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Goldman Warns Turkish Banks Will Be Wiped Out If Lira Hits 7.1

After its worst day in 10 years, the Turkish Lira’s early rebound is already starting to fade amid denied rumors of US officials predicting Lira’s demise, a record high yield at its bond auction, and Goldman warning of the collapse of Turkey’s financial system.

Turkey’s 10Y bond yield topped 20% for the first time ever and Turkey’s Treasury sold 539.7 million liras of 5Y debt today at 22.1% compound yield.

With tensions remaining high, the U.S. Embassy in Turkey has denied news in Turkish media that a U.S. official predicted the lira would weaken to 7 per dollar, calling the claim an entirely baseless “lie.” In two tweets, the Embassy said:

“Despite current tensions, the United States continues to be a solid friend and ally of Turkey. Our countries have a vibrant economic relationship.”

“For this reason, it is unfortunate and disturbing that an American official, who estimates that the U.S. dollar will be $7 TL, is completely unfounded and irresponsible in the Turkish media. It’s a fabricated and baseless lie.”

Well, they are right, it was not “officials” from the US government, it was “unofficials” from Government Goldman Sachs warns that further lira depreciation to 7.1 would erode all of Turkey’s banks’ excess capital.

Within the current backdrop, we view banks as being vulnerable to Turkish Lira depreciation given that it impacts:

(1) capital levels due to a meaningful portion of FC assets, which increase RWAs in local currency terms on Turkish Lira depreciation,

(2) asset quality and cost of risk, as Turkish Lira volatility can put stress on borrowers’ ability to repay as well as underlying collateral values. Moreover, Lira depreciation leads to higher provisioning requirements for FC NPLs, though banks are hedging this risk and can offset the impact through trading income.

…click on the above link to read the rest of the article…

Chasing Yield during ZIRP & NIRP Evidently Starved Human Brains of Oxygen. Now the Price Is Due

Chasing Yield during ZIRP & NIRP Evidently Starved Human Brains of Oxygen. Now the Price Is Due

See Argentina’s 100-year dollar-bond and emerging-market “turmoil” as the Hot Money flees.

Let’s be clear: It’s not just Argentina. But Argentina is the most elegant example. The exodus of the hot money from emerging markets where cheap dollar-debts were used to fund pet projects and jack up leverage is – once again – in full swing. Cheap dollar-debt in emerging markets is an old sin that, like all old sins, is repeated endlessly. The outcome is always trouble. But during the act, it sure is a lot of fun for everyone.

The exodus of the hot money is even gripping the non-basket-case emerging economies of Asia where it’s causing the worst indigestion since 2008. Bloomberg:

Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 – withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan, and Thailand so far this year.

While emerging markets shone in the first quarter, suggesting resilience to Federal Reserve tightening, that image has shattered over the past two months. With American money market funds now offering yields around 2% – where 10-year Treasuries were just last September – and prospects for more Fed hikes, the bar for heading into riskier assets has been raised.

“It’s not a great set-up for emerging markets,” James Sullivan, head of Asia ex-Japan equities research at JPMorgan Chase, told Bloomberg. “We’ve still only priced in about two thirds of the US rate increases we expect to see over the next 12 months. So the Fed is continuing to get more hawkish, but the market still hasn’t caught up.”

Emerging markets have responded to this new environment and a newly hawkish Fed with all kinds of gyrations, including raising rates in order to prop up their currencies. For example, the central banks of Argentina and Turkey hiked key rates to 40% and 17.75% respectively.

…click on the above link to read the rest of the article…

Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

Hilarity in NIRP Zone: Italian 2-Year Yield Still Near 0%, as New Government Proposes Haircut for Creditors and Alternate Currency, Markets on “Knife Edge”

The ECB’s Negative Interest Rate Policy has been the funniest monetary joke ever.

The distortions in the European bond markets are actually quite hilarious, when you think about them, and it’s hard to keep a straight face.

“Italian assets were pummeled again on mounting concern over the populist coalition’s fiscal plans, with the moves rippling across European debt markets,” Bloomberg wrote this morning, also trying hard to keep a straight face. As Italian bonds took a hit, “bond yields climbed to the highest levels in almost three years, while the premium to cover a default in the nation’s debt was the stiffest since October,” it said. “Investors fret the anti-establishment parties’ proposal to issue short-term credit notes – so-called ‘mini-BOTs’ – will lead to increased borrowing in what is already one of Europe’s most indebted economies.”

This comes on top of a proposal by the new coalition last week that the ECB should forgive and forget €250 billion in Italian bonds that it had foolishly bought.

The proposals by a government for a debt write-off, and the issuance of short-term credit notes as a sort of alternate currency are hallmarks of a looming default and should cause Italian yields to spike into the stratosphere, or at least into the double digits.

And so Italian government bonds fell, and the yield spiked today, adding to the prior four days of spiking. But wait…

Five trading days ago, the Italian two-year yield was still negative -0.12%. In other words, investors were still paying the Italian government – whose new players are contemplating a form of default – for the privilege of lending it money. And now, the two-year yield has spiked to a positive but still minuscule 0.247% at the moment. By comparison, the US Treasury two-year yield is 2.57% over 10 times higher!

…click on the above link to read the rest of the article…

Time to Keep Your Cash in the Microwave?

Time to Keep Your Cash in the Microwave?

The Fed’s Big Pivot

NORMANDY, France – “Now, I think I’ve seen everything” is an expression that – like “this is the end of history” and “I’ll never leave you” – usually turns out to be premature. But it is what we found ourselves saying yesterday. Not out loud. We just moved our lips in mute amazement.

micxrowaveModern cash storage method pioneered by desperate Swedes
Photo credit: SWNS.com

On Tuesday, the Italian government sold a 2-year note yielding MINUS 0.023%. We don’t know what is more preposterous: that the Italians were able to borrow money at a negative nominal interest rate or that the press reported this transaction with a straight face.

Italy, 2 year yieldEverything is awesome: an essentially bankrupt government sells two year notes at a negative yield! Today’s make-believe world created by central bankers and regulators is probably the biggest economic powder keg yet – click to enlarge.

It should have provoked howls of laughter, withering scorn, and unvarnished derision. But here at the Diary, we will not point the finger and chuckle. We will not invoke our usual tone of sarcasm. We will not damn the whole thing to Hell with loud and blustery cussing.

Instead, we’ll take the high road; we just want to know what it means. But before we get to that, let us pick up the news. Here’s the latest, from Bloomberg:

“Federal Reserve officials pivoted toward a December interest-rate increase, betting that further job gains will lead to higher inflation over time and allow them to close an unprecedented era of near-zero borrowing costs. The Federal Open Market Committee dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed liftoff timing in a statement released Wednesday in Washington, preparing investors for the first rate rise since 2006.”

…click on the above link to read the rest of the article…

Credit Market Warning: Long-awaited signs of danger are materalizing

Credit Market Warning: Long-awaited signs of danger are materalizing

Look, we all know that this centrally planned experiment forcing financial assets ever higher is simply fostering multiple bubbles, each in search of a pin. As all bubbles do, they are going to end with bang.

I keep my eyes on the credit markets because that’s where the real trouble is brewing.

Today’s markets are so distorted that you can reasonably argue that there’s not much in the way of useful signals emanating from them. And I wouldn’t put up too much of a counter-argument. But it’s my contention that the bond market is the place to watch as it will provide the most useful clues that a reckoning has begun. And when these markets eventually return to earth, there will be blood in the streets.

While some may hope that rising yields are signaling a return to more rapid economic growth, or at least that the fear of outright deflation has lessened, the more likely explanation is that something is wrong and it’s about to get… wronger.

Rising Yields

Let’s begin with the first canary in this story, rising yields. The yield of a bond, expressed as a rate of interest, moves oppositely to its price. The higher the price goes, the lower the yield goes. The lower the price, the higherthe yield. Imagine the relationship like a playground see-saw.

Over these past few weeks and months, we’ve seen yields moving up quite a lot across a wide variety of bonds, at least in terms of the percentage size of the move (yes, the yields are still historically low by any measure).

…click on the above link to read the rest of the article…

 

 

The Swiss Franc Will Collapse

The Swiss Franc Will Collapse

I have worked to keep this piece readable, and as brief as possible. My grave diagnosis demands the evidence and reasoning to support it. One cannot explain the collapse of this currency with the conventional view. “They will print money to infinity,” may be popular but it’s not accurate. The coming destruction has nothing to do with the quantity of money. It is a story of what happens when interest rates fall into a black hole.

 

Yields Have Fallen Beyond Zero

The Swiss yield curve looks like nothing so much as a sinking ship. All but the 20- and 30-year bonds are now below the water line.

Swiss Yield Curve Jan23

Look at how much it’s submerged in just one week. The top line (yellow) is January 16, and the one below it was taken just a week later on January 23. It’s terrifying how fast the whole interest rate structure sank. Here is a graph of the 10-year bond since September. For comparison, the 10-year Treasury bond would not fit on this chart. The US bond currently pays 1.8%.

 

Today’s Market Contagion: Energy High-Yield Credit Spreads Blow Above 1000bps For First Time Ever | Zero Hedge

Today’s Market Contagion: Energy High-Yield Credit Spreads Blow Above 1000bps For First Time Ever | Zero Hedge.

For the first time on record, HY Energy OAS has broken above 1000bps – signifying dramatic systemic business risk in that sector (despite a modest rebound today in crude prices). The energy sector is entirely frozen out of the credit markets at this point with desk chatter that there is no bid for this distressed debt at all and air-pockets appear everywhere as each new trade reprices the entire sector. The broad high-yield ‘yield’ and ‘spread’ markets are now under significant pressure – both pushing to the cycle’s worst levels.

HY Energy weakness is propagating rapidly into the broad HY markets:

This suggests significant weakness to come for Energy stocks:

This cannot end well (unless the Fed decides monetizing crude in addition to TSYs and E-Minis is part of its wealth preservation, pardon “maximum employment, stable prices, and moderate long-term interest rates” mandate…)

Olduvai IV: Courage
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Olduvai II: Exodus
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