone Lion Capital (founded by none other than Alan Jay Mintz and Gregory Augustine Hanley, both veterans of Bear Stearns distressed debt and HY trading desk) suspended redemptions after receiving “substantial requests.”
Yes, “substantial requests” or, in more colloquial terms, “rats from a sinking HY ship” and as we noted just moments after we confirmed the Third Avenue gate news, “investors in all other junk bond-focused hedge funds, dreading that they too will be gated, will rush to pull what funds they can and submit redemption requests, in the process potentially unleashing a liquidity – and liquidation – scramble within the hedge fund community, which will first impact bonds and then, if the liquidity demands continue, equities as well.”
It’s probably more appropriate to call that a foregone conclusion than “prescient.” That is, if one depositor loses access to his demand deposits and tells a friend about it, it won’t be long before the bank run is on. Same principle here.
Sure enough, just moments ago a third domino fell as Lucidus Capital Partners, a high-yield credit fund founded in 2009 by former employees of Bruce Kovner’s Caxton Associates, has liquidated its entire portfolio and plans to return its $900 million in AUM.
Unsurprisingly, the trouble at Lucidus started in October when a “significant investor” submitted a redemption notice. Following that request, Lucidus decided “to start winding down the portfolio and shedding staff,” according to a person familiar with the fund’s operations who spoke to Bloomberg. “Shrinking trading volume in credit-default swaps and indexes in the wake of the financial crisis posed a challenge to Lucidus, whose founders sought to profit from volatile credit markets when they started the company in 2009, the person said.”
“The fund has exited all investments. We would like to thank our investors and counterparties for their support over the years,” Chief Executive Officer Christon Burrows and Chief Investment Officer Geoffrey Sherry said.
Here’s a look at the management team:
The founders, Geoff Sherry and Darryl Green, were former heads of distressed debt trading at JP Morgan and Donaldson Lukfin, respectively.
Make no mistake, this will just add more fuel to the fire. As we’ve been warning for months, HY faces the dreaded “crowded theatre” scenario wherein the crowd has gotten larger and larger while the exit has become smaller and smaller.
Someone – or, more appropriately, several someones – yelled “fire” and now the rush to the exit is on. The question now is how quickly this spreads across the space and as we said last week, watch HYG and JNK closely to get a read on how quickly the panic is spreading to the more “mainstream” vehicles.
Unfortunately for those funds who plan on liquidating over the course of the coming weeks or months, liquidity is only going to dry up from here, and that means wide bid-asks and firesale prices, triggering harrowing declines that will only serve to spread more panic, leading to more redemption requests, and around we go. “After junk-bond prices posted their largest drop since 2011 on Friday, investors say they are bracing for another difficult week, likely featuring hectic trading and large splits between buy and sell orders,”WSJ warned on Sunday, adding that “gaps as wide as 10% between the price bondholders are willing to accept and buyers are willing to pay are likely to be commonplace until at least the conclusion of the Federal Reserve’s two-day meeting Wednesday, hedge-fund and mutual-fund managers said.”
One hedge-fund manager who spoke to The Jounral said he tried Friday morning to sell loans issued by Clear Channel Communications, now known as IHeartMedia (one of the Third Avenue fund’s largest holdings), at 71 cents on the dollar, the price Wall Street traders quoted him. “No buyers materialized until late afternoon when he received a single bid at 64 cents on the dollar, an offer he refused,” WSJ says, rather ominously.
By the way, remember that the Street isn’t going to be willing to inventory any of this paper, especially into a falling market. So ask yourself this: who’s going to buy this stuff? And if buyers can be found, at what price?
We close with the following observation from Bloomberg’s Richard Breslow:
One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones.
High Yield Bond ETFs Tumble To Friday’s Lows, Break Below Lehman-Aftermath Lows
High yield bond ETFs are down for the 8th day in the last 9, retracing the modest bounce from Friday afternoon, plunging to new multi-year lows. In fact, at current levels HYG is trading below the lows it hit in the immediate aftermath of the Lehman collapse (Sept 2008).
Bounce or Break?
HYG (the High Yield Bond ETF) is trading below the lows hit right after Lehman imploded…(9/17/08 lows were $79.25)
end
From Jeffery Gundlach’s comment this morning:
“The real question is going to be how many hedge funds go bankrupt,” Jeffrey Gundlach, the Los Angeles-based money manager overseeing $80 bln worth of assets, said. “There’s never one cockroach. There’s never just one portfolio that’s mismarked.”
(courtesy Sputnik news)
The unraveling drama in the US junk bond market might greatly contribute to the economic slowdown anticipated as a side-effect of the US Federal Reserve’s rates increase, also undermining the credibility of bonds issuance as a tool to attract capital.
Kristian Rouz — Last week’s Wall Street anxiety over the freeze in payoffs and the subsequent closure of the Third Avenue credit fund is rapidly spreading to the entire market of the US commercial bonds, threatening to impair the investment in US energy projects, among other ventures, and to worsen the overall economic growth outlook.
As if the concerns over the US Federal Reserve’s coming rise in borrowing costs were not grave enough, investors are now expecting a massive decline in high yield bonds, with some 10% to 15% of the market evaporating due to capital withdrawals from the industry.
US bond investors are concerned with the opened prospect of them not getting their money back, while the US junk bond drama is unraveling on Wall Street.Risky corporate bonds are on a selloff, while the struggling US companies, in particular those hit by the slump in energy prices and the ongoing appreciation of the US dollar, are losing their last source of investment capital.
The $788.5 bln-worth Third Avenue collapse might now trigger a domino effect in the US bond market that flourished since the end of financial crisis in 2009.
Another fund, Stone Lion Capital Partners, froze payoffs on their $400 bln debt holdings due to too many investors demanding their money at once. Yet another junk bond fund, the London-based Lucidus Capital Partners, founded in 2009, announced on Monday it would liquidate its assets next month.
“The risk is that this is going to cascade into something bigger,” Scott Minerd of the Santa Monica, CA-based Guggenheim Partners said. “If we’re going to see contagion, the most vulnerable funds are going to be the ones that are down significantly.”
So far, the US junk bond market has declined an average 2% at the close on Friday, according to the SPDR Barclays High Yield Bond ETF, the benchmark of the industry, with the likes of the $211 mln-worth AdvisorShares Peritus dropping 4.3% in the stock trading that day, and the ProShares Ultra, another junk bond fund, declining 5.8%.Mutual funds allow their investors to deposit or withdraw money on a daily basis, while exchange-traded funds (ETFs) provide an opportunity to increase or decrease investors’ portfolio during each day, resulting in a one-time massive investors’ rush to withdraw amidst the anxiety – a challenge many funds have proven unable to address.
The Third Avenue Focused credit Fund crashed on December 9 after its biggest investment project, the now-bankrupt Energy Future Holdings Corp., was proven to be too much of a toxic asset to handle.
“The real question is going to be how many hedge funds go bankrupt,” Jeffrey Gundlach, the Los Angeles-based money manager overseeing $80 bln worth of assets, said. “There’s never one cockroach. There’s never just one portfolio that’s mismarked.”
Tougher regulations imposed by the US authorities on capital investment in the aftermath of the 2008 crisis have rendered most US assets less liquid and increasingly volatile, which, coupled with the looming Fed hike in rates and a decline in returns from the once-booming US shale industry, all contributed to the fallout in high yield bonds.
Meanwhile, risk premiums on top-100 US high yield bond finds skyrocketed by 10% on Friday, signaling an unprecedentedly high volatility and a potential upcoming crash of the industry. However, investors are not buying into these assets any longer, fearing they would join the ranks of those who already cannot pull their capital invested in junk bonds.The structural problem in the US credit market might eventually result in a massive blow to the credibility of the entire institution of corporate bond issuance. Many companies in the real economy find themselves stripped of cash and cut off of investment resources, meaning the junk bond downturn may add to the slowdown in GDP expansion, already expected as a consequence of the Fed hike in borrowing costs.
Read more: http://sputniknews.com/business/20151214/1031735958/fallout-us-bonds.html#ixzz3uJYzwNfQ
It’s Not Just ETFs Anymore, Cash Bond Markets Are Plunging
While high-yield bond ETFs have been under massive pressure, some have argued that this carnage has yet to really hit the underlying cash bond market (since the flows are more exchanges between two parties as opposed to redeeming ETFs for actual bonds). It would appear that pattern is changing as today the bloodbath in ETFs is spilling directly into the corporate bond markets themselves with every sector in investment grade and high yield deep in the red.
As Bloomberg noted Friday,
HYG saw outflows of $560 million on Friday, its third worst day ever. But this was only 13 percent of its total $4.3 billion in trading volume, meaning 87 percent of the trading didn’t involve touching the underlying bonds. To put it another way, 87 percent of the trading was between two parties over an exchange and/or through a market-maker taking the other side. Some 13 percent, however, involved the redemption of HYG shares to the ETF’s provider, Blackrock, in exchange for a basket of junk bonds.
But today, the pressure is really starting to hit the underlying bonds…
Now the vicious cycle begins… and as we have already seen – the contagion is spreading.
Charts: Bloomberg
Junk Contagion Spreads: Investment Grade Bonds Plunge To 2-Year Lows, Treasury Liquidity Collapses, CLOs Next
Just as we warned, the collapse of the high-yield market has spread contagiously to the investment grade market as selling begets selling and redemptions need to be met from what you can sell, not what you need to sell (but can’t). LQD (the investment-grade bond ETF) is getting hammered today, breaking to its lowest in almost 2 years.
As Europe closed, HYG managed to stabilize but the selling accelerated in LQD (the investment-grade bond ETF)…
Cracking LQD below recent lows to 2-year lows…
Catching down to HYG’s weakness…
And while the storm that is rocking junk, and has now moved on to the investment grade space has not yet roiled government bond prices, it appears to already be doing a number on the liquidity of the most liquid, on the run security, the 10 Year government bonds which as the following chart from Stone McCarthy shows saw the 10-year trading “extremely special”, at -235 basis points, the most negative it has been since the summer of 2014, suggesting that liquidity shortages are now manifesting themselves across all fixed income markets.
Finally, just as with the bundling of subprime mortgage debt, so “bundles” of corporate debt are in trouble this time…
CLOs Hammered as Energy Rout Plays Havoc With Other Debt Markets
The bust in commodities that’s roiling junk bonds is also taking its toll on funds that bundle loans used to finance buyouts.
The riskiest slices of collateralized loan obligations raised after the financial crisis plunged 9 cents on the dollar since September to about 58 cents at the end of last month, down from 84 cents a year ago, according to JPMorgan Chase & Co. Intensifying price declines in recent months have led to one of the “more challenging years in recent memory,” JPMorgan analysts Rishad Ahluwalia and Jacob Kurosaki wrote in a Dec. 11 note to clients.
…
“The price declines are alarming and worrying,” Ahluwalia, JPMorgan’s head of global CLO research, said in a telephone interview.
Finally, why is the contagion spreading? Because as we noted earlier today, when the dreaded “gates” arrive you sell what you have to: “One of the sad side-effects, is successful strategies, with liquid investments that are built for volatile markets and have no gates, become the piggy-bank for everyone that needs cash. Investors end up liquidating the good ones and are forced to keep the bad ones”
Deja Vu All Over Again
Submitted by Jim Quinn via The Burning Platform blog,
Janet Yellen will increase interest rates for the first time in nine years on Wednesday. She isn’t raising them because the economy is strengthening. The economy just happens to be weakening rapidly, as global recession takes hold. The stock market is 3% lower than it was in December 2014, and has basically done nothing since the end of QE3. Wall Street is throwing a hissy fit to try and stop Janet from boosting rates by an inconsequential .25%. Janet would prefer not to raise rates, but the credibility and reputation of her bubble blowing machine is at stake. The Fed has enriched their Wall Street benefactors over the last six years, while destroying the real economy and the middle class.
The quarter point increase will be reversed in short order as soon as we experience market collapse part two. It will be followed with negative interest rates and QE4, as these academics have only one play in their playbook – print money. They created the last financial crisis and have set the stage for the next – even bigger collapse. John Hussman explains how their zero interest rate policy has driven speculators into junk bonds as the only place to get any yield.
Over the past several years, yield-seeking investors, starved for any “pickup” in yield over Treasury securities, have piled into the junk debt and leveraged loan markets. Just as equity valuations have been driven to the second most extreme point in history (and the single most extreme point in history for the median stock, where valuations are well-beyond 2000 levels), risk premiums on speculative debt were compressed to razor-thin levels. By 2014, the spread between junk bond yields and Treasury yields had fallen to less than 2.4%. Since then, years of expected “risk-premiums” have been erased by capital losses, and defaults haven’t even spiked yet (they do so with a lag).
Years of excessive risk taking, spurred by the reckless Fed policy convinced Wall Street to issue billions in junk bonds, just as ridiculously low rates from 2001 through 2005 spurred billions of subprime mortgage issuance. Wall Street has no care about clients, investors, or the impact on the economy. They care about fee generation and dumping their toxic sludge on someone else. The junk bond market is imploding and any muppet who has been lured in during the last two years is getting slaughtered.
The entire shale scam was funded with easy money and junk bonds. The dozens of companies who issued billions in junk bonds weren’t profitable at $80 oil. They are plunging towards bankruptcy at $36 oil. The amount of mal-investment created by the Federal Reserve over the last six years is almost incomprehensible. The tremors in the junk bond market portend another Lehman moment in the near future.
From an economic standpoint, the unfortunate fact is that the proceeds from aggressive issuance of junk debt and leveraged loans in the past few years were channeled into speculation. Excess capacity in energy production was expanded at the cyclical peak in oil prices, and heavy stock buybacks were executed at obscene equity valuations. The end result will be unintended wealth transfers and deadweight losses for the economy. Since the late-1990’s, the Federal Reserve has actively encouraged the channeling of trillions of dollars of savings into speculation. Recurring cycles of malinvestment and crisis have progressively weakened the resilience and long-term growth prospects of the U.S. economy.
The coming collapse will be three pronged as stocks, bonds, and real estate are all simultaneously overvalued. Junk bonds are the canary in a coalmine. High end real estate in NYC has topped out. New and existing homes sales growth has stalled out. Retailers desperately slash prices to maintain sales, while destroying their profits. Corporate profits are falling. The stock market is teetering on the edge. If you can afford to lose 50% of your retirement savings, now is the time to buy some Facebook, Netflix, Google, or Amazon on margin.
Given the valuation extremes we presently observe in the equity market (see Rarefied Air: Valuations and Subsequent Market Returns), our view is that spiking yields in the junk debt market are a precursor of significant losses in stocks, as we’ve observed in other market cycles across history.
At current valuations, the notion that “There Is No Alternative” (TINA) to zero-interest cash is profoundly incorrect. The only thing that equities offer here is to promise wider extremes of panic, despair, excitement, and hope over the coming 10-12 years, on the way to overall returns no better than safe, liquid cash equivalents are likely to achieve.
Over the last two decades the Fed’s interventionism has created artificial booms and real busts. Their dreadful mistakes are “fixed” by currency debasement, lower interest rates, and money printing – creating even worse mistakes. They have successfully gutted the American economy and left a hollowed out shell.
Moreover, as we should have learned from the global financial crisis, when the Fed holds interest rates down for so long that investors begin reaching for yield by speculating in the financial markets and making low-quality loans, the entire financial system becomes dangerously prone to future crises. If the Fed’s mandate is really to support long-run employment and price stability, the first priority of Congress should be to rein in this cycle of activist Fed intervention; to end the Fed’s ability to promote yield-seeking speculation and malinvestment that only produces inevitable crises and weakens long-run U.S. economic prospects.
Bernanke is no hero. He did not save us. He saved his cronies on Wall Street and their captured politician lackeys in Washington DC. The unholy alliance between central bankers, corporate America, and corrupt politicians resulted in Glass Steagall being repealed and allowing Wall Street to run roughshod over our economic system, reaping riches during the good times and heaping the inevitable losses onto the backs of taxpayers. That’s the new American Dream.
Some would argue that the Federal Reserve “saved” us from the global financial crisis. I couldn’t disagree more. My view is that the financial crisis was caused because the Fed overly depressed interest rates in the early 2000’s, encouraging investors to reach for yield in mortgage securities. In response, poorly regulated financial institutions, with banks free from the constraints of Glass Steagall, and other institutions having inadequate capital requirements, created a huge mountain of new, low-grade mortgages in the frenzy to create more “product.” The easy lending created a housing bubble, but someone had to hold the mortgages when they went belly-up, and those holders were banks, insurance companies, hedge funds, and individuals. As the mortgages went into foreclosure, banks had to mark the value of those mortgages to market value on their books, to the point where the value of their assets was less than the value of their liabilities: insolvency.
The liquidation of insolvent criminal Wall Street banks would have set the country back on the path to legitimate recovery. Instead, the ruling class chose accounting fraud, QE to infinity, and screwing senior citizens with 0% interest rates.
In hindsight, the financial crisis actually ended – precisely – in March 2009. How? The Financial Accounting Standards Board changed rule FAS 157 and overturned the mark-to-market requirement, instead allowing financial institutions “significant judgment” in the way they valued their assets: often called mark-to-model (or as some of us call it, mark-to-unicorn).
John Hussman warned those who chose to listen in 2000 and 2007 about the impending collapses. He has been warning those who choose to listen for months again. This market has gone nowhere in the last 13 months. It’s about to go somewhere, and that is DOWN. Remember 2000 and 2007. Enjoy the trip – deja vu all over again.
In the absence of clear improvement in market internals – and last week was categorically opposite to that – I view the stock market as being in the late-phase of an extremely overvalued top formation that will likely be followed by profound losses over the completion of this market cycle, and the U.S. economy as being on the cusp of a new recession.
Fitch Warns Of “Historic Junk Milestone” As US Defaults Surge
Despite the rear-view-mirror-gazing optimists proclamations that default rates have been low (which matters not one jot when pricing the future expectations of default into corporate bond cashflows), Fitch just released its forecast for 2016 defaults and notes that more than $5.5 billion of December defaults has increased the trailing 12-month default rate to 3.3% from 3% at the end of November, marking the 13th consecutive month that defaulted volume exceeded $1.5 billion, closing in on the 14-month run seen in 2008-2009.
“Investors are taking note that the lower-for-longer oil price scenario doesn’t look like it’s going away anytime soon,” said Eric Rosenthal, Senior Director of Leveraged Finance.
Corporate spreads for ‘CCC’ credits exceeded 1,600 bps on Friday for the first time since summer 2009. Energy and metals/mining compose $84 billion of the ‘CCC’ rating category. Spotty capital markets access for these companies has led to decreased issuance, and pricing suggests distress will continue. Of ‘CCC’ rated energy and metals/mining companies, 88% are bid below 80 cents.
So far this month the energy TTM default rate climbed to nearly 7%.Vantage Drilling’s chapter 11 filing and Magnum Hunter Resources and Swift Energy’s missed payments pushed the E&P TTM default rate close to 12%.
Distressed debt exchanges (DDEs) accounted for 44% of defaults on an issuer-count basis in the past year. Energy companies have relied on DDEs to improve their capital structure and buy time as liquidity and cash flows are affected by low oil prices. Several companies including SandRidge Energy, Halcon Resources, Warren Resources and Exco Resources have completed multiple DDEs.
Fitch Ratings forecasts the 2016 US high yield bond default rate at 4.5% as weak prices will continue to challenge energy and metals/mining issuers. The energy sector default rate is projected to hit 11% in 2016, eclipsing the 9.7% rate seen in 1999.
A 4.5% 2016 high yield default rate equates to $66 billion of defaults and would be the fourth highest default total since 2000.
This would be close to the $78 billion amassed in 2001 but well below the record $119 billion posted in 2009. At the beginning of December, $98 billion of the high yield universe was bid below 50 cents, while $257 billion was bid below 80 cents.
While Moody’s 2016 default forecast is 3.8%, and Fitch now forecasts 4.5% but the relationship with the ratio of money-losing firms now suggests something much higher, and we watch that outcome as a risk.
This is not a forecast, but an observation and a watching point. With the ECB now apparently less friendly as we examine below, we become more cautious ahead of the presumed Fed hike on 16 December, particularly in terms of total return dynamics.
Ironically, if defaults were to rise to anything like the degree this analysis suggests, it might abort the Fed hiking cycle which is a source of concern for the credit market. But we would hardly take this as a reassuring outcome.
There is a theme at present that credit is leading other markets, and is predicting “recession.” We are worried…
The Markets Edge Closer To Collapse – What About The Derivatives?
The massive, unprecedented level of Central Bank intervention in the markets has terminated the purpose for having capital markets. Currently the only goal of the Fed is to do what needs to be done in order to prevent the markets from collapsing. This has been the mission since 2008 – and, really, since 1987.
Currently there’s a gargantuan tug of war going on between the hedge funds and the Fed. The hedge funds are leveraged up on extremely overvalued stocks and bonds. Most of them are about to become impaled on their OTC derivatives, which have zero liquidity and function to “turbo- charge” the margin debt extended to hedge funds by Wall Street. On the other side of the tug-of-war rope is the Fed/ECB/BoE, which are working furiously to prevent forced hedge fund selling from collapsing the markets.
The ongoing effort to push down the price of gold and silver is essential to prevent a big move higher in the metals from signalling to the world that global financial system is collapsing. If you don’t want everyone rushing out of the coal mine, remove the canary before it dies. Imposing downward pressure on the metals using their derivatives form is the Fed’s act of removing the canary. At some point the canary will escape and fly back into the coal mine…
Zerohedge published this graph earlier this morning. It shows the extreme Untitledvolatility of the S&P 500 right after the NYSE open. It’s a 5-second graph of the March S&P 500 future. The obvious trade right now is to short the stock markets. This is probably the last alternative available for hedge funds to hedge out their illiquid fixed income positions, especially the junk-rated stuff. The pension funds are dead meat. They have no hedging alternatives. Their only “hedge” is if the Fed/Government decides to shut down the markets to in order to prevent selling.
I suggested several months ago that this was coming eventually. The gating of junk bond funds is the Untitledstart of this process. Gating is the same thing as shutting down a market, as it prevents anyone from selling their positions. Please notice that discussions about OTC derivatives seem to have slipped out of the public forum. For most, this simply means the problem has gone away. But OTC derivatives lie at the heart of the problem for the Fed. Fuses have been lit and are moving closer to the detonators.
No one knows when the big explosions will become uncontainable. But that reality grows closer by the day. I don’t know what meaningless policy decision will be regurgitated by the FOMC on Wednesday. I’m sure a lot of midnight oil was burned over the weekend working on the draft. But the stock market has at least 1000 points of downside risk and little to no upside, unless the Fed goes “Weimar” with the printing press.
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I very much enjoy your blog but please work on proof reading before you put things up. It gets pretty bad some days…
“we again we more silver leave the customer account.”
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Any thoughts on those 31K silver future contracts standing for delivery at SHFE, Harvey? That’s 465 metric tons with only 515 metric tons of silver inventory. This is looking to be a tighter situation for silver in China than the one you foresaw last year. The conditions seem more ripe for a $200/oz silver. Just kinda surprised that you’ve kept mum about it this time around!
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