maandag 20 september 2021

Bitcoin Bounce Levels Extend To $36K, Bulls Unmoved By 8% BTC Price Dip

An "interesting opening" for stocks promised a hectic day for Bitcoin traders. Bitcoin (BTC) kept blowing through support levels during trading on Sept. 20 ahead of what promised to be a "very interesting" U.S. stock market open. 
# No sweat for BTC traders after $42,500 visit; Data from Cointelegraph Markets Pro and TradingView tracked BTC/USD. It dipped briefly to near $42,500 before returning to hover near $44,000 in volatile conditions. Monday's low was beneath that seen earlier in the month during the leverage cascade, with Bitcoin testing both its weekly higher low and 21-week exponential moving average (EMA) as support. As Cointelegraph reported, a plethora of factors combined to produce sell pressure for BTC markets. These were led by concerns over Evergrande defaulting on hundreds of millions of dollars in debt, in turn pressuring stocks and strengthening the United States dollar. Rising Bitcoin exchange balances provided an additional catalyst from within the market, itself. Traders, nonetheless, kept their cool. 
* "Why are you surprised today? Don’t be so emotional," popular Twitter account Anbessa told followers at the height of the rout. Anbessa espied levels in the mid-$30,000 range as being the only definitive area of concern, with Bitcoin still well above $40,000 and a Fibonacci retracement level at $38,000...


For analyst and statistician Willy Woo, however, the stock market open should provide a debate in itself. "SPX teetering, threatening a large sell-off," he warned in advance of Wall Street's return. "BTC carving out a Wycoffian distribution pattern, speculators selling down in risk-off mode, meanwhile investors on-chain have been in strong accumulation. It's going to be an interesting opening to this morning's equities market." Woo added that should stocks face a deeper crash, the situation may mimic 2020 when Bitcoin's supply squeeze ultimately sent it from $3,000 lows to new all-time highs in spite of initial misgivings...
 

# Bulls' conviction proves hard to shake; Others were even less fazed by the events of Sept. 20, including popular trader Pentoshi, who revealed record BTC exposure at current levels. "Do I think 41k is possible? Yes. But I think we see 56k–58k within three weeks. I’m macro bullish," he said as part of comments on the day....

Coinbase Drops Plans To Launch Crypto-Lending Platform; SEC 'Wins'?

Having unsuccessfully roused populist anger against the SEC in his twitter tirade against the SEC's over-reach, Coinbase CEO Brian Armstrong appears to have folded, confirming in a blog post that the giant crypto exchange will not be launching its lending program. As a reminder, Armstrong noted "some really sketchy behavior coming out of the SEC recently," as he revealed that the securities regulator had threatened to sue over the crypto exchange's new lending program. Two weeks later, and it appears Armstrong has folded as Coinbase updated its Lend program launch site:
* Update as of 5pm ET, Friday, September 17th: we are not launching the USDC APY program announced below Our goal is to create great products for our customers and to advance our mission to increase economic freedom in the world. As we continue our work to seek regulatory clarity for the crypto industry as a whole, we’ve made the difficult decision not to launch the USDC APY program announced below. We have also discontinued the waitlist for this program as we turn our work to what comes next. We had hundreds of thousands of customers from across the country sign up and we want to thank you all for your interest. We will not stop looking for ways to bring innovative, trusted programs and products to our customers... 


As Daniel Priestley noted, this signals a turning point in the world of Crypto. No longer is crypto-currency lending a fringe asset class operating in the wild wild west of the internet; the time has come for the sheriff to lay down the law. This move by the SEC should be seen a significant warning sign that they intend on going head to head with crypto-related businesses. In the coming year, it’s likely that the financial regulators around the world will turn their sights to Crypto businesses and require them to comply with specialized regulations that are still being drafted as well as traditional securities laws. The only exception will be to those companies that are already regulated to sell securities or are regulated banks and will have the benefit of continuation of trade and will likely have a poll position for any changes in the requirements. Coinbase and other large crypto-lending companies like BlockFi and Celsius have a strong position now but the future of the Crypto business will likely have more to do with regulatory approval than white papers, branding, and well-designed smartphone apps. The disruptors are facing serious disruption as the whole industry finds itself on the radar of global regulators who have been given the go-ahead to start cleaning things up. 
* Interestingly, however, at the same time as Coinbase announces the abandonment of this lending program, they just launched their Coinbase Prime product aimed at institutional investors....

Eight Bond Deals Pulled On Evergrande Contagion

After a record post-Labor day bond offering frenzy, and a September calendar which has seen $104BN in IG debt issuance to date, and which Goldman believed (as of last week) will rival the monthly totals of 2019 and 2020... 


The mood has soured sharply, and on Monday, at least eight investment-grade companies are said to have pulled their bond offerings amid the crash in risk assets, according to Bloomberg which notes that "the issuance backdrop isn’t inviting with equity futures lower by about 1.5% and the IG CDX index trading over 6.5 basis points wider (largely due top the roll which put an extra six months of maturity on the new contracts). Today's pullbacks follow Friday's vacuum when nothing priced amid the market's sharp opex drop; last Monday some 13 deals priced. 
# That said, even without the Evergrande contagion, issuance was slowing: this week syndicate desks expect issuance to hit $20 billion to $25 billion, a slowdown from frenzied, record pace of sales since the market returned from the Labor Day holiday. It is possible that most companies that had planned to come look again on Tuesday, but that will be contingent on stabilization in markets, which in turn will depend on what Beijing does in the next 24 hours....

Ultimate Contagion: China Sovereign Risk Is Starting To Blow Out

"Something historic will happen this week" was how we started to explain the process by which the collapse of Evergrande could spread contagiously across the world this week. One glance at global markets this morning suggests, at a minimum, that risk is being de-grossed across everything from European utilities to cryptos to US materials stocks. However, the biggest, and ultimate-est, contagion is that of China's sovereign risk itself and that is starting to blow out... 


This sudden surge in default risk on China's sovereign debt is very significant in the context of China's constant reassurance to the rest of the world that it is solid-as-a-rock (just as Larry fink, but don't ask George Soros). However, we do note that China CDS spiked to around 90bps in March 2020 (as the COVID crisis hit) and around 150bps in early 2016 (accelerating after China devalued the yuan in late 2015). The question is, of course, where will this stop this time? How much 'risk' is China willing to take with its sovereign risk?

And Another: Shanghai-Based Property Developer Crashes 87% In Minutes Before It Is Halted

It's not just Evergrande that is about to keel over. Overnight, one of its smaller peers, Shanghai-based Sinic Holdings Group which focuses on the development of residential and commercial properties in China, was halted trading after it shares cratered in a freak 87% plunge on Monday afternoon. The plunge slashed the market value to just under $230 million, which is laughable for a listed developer in the city. There was no reason for the selloff, an officer at the firm’s Hong Kong office said there’s no one to attend to media inquires which is probably not a good sign, which was attributed to the general panic resulting from Evergrande's imminent default, nor did the company give a reason for the trading halt in Hong Kong. 
# One thing was clear: selling volumes were off the chart, and as Bloomberg observes, the sudden selloff in the last two hours leading up to the suspension was accompanied by a surge in trading volume that was about 14 times its average in the past year. The liquidation may have been a margin call on a core shareholder who was forced to hit any bid, but we probably won't know for a few days... 


Unlike Evergrande, Sinic is not faced with an imminent default, but it does have a 9.5% $246 million bond due on Oct. 18 and Fitch Ratings revised its outlook to negative last week. "It’s the same story as everywhere else, investors are concerned about the liquidity," said Philip Tse, director and head of Hong Kong and China property research at Bocom International Holdings. “I think there are most likely some margin calls on some of the major shareholders” by looking at Sinic’s stock price pattern this afternoon. The crash came as Hong Kong’s property gauge plunged the most since May 2020 amid growing investor angst about China’s real estate crackdown and worries that Beijing may tighten grip on the city’s property sector in its “Common Prosperity” campaign. As discussed extensively last night, risk-off sentiment in financial markets exploded on Monday, with contagion from Evergrande spooking global markets, and as Chinese junk bond yields have soared to the highest level since 2011...


More ominously, even China's CDS are starting to move sharply wider...

US Stocks Hit With 2nd Biggest Sell Program In History

As futures indicated, the US cash equity open was greeted by an avalanche of selling, breaking the S&P back below its 50DMA... 


This was the second largest sell-program in history with TICK crashing to -2067 (record low as -2069 on 5/11/21)... 


Which means that we were off by just 2 stocks from the biggest selling-wave in history. A sea of red in stonks... 


Perhaps one sign of capitulation is that we are at a more than 90%-down-day in early S&P 500 cash trading (actually 94% of the S&P are in decline). That’s the highest since about October 2020... 


But, bear in mind that dip-buyers did not step right in after the 5/11 puke...


So, is that a big enough puke to spark dip-buying?

Today Will Be A "Notable Test" For BTFD'ers: Volatility Spike Could Trigger Up To $40 Billion In Forced Selling!

The last seven times that the S&P 500 has traded down to its 50-day moving-average, it has rebounded rapidly and aggressively...


This time, for now, is different, as Friday saw the S&P cash close back below the 50DMA and futures indicate a serious move below it at the open... 


And things could escalate, as. following the extinction of a serious chunk of options on Friday, we start today with a sharply negative gamma position. This negative gamma position doesn’t flip positive unless markets recover the 4425 area. For today we look to 4415 as resistance, with support at 4360 and 4310... 


SpotGamma's EquityHub model lays out where there are major inflection points in gamma position, which we believe can be key support and resistance lines. We believe that when the gamma position changes it may invoke a “state change” in hedging, which we’d watch for at 4365 and 4315... 


Finally, the key for today will be in watching implied volatility levels (VIX, currently 25). A higher VIX likely means lower markets. If the VIX trend breaks lower that implies a rally... 


All strikes below 4400SPX/440SPY are dominated by put gamma, which are very sensitive to implied volatility. If the VIX breaks higher it indicates that puts are in demand which could lead to dealers needing to short more futures. VIX moving lower may be a signal that traders are selling puts, in which case dealers may be able to buy back their short hedges. It's not just equity markets, Emerging Market currencies are at critical levels... 


We give the last word to Mohamed A. El-Erian, who tweeted a warning this morning: With a down 1% Futures backdrop for the open of US #markets coming on top of three straight weeks of losses, today's trading session will be a notable test for the "buy-the-dip"/"there is no alternative"/FOMO narrative that has impressively powered #stocks through prior headwinds." 
# This is exactly what Nomura's Charlie McElligott warned about last week: “Who woulda thunk it?!” 
1) the post options expiration “gamma unclench” and “vol expansion window” allows for movement in US Equities (SPX and QQQ $Gamma were both +90%ile just two weeks back, now Dealer Gamma in negative territory vs spot for both) via 
2) a US Equities Vol market which has been pricing outright “crash” metrics for months (SPX Skew, Put Skew, iVol vs rVol, Term Structure all upper 95-99%iles), in conjunction with 
3) significant de-risking flow potential from “negative convexity” vol-sensitives (what was +99%ile SPX- and QQQ- options $Delta just ~two weeks ago, 90%ile historical CTA Trend net exposure in DM Equities and 87%ile Vol Control fund US Equities exposure) into 
4) this week’s FOMC event-risk (higher Fed dot plot will signal faster tightening trajectory for ’23 & ‘24) during
5) a poor weekly seasonal slice for global Equities ahead (Sep17-Sep24 median chg ~-0.4% SPX, -0.9% HSCEI, DAX & Eurostoxx, -1.4% for Russell, with clear “Defensives / Duration over Cyclicals” historical sector performance tilts) and with 
6) a macro scare catalyst to-boot (China real estate “contagion” off Evergrande, mainland closed for holiday, but HSI Real Estate and Financials smashed overnight, while USDCNH moving towards 6.50 with client “Evergrande default” hedges in topside there) now see ES1 approx -4.0% from all-time highs made 9/3/21 
# Simply out, McElligott warns "option positioning is gonna hurt"; Current Gamma / Delta “flip” levels show NEGATIVE territory vs spot in all, as sources of potential “accelerant flows” here... 


With the Fed event risk holding what otherwise would be "'reflexive' sellers of Volatility on squeezes" OUT of the market, any ability to arrest this Vol spike and reverse the selloff into a “bounce” in spot won't be clear until at least Wednesday. But if this stress continues, and we see 1.0%-2.0%-3.0% daily changes sustained, McElligott warns there is risk of shock de-allocation from VC in the forward 1w-2w period, on account of the dangerous mix of the recent impulsive exposure accumulation (+$139.1B over the past 6m, 95.1%ile over that historical period), against such absolute low trailing realized vol levels (SPX 1m rVol 8.9 / 15.2%ile, 3m rVol 9.4 / 1.2%ile which also is current “trigger” in our Vol Control model)... 


IF today’s current -1.5 to -2.0% holds, would be approx -$15B to -$40B of selling in coming days... 


Meanwhile, USA Sovereign risk is spiking... 


Do something Mrs. Yellen!

Futures Slide, Europe Tumbles As Evergrande Contagion Shockwave Goes Global!

In retrospect, China, Japan, South Korea and Taiwan picked a great day to take a holiday, which as we noted earlier hammered Hong Kong stocks more than 3%, slamming the Hong Kong property sector and sending Evergrande, which is expected to default within hours to a bank loan due Monday while crucial interest payment deadline on its offshore bonds looms on Thursday, to its lowest market cap ever (it closed down 10.2% just off the worst levels of the day) before the rout spread to European bourses and US equity futures as Evergrande's escalating liquidity, and now solvency, crisis spread beyond the sector... 


At 24,099 points, Hong Kong’s broader Hang Seng index has closed at its lowest level since October 2020. “Evergrande is just the tip of the iceberg,” said Louis Tse, managing director at Wealthy Securities, a Hong Kong-based brokerage. Chinese developers were under substantial repayment pressure on dollar-denominated bonds, he added, while markets had become nervous that Beijing would push listed real estate groups to cut the costs of housing in mainland China and Hong Kong. “That affects the banks as well, if you have lower property prices what happens to their mortgages?” Tse said. “It has a chain effect.” And with Hong Kong becoming the temporary epicenter for the Evergrande meltdown (before it shifts back to China), contagion which had long been absent, finally spilled over across the globe, hitting not only stocks but also FX and commodities, with angst over this week's FOMC meeting where some still think the central bank will announce tapering (spoiler alert: it won't), only deepened on Monday, sending U.S. futures falling more than 1.3% as low as 4,356.25 touching the lowest level since Aug. 19 and far below the 50DMA which has proven to be a remarkable support zone, while European equities were 2% lower and hitting a two-month low. Treasuries gained along with the dollar before Wednesday’s Fed meeting, where policy makers are expected to start laying the groundwork for paring stimulus. Cryptos crumbled, with Bitcoin plunging to $44,000... 


The early drop which sent the VIX to 26, its highest reading since May 12, was especially ominous because, as Mohamed El-Erian said, "after three straight weeks of losses, today's trading session will be a notable test for the "buy-the-dip"/"there is no alternative"/FOMO narrative that has impressively powered stocks through prior headwinds." Meanwhile, while we wait to see the dip buyers, the benchmark S&P 500 is on track to snap a seven-month gaining streak....

Bitcoin Might Be Safe From A Global Stock Market Crisis

BTC’s lack of integration with traditional finance and its inability to be forcefully sold to cover financial losses mean the price might not “collapse” if there is a global stock market meltdown. One of the reasons behind Bitcoin’s (BTC) volatility, the substantial price oscillations that occur regularly, is the discrepancy of its use cases. Some pundits deem it “digital gold,” a truly scarce and perfect store of value. Others consider Bitcoin a technology project or a type of software with a corresponding network. El Salvador’s adoption as legal tender will likely evidence the means of exchange functionality that the Lightning Network provides. The Layer-two scaling solution allows instant and insanely cheap transfers, although it requires regular on-chain transactions to enter or exit this parallel network. As these narratives about Bitcoin shift over time, so does BTC’s correlation to traditional assets. For example, there have been sustained periods of a strong correlation with gold. The March 2020 crash was devastating for almost every asset class, but the recovery pattern that followed those six or seven months was virtually identical for gold and Bitcoin. Curiously, the opposite movement occurred in 2021, displaying an inverse correlation between the two assets...


# Is Bitcoin a tech stock proxy? On the other hand, Bitcoin started to mimic the Hong Kong stock market, as measured by the Hang Seng Index. Among its top constituents are Tencent, Alibaba and Meituan, which are billion-dollar Asian technology companies. This shift in investors’ perspective, from tracking gold prices to tech stocks, begs the question of whether Bitcoin will succumb to the Hang Seng downward movement seen in the past 90 days. Does it make sense to decouple right now? If so, will Bitcoin continue to act as a safe haven amid a general correction? 
* On Tuesday, China’s second-largest property developer, Evergrande Group, announced that a significant decline in sales forced the company to postpone payments over its debt. This single company has over $300 billion in liabilities, which, according to analysts, could severely impact the broader market. 
In August, China’s retail sales disappointed at 2.5% versus the previous year, where investors expected a 7% growth rate. Obviously, growth and the economy were heavily impacted in 2020 by governments’ reaction to the COVID-19 outbreak. However, one must consider that the most influential central banks have been practicing near zero or even negative interest rates since the Q1 of 2020. Thus, if the economy fails to gain momentum amid multiple trillion-dollar stimulus packages, there’s not much that can be done to prevent a generalized stock market correction and potential losses on debt markets. The problem is: Bitcoin might be 12 years old, but it has never faced a significant economic crisis, at least nothing that puts the $250-trillion-plus global debt markets at risk. Therefore, any analysis or estimate will unlikely yield a credible assessment. 
# Bitcoin might be less impacted by a market meltdown; However, the predominant cryptocurrency has an edge over traditional markets such as commercial real estate, stocks and bonds. Lenders will foreclose on these assets if clients default on their payments, and this adds further pressure because the bank or institution has no interest in keeping them. On the other hand, generally speaking, Bitcoin and cryptocurrencies cannot be used as collateral. Regarding the billion-dollar Bitcoin futures liquidations on derivatives markets, those are just synthetic instruments. Undoubtedly these events will impact the price, but at the end of the day, the effective BTC stays on the derivatives’ exchange. It solely moves from the long (buyer) balance to the short (seller) account. Until Bitcoin becomes fully entrenched in financial markets and accepted as collateral and deposits, the mid-term systemic risk for the cryptocurrency is lower than the traditional market....

Market Update

# The SPX declined on Friday’s quad-witching expiration and made a weekly close below its 50-dma; the SPX made a weekly close below its 50-dma on quad-witching Friday and the SPY closed below massive Dark Pool prints, this is bearish. 
# The Monday/Tuesday's Full Moon Timing Window will be key to the short-term trend for the SPY; the Tuesday after a monthly option expiration is a turn window in our work. Our view is that the correction from 9/2 will take the shape of a highly volatile EW a-b-c correction into early October and we could see the Wave A low this week into Tuesday / Wednesday before a B-Wave bounce
# The Option Premium Ratio has trended sideways in the .40s/.50s for weeks; we should see this indicator spike to the .70s for the end of Wave A down. 
# The NYSE Advance/Decline line has been diverging from the steady advance of the SPX since June and the EW 5-wave decline on the hourly chart confirms that a significant top was made on 9/2; the Fibonacci 34-day step out from 9/2 points to 10/6 as a potentially scary low. 
# Now, on a much longer time scale, the Fibonacci 34-year step out from the great crash of 1987 predicted a MAJOR TOP this fall, and our bias is that the market highs are already in...


# The July/August SPX pullbacks into monthly option expiration week looked like “bull market corrections” but the current pullback into September monthly option expiration last week looks like the start of a long-needed correction
# From September 2020 the SPX has rallied in a “Rising Wedge Pattern” and a “symmetry correction” from this long pattern could take us to 4166 for the initial (Wave A) leg down. The 34-day Fibonacci step out from the 9/2 high projects to 10/6 which could be a scary low
# We view the potential for a “black swan” event this fall to be quite high; the SPX has rallied for a year without a 5% correction, but our bias is that we are in one now. 
# We raised our cash position to 70% after the Market Vane Bullish Percent went to 72% on 8/27, the highest bullish sentiment in years. 
# The US bond market must be watched closely for signs of a reversal down; we may have seen a false break out in the TLT coil pattern. 
# Bonds may have given us a false breakout from its coil pattern and a break down in bonds here could be “the black swan event” that triggers a stock selloff. 
# However, the Chinese Evergrande bankruptcy risk is causing US bonds to rally overnight Sunday as Asian stock markets get hit. 
# In the US, the background monetary conditions have been deteriorating for months; US liquidity conditions are tightening in advance of the Fed taper as US Excess Liquidity measures continue to roll over and that predicts a “compression” in the S&P 500 P/E ratio this fall and a possible end to the 12-yr bull market from 2009. 
# Gold, silver, crude oil and bitcoin are falling into the 9/20-9/22 Full Moon Timing Window. 
# Bitcoin plunged below its S2 support pivot Sunday night and tested 45,070 as the USD bounced to test 93.34. 
# Crude oil is pulling back into the Full Moon Timing Window on 9/20-9/22. 
# A rising USD is also pressuring gold overnight Sunday and it is testing its S1 support pivot at $1745. Gold plunged below $1750 and the GDX plunged below 30.69 which argues for more weakness in the PM sector into Monday/Tuesday’s Full Moon Timing Window; we are looking for a short -term low by the 9/22 Fed meeting and then a bounce with the SPX’s Wave B rally. 
# Silver tested its S1 pivot support at $22 overnight Sunday before bouncing; silver undercut its 8/9 low while gold remains above for intermarket divergence. 
# Bonds are rallying Sunday night on the Chinese Evergrande bankruptcy risk that is causing Asian markets to sell off. 
# The USD made highs for the week on Friday and is testing 93.34 overnight Sunday as foreign currencies take a hit on the Evergrande bankruptcy risk being seen in Asian stock markets....

Hong Kong Stocks Crash, Futures Slide As Markets Finally Freak Out About Evergrande Default Contagion!

Well, as we warned, the Evergrande contagion has finally arrived and with China closed for holiday traders are getting out while they can and where they can, and on Monday morning in Asia that means Hong Kong, where Evergrande, which is about to default, has crashed by another 13% this morning and is on track to close at its lowest market cap ever (to be expected ahead of a bankruptcy that will wipe out the equity)... 


With Evergrande property development peers such as New World Development & Sun Kung Kai Properties both down over 8%, and Sunac China and CK Asset plunging over 7%, the Hang Seng property index has crashed more than 6%, its biggest drop since 2020 to the lowest level since 2016...


The broader Hang Seng index is down 3.5% in early trading, to the lowest level since November 2020... 


With traders on edge about the rapidly spreading contagion (as we described earlier) even sectors supposedly immune to China's property woes, such as the Hang Seng Tech Index are plunging, sliding as much as 2.7%. And speaking of Evergrande's imminent default, we noted earlier that while the company is scheduled to pay $83.5 million of interest on Sept. 23 for its offshore March 2022 bond, and then has another $47.5 million interest payment due on Sept. 29 for March 2024, the day of reckoning may come as soon as Tuesday: that's because Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period. In other words, should it fail to arrange an extension, it could be in technical default as soon as Tuesday. Spoiler alert: a default is coming because Chinese authorities have already told major lenders not to expect repayment... 


Incidentally, as Bloomberg's Mark Cranfield notes, Hong Kong stocks can't blame low liquidity for the meltdown as "trading volumes on the Hang Seng and H shares indexes are running well above the 10-day average on Monday as both drop by ~4%." There's more: junk-rated Chinese dollar bonds slid by as much as 2 cents, according to credit traders, pushing their yield to just shy of 15%, the highest since 2011. Other sectors are also getting hammered, such as Ping An Insurance, China’s largest insurer by market value, which plunged 7.3% in Hong Kong. “Investors may be concerned about highly-geared names and don’t care about valuation nowadays,” said Philip Tse, head of Hong Kong & China Property Research at Bocom International Holdings Co Ltd. “There will be further downside” unless the government gives a clear signal on Evergrande or eases up on its clampdown on the real estate sector, Tse said. 
# Meanwhile, pouring gasoline on the fire, Goldman's China anlyst Hui Shan published a note on Sunday in which it discussed the riructural reforms in the property sector (such as the "3 Red Lines"). At the same tising risks from the property market, writing that even without the Evergrande debacle "housing activity fell sharply in July and weakened further in August" largely in response to China's stme, "concerns over Evergrande are rising and signs of financing difficulties spreading to other developers are emerging." In the note, Goldman also estimates the potential impact of the coming property market crash on Chinese growth under different scenarios, which can be described as bad, worse, and terrible, with the bank expecting a GDP hit anywhere from just over 1% to as much as 4.0%. Needless to say, such an outcome would be devastating not only for China but for the world... 


Looking ahead, Goldman notes that while for now, its baseline remains that any potential default or restructuring of Evergrande would be carefully managed by the government with limited contagion effect in both financial and property markets "this would require a clear message from the government soon to shore up confidence and to stop the spillover effect, the absence of which we think poses notable downside risk to growth in Q4 and next year." In short, as we explained previously, it all depends on Beijing whether the current selloff accelerates, or if we see a furious surge as Beijing directly or indirectly injects another cool trillion or 10. Meanwhile, as Bloomberg's bloggers write echoing what we said yesterday while traders may have been hoping there would be some clarity on the road ahead for the company, given it has bond payments due this week, "the complexity of the case may be the reason for a lack of communication from the authorities. That compounds the uncertainty for investors, and with China on holiday, the momentum for lower Hong Kong stocks are picking up pace." 
# So while contagion is clearly hammering Hong Kong in lieu of the shuttered China, it is also spreading to Australia where the Aussie dollar is mining stocks have slumped as iron ore prices continue to collapse, with the industry group falling 4%. Among the biggest movers, Champion Iron fell as much as 12.5% in early trade Monday, continuing a four-day losing streak while Fortescue Metals dipped as much as 7%, falling to the lowest price since July last year. Contagion has also moved beyond merely stocks, with US equity futures trading as low as 4380... 


And is starting to impact both commodities, with Iron Ore tumbling more than 10% on fears a Chinese property crisis will lead to collapsed demand for steel, as well as FX, with the dismal mood lifting USD/HKD to the highest for September, and while USD/CNH is firmer, but for now, that is in line with broad dollar strength. Should EUR/CNH start trending higher, Bloomberg notes, "that would be a signal traders have become anxious about the health of the yuan amid the equities slump." 
# Incidentally, it is hardly a secret that the bigger the market crash, the more likely Beijing is to do something to bail out the market and tens of millions of very angry Chinese investors who may soon show Nancy Pelosi what an insurrection really looks like. But should the silence out of Beijing persist, it's only a matter of time before the "anxiety" hits levels not seen since Sept 2008 as an outcome most traders thought impossible becomes inevitable....

Paul Sullivan; The US Desperately Needs To Rethink Its Middle East Strategy

Is the Middle East still important? This is a seemingly absurd question, yet some are asking this in Washington. The Middle East is the source of massive reserves in oil and gas. Much of the fuel to produce goods and trade from Asia and the EU comes from the Middle East. Much of the world economy relies on Middle East energy. The region has strategic chokepoints like the Strait of Hormuz, The Suez Canal, and The Bab al Mandab. It is a source of some of the more significant threats in the world, such as from ISIS, Al Qaeda, and other groups. It contains some of the most important security connections in the world. Consider the neighbors of the Middle East and not just the Middle East. The Middle East is a crossroads for energy and security. It also could be one of the generators of change and improvement, if it is allowed and supported to do so. However, as the U.S. becomes more focused on “The Great Powers Conflict” in Asia, especially with China, it is becoming clearer that the U.S. is losing the plot in the Middle East. Consider the slow to no reaction to the shipping of Iranian fuel with the help of Hezbollah and Syria to Lebanon. The U.S. could have done many different things to help the Lebanese with this without handing a massive public relations and political victory to its adversaries. But, in some ways, Washington’s sanctions have painted it into a corner on such issues. Consider how the U.S. took the anti-missile batteries from Saudi Arabia as the Houthis are still attacking Saudi Arabia with missiles. The Saudis made a deal with the Russians in response to this and other moves by the U.S. The U.S. handed leverage to the Russians. These are just two of many examples of how the plot is being lost... 


Indeed, China is a threat in the Pacific to Taiwan and others. It is a threat to the freedom of navigation in the Western Pacific. It is an economic and technological threat to the US and has been for a very long time. It is a cyber threat to the US. It is developing leverage in many countries with its Belt and Road Initiative. It is now the largest trading partner with almost all Middle East countries. It is building significant diplomatic, economic, and even military leverage in the Middle East. China is moving into the region as the U.S. moves in other directions. By the way, it is getting more likely that China could have a piece of the nuclear power pie in Saudi Arabia. Russia has also been creating greater leverage in the region. Its recent big defense deals with Saudi Arabia are just one example. The U.S. basically opened the door to them. Similar things happened when the U.S. cut back on defense aid to Egypt a few years back. The Egyptians were in Moscow in quick order to make defense and other deals. Russian advisors are back in Egypt. The Russians are building a huge nuclear power complex on the north coast of Egypt. There is no doubt that the Russians have far more clout and leverage in the region than before. Much of this is due to missteps by the U.S. or simply U.S. neglect of this vital region.
* The U.S. should be in the running on nuclear power plant exports and other crucial leverage-giving exports in the region. We could export small modular rectors to the region. These have much lower proliferation and safety risks than older, larger plants. We could further develop the safety of this trade by applying 123 agreements as we did in the UAE. The UAE has the gold standard nuclear power agreement with the US even though the plants were built by a Korean company. 
# Why am I mentioning nuclear power plants? Because whoever exports a nuclear power plant to another country can develop 80 to 100 years of leverage and clout in that country. Nuclear power plant exports are dominated by Russia with China second. The U.S. is not even in the running. We have seen above some examples of how the Russians and Chinese are building leverage and clout in the region. If the U.S. wants to turn more to the “Great Powers Conflict”? Then it should realize that the “Great Powers Conflict” is not just in Asia, but also in the Middle East (and Asia begins in the Sinai). The Middle East is a contested space. One cannot win a backgammon and chess game by letting the other sides, one’s adversaries, make clever moves while we do not have good counter moves and we do not think many moves ahead. The U.S. seems to be losing the plot of the 4D chess game in the Middle East. It is not too late to rethink strategies. The U.S. needs to be in the game for the long run and think in the long run. The U.S. needs to regain the plot in the region and how it connects with the big pictures in geopolitics, geo-economics, energy, security, and much more. It is not too late.

The Fed Has Liquidated Its Entire Corporate Bond Portfolio

Last March capital markets as we once knew them ceased to exist: that's when the Powell Fed crossed a Rubicon even Ben Bernanke dared not breach and announced that it would start buying single-name corporate bonds and ETFs under its Secondary Market Corporate Credit Facility (SMCCF) with both IG and HY names eligible for purchases in the process effectively nationalizing the corporate bond market. Purchases under this facility, which were meant to reassure and stabilize the corporate bond market continued until December, at which point - with stocks at new all time highs - the Fed announced the cessation of its corporate bond purchases and entered the beginning stages of fully winding down the Secondary Market Corporate Credit Facility (SMCCF). At the time, some market participants worried this might translate into a reduction in liquidity, but with purchases amounting to less than $500 million per week since July 2020... 


An overall portfolio holding of just $14 billion, it was unlikely that any material deterioration in market microstructure would take place... 


After all, the Fed's purchases were merely symbolic: the Fed never wanted to become as BOJ-like whale in the corporate bond market, but merely to signal to the world that it would not allow bonds to drop further and would, if required, buy more. Of course, it was not required as the mere guaranteed backstop by the Fed was sufficient to the get dip buyers out in force. And sure enough, fast forward to the first week of September, when the Federal Reserve has now been able to sell-off the entirety of its corporate bond portfolio with no effect on the market’s microstructure; curiously this also comes at a time when the latest TIC report showed that in Julye foreign investors were net sellers of corporate bonds for the first time this year... 


Yet while the SMCCF has now been closed, we continue to think its legacy will live on as a part of the Fed’s policy toolkit with investors forever expecting its reactivation when another macro shock occurs and sends large gyrations throughout corporate credit markets. Or rather "markets" because a world where corporate bonds have no downside is just as centrally-planned as anything China could come up with, and while stonks continue to ramp up for now, there will come a time when everything will crash again and the Fed will once again remind us just how fake price discovery is in a world where the only thing that matters is the Fed's balance sheet as Citi's Matt King put it so elquqently in his latest report: 
* Some of the most interesting research of recent months concerns the “price inelasticity” of markets. Interesting, that is, to academic economists and monetary policymakers. For anyone who’s actually tried trading in markets over the past decade, the idea that prices might be determined more by flows and liquidity and certain large, price-insensitive buyers than by a rational discounting of fundamentals sounds less like a revolutionary insight and more like a statement of the blindingly obvious As one investor put it to us recently, central bankers seem to be the only market participants left who fail to appreciate the stranglehold their policies have over asset prices: everyone else gave up looking at fundamental value in favour of obsessing over the minutiae of central bank balance sheet line items a long time ago. 
While we are currently on autopilot, we expect to be reminded quite soon just how critical the Fed's liquidity injections are for a binary world where the alternatives are simple: either the Fed prints hundreds of billions every quarter bringing the fiat system ever closer to its death, or we crash....

zondag 19 september 2021

ANKUS Agreement: US And UK Will Help Australia Build Nuclear-Powered Submarine Fleet

The US, the UK and Australia have reached a new agreement called the "AUKUS pact." The US will provide nuclear-power technology to Australia, and Australia will build a fleet of nuclear-powered submarines using the technology, with help from the US and UK. The submarines will be nuclear-powered, but they will not be capable of launching nuclear weapons. The intention is for eight nuclear-powered submarines to be built in Adelaide. The Aukus announcement did not mention China specifically. However, it referred repeatedly to regional security concerns which they said had "grown significantly." Commenting on the agreement, UK Defence Secretary Ben Wallace said China was "embarking on one of the biggest military spends in history. It is growing its navy [and] air force at a huge rate. Obviously it is engaged in some disputed areas. Our partners in those regions want to be able to stand their own ground." The agreement will also provide for industrial cooperation among the United States, Australia, and the United Kingdom on other key technologies, including artificial intelligence, cyber, and long-range precision strike capabilities...


# Furious reaction from China; According to China's Foreign Ministry: "The nuclear submarine cooperation between the US, the UK and Australia has seriously undermined regional peace and stability, intensified the arms race and undermined international non-proliferation efforts. The export of highly sensitive nuclear submarine technology to Australia by the US and the UK proves once again that they are using nuclear exports as a tool for geopolitical game and adopting double standards. This is extremely irresponsible." It's always really funny when the Chinese Communist sleazebags accuse someone of undermining peace and stability, or of being irresponsible. The Chinese Communists are emulating the Nazis by illegally annexing the South China Sea, by threatening Taiwan, and by committing genocide, rape, torture, and other atrocities against millions of Uighurs. What the Chinese sleazebags want is to take control of the entire Indo-Pacific region, without any opposition. The Aukus agreement is a clear challenge to China's illegal military threats.
* Soldiers of China’s People’s Liberation Army (PLA) Navy patrol at Woody Island in the disputed South China Sea...


# Furious reaction from France; The Ankus agreement scraps an existing $90 billion deal that Australia had with the French shipbuilding firm Naval Group. That agreement would have had France provide non-nuclear submarine technology for Australia's submarine fleet. In an interview, France's furious Foreign Minister Jean-Yves Le Drian said: "It's just not done between allies. It's a stab in the back. This unilateral, brutal, unpredictable decision is very similar to what Mr Trump used to do. We had established a relationship of trust with Australia and this trust has been betrayed. This is not the end of the story." France's Defense Ministry added: "Australia's decision is contrary to the letter and spirit of the cooperation that prevailed between France and Australia, based on a relationship of political trust as well as on the development of a very high-level defence industrial and technological base in Australia. Also, the American choice to exclude a European ally and partner from a structuring partnership with Australia, at a time when we are facing unprecedented challenges in the Indo-Pacific region, whether in terms of our values or in terms of respect for multilateralism based on the rule of law, shows a lack of coherence that France can only note with regret." As far as I can tell, France was going to sell Australia old, out-of-date diesel-power technology for the new submarine fleet, while the Aukus agreement sells new nuclear-power technology. I assume that's the reason that Australia canceled the agreement with France and went with the Aukus agreement. 
# Must read articles
* Aukus: UK, US and Australia launch pact to counter China (BBC, 16-Sep-2021) 
* 'Stab in the back': France blasts new UK-US-Australia security pact in Indo-Pacific Access to the comments Comments (Euro News, 16-Sep-2021) 
* Experts React: The US, UK, and Australia struck a nuclear submarine deal. What does it mean? (Atlantic Council, 15-Sep-2021) 
* US, UK and Australia agree new Indo-Pacific security pact (Al-Jazeera, 15-Sep-2021) 
* Foreign Ministry Spokesperson Zhao Lijian's Regular Press Conference on September 16, 2021 (Foreign Ministry, China, 16-Sep-2021) 
* ‘Stab in the back’: French fury as Australia scraps submarine deal (Guardian, London, 16-Sep-2021) 
* Australia beefs up international defence in US, UK pact as Scott Morrison declares ‘this affects us all’ (Australian AP, 16-Sep-2021) 
* Adelaide residents react to nuclear submarine move after Naval Group deal scuttled (Australian Broadcasting, 16-Sep-2021)....

Forget 5G, China Leads The 6G Charge

While the world is still very much in the transition phase with 5G, research is already well underway for the next iteration of the technology standard for mobile broadband networks, 6G. Statista's Martin Armstrong notes that, according to a whitepaper by Samsung it takes an average of ten years for a new standard to become ready for commercialization, with 5G taking eight years. The tech giant suggested a potential rollout date of 2028-2030 for 6G, highlighting the urgent need for progress to be made. As this infographic shows, the country at the front of this new charge is China... 


Data from the Cyber Creative Institute as covered by Nikkei Asia shows that of around 20,000 6G-related patent applications as of August 2021, 40.3 percent originated from the Asian superpower. The United States isn't far behind, however, claiming 35.2 percent of the applications. The home of Samsung, South Korea, is in fifth place (when combining applications for European countries) with 4.2 percent. The source assessed patent applications for nine core 6G technologies including communications, quantum technology, base stations and artificial intelligence. 6G is expected to be about ten times faster than 5G....

France Still Seething, Warns Australia Over "Huge Mistake" In Defense Deal With US

Still seething, French diplomats continue to harangue Washington and Australia over the new landmark defense pact which will center on the US sharing nuclear submarine technology with Australia, which led to the immediate cancelation by Canberra of a major contract for submarines worth over $60 billion (with some estimates putting the total deal struck in 2016 at $90BN). As we detailed earlier, on Friday France recalled its ambassadors to both countries in protest, in a move widely being described as the first time in history Paris pulled its ambassador to Washington in anger. Meanwhile on Saturday France's ambassador to Australia rebuked the country for its "huge mistake". 
* Launch of French nuclear submarine Suffren in Cherbourg in 2019... 


Ambassador Jean-Pierre Thebault said trust and integrity have been broken. "This has been a huge mistake, a very, very bad handling of the partnership," The Associated Press reports. "I would like to be able to run into a time machine and be in a situation where we don’t end up in such an incredible, clumsy, inadequate, un-Australian situation," Thebault added. The initial French sub contract with Australia, which had been first agreed to in 2016, was for France to build 12 conventionally powered submarines modelled on Barracuda nuclear-powered subs. Negotiations had long been tense, particularly after rising costs and significant production delays on the French side. 
# The new 'AUKUS' deal with the United States officially announced Thursday will see Australia acquire at least eight nuclear submarines, allowing it to join a tiny number of countries globally who deploy nuclear-powered subs, in a moved being seen as aimed at countering China's growing power in the Indo-Pacific. Australian Foreign Minister Marise Payne said at the end of this week of which has seen France continue to lash out: "Australia understands France’s deep disappointment with our decision, which was taken in accordance with our clear and communicated national security interests." French FM Le Drian earlier described Australia's scrapping deal "a stab in the back" and warned that trust has been broken between the two trading partners....

JPMorgan: DeFi Adoption By Institutional Investors Surges

It was a busy week for crypto, with many updates in JPMorgan's weekly Crypto Weekly note. Here are the highlights: 
* Bitcoin and ether prices rise in the week. The price of bitcoin and ether rose by about 4% w/w and 6% w/w to $48.1K and $3.6K, respectively. This recovery follows the price decline across major cryptocurrencies after a selloff in the last week. The price of ether gained following the news of its co-founder Vitalik Buterin making it to the TIME's 'Most Influential' List. 
* Trading volume of major cryptocurrencies decline w/w. The average daily volume (ADV) of Bitcoin and Ether declined by 18% and 21% w/w, respectively, as did volatility. The ADV of Litecoin, Dogecoin and Uniswap also declined during the week. 
* At the Senate hearing, SEC Chair Gary Gensler reiterated that most cryptocurrencies, including stablecoins, qualify as securities, which should not be sold without proper risk disclosures. He also said that crypto lending and staking services are likely to fall under SEC’s jurisdiction as lending products come under the securities laws. 
The size of the global market increased in the past week, with the global crypto sector’s market cap increasing 2.2% w/w from $2.1 trillion to $2.2 trillion as of 9/16... 


A snapshot of the key regulatory updates this week... 


It continues to be a busy time for crypto adoption by financial institutions. Among the notable developments: 
* Interactive Brokers will start offering cryptocurrency trading and custody services for Bitcoin, Ethereum, Litecoin and Bitcoin Cash.
* Fidelity Digital Assets plans to increase its headcount by up to 70% between April and year-end. It also plans to offer yield funds and other products related to stablecoins or decentralized finance (DeFi) coins. 
* The Fairfax County pension funds will invest a total of $50 million in a fund which invests in digital tokens and cryptocurrency derivatives. Earlier this year, the pension funds also invested in a crypto venture capital fund. 
* Franklin Templeton is raising $20 million for the firm's first blockchain VC fund. The fund was already raised $10 million from a single sale. The firm is also recruiting engineers in "tokenized asset development department." 
There was also a flurry of news on the adoption by non-financial services companies, including AMC Theaters accepting most cryptos, Googles announcing the development of an NBA-linked blockchain, Square joining the open invention network, and Paris Saint Germain announcing crypto.com as its official cryptocurrency partner... 


Which brings us to the main story: according to JPMorgan, the second quarter of 2021 saw an increase in DeFi adoption by institutional investors as more than 60% of all DeFi transactions were over $10 million versus less than half in the broader crypto market. Institutions in major economies are driving the DeFi activity as emerging markets are still adopting traditional crypto assets. Huobi Ventures announces a $10mm GameFi fund (9/14) to invest in projects developing blockchain based games with “play-to-earn” features such as those in Axie Infinity. Huobi also set up a $100mm DeFi fund and a $10mm NFT fund in May... 


Total Value Locked (TVL) Across DeFi Projects is rising. Total value locked (TVL) refers to the total dollar amount of assets that is staked or “locked” up across all DeFi protocols. Put differently, TVL does not refer to transaction volumes or market cap of cryptocurrencies but rather the value of reserves that are “locked” into smart contracts. TVL can help assess the health of the entire DeFi ecosystem or a specific DeFi project or app. This value does not represent any leverage created by the underlying crypto assets... 


In traditional finance, this could be thought of as deposits in the banking system. Examples of assets included in total value locked include crypto assets staked in yield protocols (ex. depositors earn yield on staked crypto), lending protocols (ex. borrowers post collateral for loans), staked in automated market maker exchanges (ex. liquidity pools for decentralized exchanges), and underlying synthetic assets. As of 9/16/2021, total value locked in DeFi protocols stands at $90.6B...

Actually, It All Makes Sense

Back in June, we explained that the reason behind the market's shocking response to the Fed's hawkish policy announcement when yields plunged instead of spiking higher, had little to do with what the Fed would actually do (as every Fed action is now in direct response to the market, which the FOMC is compelled to prop up no matter the cost) and everything to do with the market's read of r-star, and we quoted DB's head of FX strategy George Saravelos who said that everything that is going on "boils down to a very pessimistic market view on r*" or in other words, the same argument we made 6 years ago when we predicted, correctly, that the Fed's hiking cycle would end in tears (as it did first in November 2018 when the Fed capitulated on its hiking strategy after stocks plunged, and then again in Sept 2019 when the Repo crisis forced the Fed to resume QE)...


The bottom line is that the equilibrium growth rate in the US, or r* (or r-star), was far far lower than where most economists thought it was. In fact, as the sensitivity table below which we first constructed in 2015 showed, the equilibrium US growth rate was right around 0%. This means that each and every attempt by the Fed to tighten financial condition will end in disaster, the only question is how long it would take before this happens... 


Today, we won't recap the profound implications from Powell's huge policy error, but we will touch on a recent blog by Deutsche Bank's Saravelos - who unlike most of his peers on Wal Street, has a clear and correct read on what is currently going on in the market - and to help clients comprehend what's actually going on, he has penned a simple framework to understand current market behavior. As Saravelos puts it, "there is no “puzzle” in the way global bond markets are behaving and it is entirely possible for yields to fall as inflation pressures rise." As Saravelos explains, the starting point is that over the last six months the global economy has been experiencing a negative supply shock due to COVID. This can be most clearly seen in the incredibly sharp run-up in inflation surprises against the equally incredible sharp run-down in growth surprises... 


In simple Econ 101 terms, we are experiencing a leftward shift in the global economy’s supply curve. A negative supply shock (permanent or not) does two things: it lowers growth and increases inflation... 


This is exactly what markets have been doing: inflation expectations are close to the year’s highs, but real rates (the closest market equivalent to a measure of real growth) are at the year’s lows... 


The moves in the two variables are therefore entirely consistent with the incoming data. Now what is most notable is that real yields have dropped more than inflation expectations have risen. The combined effect has been to lower nominal yields. As Saravelos puts it, "there is nothing surprising about this, because there is nothing automatic about which effect dominates" and it ultimately depends on consumer sensitivity to rising prices, or in wonkish terms the slope of the demand curve: the greater the demand destruction from price rises, the bigger the negative effect on growth relative to inflation pushing yields down and vice versa. So, what the market is effectively doing, is pricing in substantial demand destruction from the supply shock. Is this the correct thing to be pricing? Perhaps it is, we have been highlighting this unfolding demand destruction since May, and consumer confidence in the US is collapsing... 


What about central bank reaction functions? There is an automatic belief in the market that higher inflation should mean more hawkish central banks. But as the DB strategist notes, "this belief rests on 30 years of demand shock management, where inflation has always and everywhere been positively correlated to growth." And as an interesting aside, according to Saravelos, Larry Summers was right about inflation risks this year but wrong about the cause: lower supply has dominated over stronger demand. A supply shock similar to the one we are currently experiencing means the central bank response is not obvious, and as a result "raising rates will only make the growth shock worse." By implication, tapering, which is tightening no matter what you read to the contrary, will similarly be a policy mistake and compound the economic slowdown, leading to an even more powerful easing reaction in the coming quarters. Which brings us to central banks' characterization of the current inflation shock as transitory; as DB explains, it is another way of saying that they currently prefer to accommodate rather than respond to the supply shock. In terms of capital markets, ss long as the Fed looks through the shock, risk appetite will likely stay resilient, the dollar weak and volatility low. However, the moment the Fed does respond, all bets are off...
 

Bottom line, current market pricing is fully in line with a supply side shock with very strong demand destruction effects. A low r*, as we have been arguing since 2015 and again since June, is likely to prevail post-COVID only flattens consumer demand curves further. Saravelos concludes that "he continues to believe that it is the behavior of the consumer, including the desired level of precautionary savings as well as the response to the unfolding supply shock that is the most important macro variable for the market this year and beyond." As such, the latest UMich survey which showed that Americans are panicking over soaring inflation, and whose buying intentions have plunged to the lowest levels on record....