Doug Noland: Black Friday

Where is it safe these days for levered speculation? It is a fundamental Credit Bubble Bulletin (CBB) tenet that contemporary finance works wonderfully, so long as leverage and speculation are expanding. It does not function well in reverse.

I posted a link Thursday morning to a Bloomberg article, “New Coronavirus Variant a ‘Serious Concern’ in South Africa.” The seemingly small outbreak generated minimal media attention. Within 24 hours, however, global markets were in a tailspin, with Crisis Dynamics gaining critical momentum. The World Health Organization Friday in an emergency meeting designated the new B.1.1.529 – “Omicron” – a “variant of concern.”

From Thursday’s Bloomberg article, “Virologists have detected almost 100 cases linked to the variant in the country to date…” By Friday, there were individual cases reported in Hong Kong, Brussels and Israel, all travelers from South Africa, along with a number of infections in Botswana. Friday from Bloomberg: “Early PCR test results showed that 90% of 1,100 new cases reported Wednesday in the South African province that includes Johannesburg were caused by the new variant.” “This new variant, B.1.1.529 seems to spread very quick! In less than 2 weeks now dominates all infections following a devastating Delta wave in South Africa.”

It could take scientists several weeks to better understand what the world is dealing with.

November 26 – Financial Times (Clive Cookson and Oliver Barnes): “The 50 mutations on the new B.1.1.529 variant… include more than 30 on the spike protein, the exposed part of the virus that binds with human cells. These changes could make it more transmissible than the dominant Delta variant and more likely to evade the immune protection conferred by vaccines or prior infection. Scientists are concerned for two main reasons. One is epidemiological and relates to the speed with which the variant that emerged this month is spreading in South Africa, particularly in Gauteng province… Daily cases have more than tripled in South Africa since Tuesday, with 2,828 cases recorded on Friday. Early testing results indicated that 90% of the new cases on Wednesday in Gauteng were caused by the new variant… The other cause for concern is its highly unusual genetic profile. Jeffrey Barrett, director of the Covid-19 Genomics Initiative at the Wellcome Sanger Institute, described Omicron as ‘an unprecedented sampling’ of mutations from four earlier variants of concern: Alpha, Beta, Gamma and Delta. There are other genetic changes that have not been seen before, whose significance is as yet unknown, he added. Worryingly, said Jacob Glanville, a computational immunologist and founder of California therapeutics company Centivax, 15 of the mutations are on the ‘receptor binding domain’ — which acts like a ‘grappling hook’ for the Sars-Cov-2 virus to enter human cells. These mutations help the virus circumvent the body’s immune defences because it is trained by vaccines or prior infection to recognise and fight the original Wuhan strain. By comparison, the Delta variant which accounts for almost all sequenced cases worldwide dented the effectiveness of vaccines with just three mutations in this region.”

November 26 – Business Insider (Aria Bendix): “South African researchers identified the first Omicron case on November 9, then reported the variant to the WHO on Wednesday. Scientists are hopeful that they spotted the variant early, since the majority of known cases are still concentrated in southern Africa… Still, a number of markers suggest that Omicron is highly transmissible relative to other coronavirus strains. For one, South Africa’s coronavirus cases have risen sharply over the last few weeks: Average daily cases have risen 13-fold since the variant was first discovered on November 9, from around 275 to 3,700 cases per day. Omicron also contains several worrisome mutations found in other variants of concern — including Delta and Alpha — that could help it spread, render vaccines less effective, or potentially lead to more severe disease. The new variant carries some unfamiliar mutations, as well. ‘There are a number of mutations that we don’t have any information about,’ Jetelina said. ‘They’ve never seen them on previous variants of concern. So I think one of the first questions is: What are these? Do we need to worry about them or not?’ So far, scientists have identified 32 mutations on the variant’s spike protein — the sharp, crown-like bumps on the surface of the virus that help it invade our cells. Other variants of concern have had fewer spike mutations.”

November 26 – Bloomberg: “Based on omicron’s mutation profile, partial immune escape is likely, the European Centre for Disease Prevention and Control said in a threat assessment report Friday. The EU’s health agency is among the first official authorities to acknowledge that vaccines may not work well against the new strain. ‘The omicron variant is the most divergent variant that has been detected in significant numbers during the pandemic so far, which raises concerns that it may be associated with increased transmissibility, significant reduction in vaccine effectiveness and increased risk for reinfections,’ the ECDC said.”

Market reaction was swift and, in many cases, brutal. Pundits suggested panicked markets were overreacting. There is as yet no evidence of more severe symptoms from Omicron, and South Africa’s early recognition and communication offer the possibility of more successful global containment efforts. The U.K. and European Union moved quickly to restrict travel from South Africa, followed by Singapore, Japan, the U.S., Canada and others.

Once again, the wily Covid virus boasts ghostly timing. Omicron barges in with de-risking/deleveraging and global Crisis Dynamics attaining pivotal momentum. And with contagion rapidly enveloping the emerging markets (EM), disaster strikes for the vulnerable South African domino already in line for trouble.

The South African rand this week sank 3.4%, increasing 2021 losses to 9.8%. South African 10-year yields jumped 19 bps Friday (high since April 2020), boosting the week’s yield spike to 43 bps. South African CDS Friday surged 25 (43 for the week) to 252 bps – the high since March.

An index of EM CDS surged 19 Friday – the largest one-day rise since September 2020 – to 221 bps, the high back to October 2020. EM CDS surged 34 for the week, the biggest weekly gain since September 2020. Friday saw sovereign CDS surge 17.5 in Brazil to 268 bps (high since June 2020), 17.5 in Colombia to 218 bps (May 2020), and nine in Chile to 99 bps (May 2020). For the week, CDS jumped 26 bps in Brazil, 32 bps in Colombia, 27 bps in Mexico, and 11 bps in Indonesia.

November 25 – Wall Street Journal (Jared Malsin and Anna Hirtenstein): “A currency crisis here is battering Turks’ confidence in their government’s ability to manage the economy, causing droves of people to buy U.S. dollars and sending crowds of people into the streets to oppose President Recep Tayyip Erdogan’s policies. Riot police lined the streets in parts of Istanbul as the country braced for a third night of scattered protests over Mr. Erdogan’s inability to stop a precipitous drop in the Turkish lira. The lira’s depreciation has undermined nearly two decades of economic gains that had lent Turks a sense that they were ascending into the world’s club of top economies. Such protests have been rare since Mr. Erdogan concentrated power following a 2016 coup attempt…”

The last thing Turkey needed was a stiff forearm shove toward a full-fledged financial and economic crisis. The Turkish lira sank another 2.8% Friday, pushing losses for the week to 8.9% – for the month to 22.1% and for 2021 to about 40%. Turkey’s 10-year (lira) yields spiked 80 bps this week, trading above 20% for the first time since May 2019. Turkey CDS surged 28 Friday (58 for the week) to a one-year high 504 bps. For a country with a population of 84 million – that saw living standards and expectations inflate right along with its Credit Bubble – the collapse is turning increasingly desperate.

Mexico is another key EM domino – with self-inflicted wounds placing it directly in the line of fire.

November 24 – Financial Times (Christine Murray and Eric Platt): “Mexico’s president unnerved financial markets on Wednesday by nominating an obscure public sector economist to head the country’s central bank, causing the peso to slide to its lowest level since March. The announcement came a day after unexpected news that President Andrés Manuel López Obrador had withdrawn his previous nominee Arturo Herrera — a former finance minister better known to investors. At his morning news conference, López Obrador gave little explanation for his change of heart but tried to calm fears that he wants to interfere in the bank’s policymaking.”

The Mexican peso sank 5.0% this week, boosting y-t-d losses to 9.2%. Mexico’s local currency yields jumped 21 bps to 7.68%, the high since the March 2020 market crisis. Mexico’s dollar bond yields rose 16 bps to 3.16% (high since March). Mexico CDS jumped 14 Friday to 125 bps (October 2020), with the week’s 27 bps jump the largest gain since June 2020. Mexican stocks dropped 2.6% this week.

Fragile Brazil’s dollar bond yields surged another 34 bps this week to 4.99%, the high since June 2020. Brazil’s mid-November annual inflation jumped to 10.73%. From Goldman Sachs chief Latin America economist Alberto Ramos (from Bloomberg): “Overall, inflation is now very generalized with overwhelming evidence of significant second-round effects.”

So-called “strongmen” leaders from Ankara to Mexico City and beyond have not taken inflationary surges seriously. They act as if the world hasn’t changed from earlier halcyon days of seemingly endless global liquidity and yield-chasing EM “hot money” inflows. Especially these days, there is no overstating the critical role played by disciplined, principled, and independent central banking. Enormous speculative leverage throughout the emerging markets left no room for error. Tons of erroneous policies and market misperceptions created currency and bond market fragilities, with Crisis Dynamics having now been unleashed.

Bubbles at their core are pernicious mechanisms for wealth redistribution and destruction. Geopolitical risk is a key Bubble manifestation, with the current most protracted global Bubble unmatched in this regard. Competing head-to-head with Covid in terms of stubborn persistency, there was similarly no relief this week from mounting geopolitical risks.

November 26 – Wall Street Journal (Ann M. Simmons): “Ukrainian President Volodymyr Zelensky accused Russia of backing a plan to overthrow him, in remarks that threaten to aggravate tense relations between Kyiv and Moscow as Western officials warn of a possible Russian invasion of Ukraine. Mr. Zelensky told reporters Friday that he had received information through Ukrainian security services that a coup would be undertaken on Dec. 1-2, according to Ukraine’s national news agency, Ukrinform. He said the Ukrainian government had intelligence as well as audio intercepts.”

November 22 – Bloomberg (Alberto Nardelli and Jennifer Jacobs): “The U.S. has shared intelligence including maps with European allies that shows a buildup of Russian troops and artillery to prepare for a rapid, large-scale push into Ukraine from multiple locations if President Vladimir Putin decided to invade… That intelligence has been conveyed to some NATO members over the past week to back up U.S. concerns about Putin’s possible intentions and an increasingly frantic diplomatic effort to deter him from any incursion, with European leaders engaging directly with the Russian president. The diplomacy is informed by an American assessment that Putin could be weighing an invasion early next year as his troops again mass near the border.”

The Russian ruble was slammed 2.8% this week. Russia’s 10-year yields traded to an almost three-year high 8.64% in Tuesday trading, before ending the week up 10 bps to 8.46%. Russia CDS jumped 12 Friday (24 for the week) to a one-year high 124 bps. Russian stocks were pummeled 5.1%. Ukraine dollar bond yields surged 30 bps Friday – and 91 bps for the week – to 8.31% (high since May 2020). Ukraine CDS jumped 33 Friday – 66 bps for the week – to 554 bps, the high back to April 2020.

With Crisis Dynamics now in full swing within the global “Periphery,” the “Core” is in heightened jeopardy. European stocks were hammered this week. France’s CAC40 sank 4.8% in Friday trading (down 5.2% for the week), with major indices falling 4.2% in Germany (down 5.6%), 5.0% in Spain (down 4.0%), 4.6% in Italy (down 5.4%), and 3.6% in the U.K. (down 2.5%). Ominously, Italian bank stocks were slammed 7.8%, with European banks sinking 5.9%. An index of bank (subordinate) debt CDS surged 19 this week to 131 bps, the largest increase in over a year.

Greek yields jumped 13 bps to 1.28%, trading Thursday to the high since June 2020. Italian yields surged to 1.12% in Wednesday trading, before ending the week up 11 bps at 0.97%. With German bund yields increasing only one basis point, European periphery yield spreads (to bunds) widened meaningfully this week.

JPMorgan CDS jumped 4.8 Friday (6 for the week) to a 13-month high 52.25 bps, the largest one-day increase since June 11, 2020. Bank of America CDS rose five Friday to the high since July 2020. Highflying U.S. bank stocks sank 4.2% Friday, in what could prove a wake-up call for stocks that have remained oblivious to mounting risks.

“Core” U.S. corporate Credit is indicating vulnerability. Investment-grade CDS jumped 4.5 Friday (largest gain in two months) to an eight-month high 57.5 bps. High-yield CDS surged 20 (biggest gain since March) to a one-year high 327 bps. High-yield bond funds suffered outflows over the past week of a notable $3.3 billion.

The week brought no respite to the wild west Treasury marketplace. Ten-year Treasury yields rose to 1.69% in Wednesday trading, only to reverse sharply lower Friday to close the week down seven bps to 1.48%. The market Wednesday priced in 2.8 rate increases by the Fed’s December 14, 2022 meeting. It had dropped to 2.1 by Friday’s close.

It was definitely Black Friday for crude and some other commodities. WTI was slammed $10.24, or 13%, to an 11-week low $68.15. The Bloomberg Commodities Index dropped 2.2%. If there were any doubts, the cryptocurrencies are vulnerable speculative vehicles. Bitcoin was hammered for more than 7%.

Where is it safe these days for levered speculation? It is a fundamental CBB tenet that contemporary finance works wonderfully, so long as leverage and speculation are expanding. It does not function well in reverse. Global “risk off” de-risking/deleveraging took a meaningful leap forward this week. China’s historic Bubble continues to deflate, while virulent contagion ruthlessly targets the weak and vulnerable throughout the emerging markets. And, importantly, a bout of risk aversion Friday slammed the “Core.” At this point, a lot has to go right to restrain energized Crisis Dynamics hellbent on engulfing an unprepared world.

Original Post 27 November 2021

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