The market has taken over The Fed's role - forget above 25bps here or there, the cost of funding for even the highest quality US Corporates is exploding...Simply put, the credit cycle has turned and is accelerating rapidly - crushing any hopes for debt-funded shareholder-friendliness.
And, as Bloomberg calculates, this means that as of this moment, $7 trillion or about 30% of all sovereign bonds, are yielding negative rates, implying "investors" have to pay governments for the privilege of holding their money. It also means that in the past 10 days a record $1.5 trillion in global treasurys have gone from having a plus to a minus sign in front of their yield
The ECB's "whatever it takes" ponzi strategy of keeping the dream alive in Europe's financial system has finally been caught as rapid collapse in the banking system is contagiously spreading to peripheral sovereigns once again. Portugal risk spreads are up 120bps in the last 3 weeks and Spain and Italy are soaring over 35 and 50bps respectively as the almost self-dealing nature of banks buying "risk-free" EU bonds and repoing for cash via The ECB comes home to roost...And now The ECB is cornered as any more NIRP will merely exacerbate the stress in the financial system and lead to a vicious circle in sovereign risk.
“The Nikkei has been well and truly savaged today,” said Chris Weston, chief markets strategist at IG in Melbourne. “It is clear that strong buying in the Japanese government bond market is not going to drive the (yen) weaker in times of extreme volatility, so negative rates have little bearing on markets.”
The Bank of Japan’s rates decision has prompted fears that after years of monetary easing, central banks have few avenues left to explore to encourage investment and boost growth.
Talk of an impending recession in the US, however, is creating speculation among investors that the federal reserve will put on hold its attempts to normalise rates
U.S. bank stocks and bonds took a pounding on Monday as recession fears compounded concern about their exposure to the energy sector and expectations that global interest rates are unlikely to rise quickly.
The S&P 500 financial index, already the worst performing sector this year, fell 2.6 percent and now stands more than 20 percent from its July 2015 high, confirming the sector is in the grip of a bear market.
Shares of Morgan Stanley slid 6.9 percent in their largest one-day drop since November 2012, while rival Goldman Sachs fell 4.6 percent. Both stocks closed at their lowest since the spring of 2013.
Meanwhile, bonds issued by U.S. banks extended their decline, with the yield premium demanded by investors to hold these securities, rather than safer U.S. Treasury debt, climbing to the highest in three-and-a-half years, according to Bank of America Merrill Lynch Fixed Income Index data.
"Investors' attitudes seem to be worsening relative to the likelihood of a global recession. I think that's what financials are reflecting – that their net interest margins are going to be further compressed under collapsing (sovereign) bond yields," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia
BANK DEBT UNDERPERFORMS
The pessimism around bank profits continues bleeding through credit markets as well. High grade financial sector yield spreads have climbed to an average of 211 basis points over comparable U.S. Treasuries, their highest level since August 2012, according to Bank of America Merrill Lynch data.
The widening is a dramatic turnaround for banks, which strongly outperformed other sectors last year, prompting many investors to name them as one of their top picks for 2016.
Banks have issued about 91 billion euros ($102 billion) of the riskiest notes, called additional Tier 1 bonds,since April 2013. The problem is the securities are untested and if a troubled bank fails to redeem them at the first opportunity or halts coupon payments investors may jump ship, sparking a wider selloff in corporate credit markets.
“It’s the first thing that gets cut from portfolios,” said David Butler, a portfolio manager at Rogge Global Partners, which oversees about $35 billion of assets. “When the wider credit market turns, it leaves investors exposed.”
The notes were issued in Europe and offer some of the highest yields in credit markets, at an average 7 percent, compared with an average yield for European junk credits of less than 6 percent, according to Bank of America Merrill Lynch indexes.
But critics say banks are too opaque, the notes are too complex to be properly understood, they’re too varied and too much like equity to be considered bonds. With so many unknowns, the risks are high.
“Basically you have the upside of fixed income and the downside of equity,” said Gildas Surry, a portfolio manager at Axiom Alternative Investments. “AT1s are instruments of regulators, by regulators, and for regulators.”
Central banks will panic. They will do whatever they can to save the markets.
It’s artificial… it won’t work… there comes a time when no matter how much money you have, the market has more money.
I don’t know if they’ll even call it QE (Quantitative Easing) in the future… who knows what they’ll call it to disguise it… they’re going to try whatever they can… printing more money or lowering interest rates or buying more assets… but unfortunately, no matter how much P.R. or whitewashing they use, the market knows this is over and we’re not going to play this game anymore.
Seven years after the global financial crisis erupted in 2008, the world economy continued to stumble in 2015. According to the United Nations’ report World Economic Situation and Prospects 2016, the average growth rate in developed economies has declined by more than 54% since the crisis. An estimated 44 million people are unemployed in developed countries, about 12 million more than in 2007, while inflation has reached its lowest level since the crisis
But the dominant policies during the post-crisis period – fiscal retrenchment and quantitative easing (QE) by major central banks – have offered little support to stimulate household consumption, investment, and growth. On the contrary, they have tended to make matters worse. ...
Neither monetary policy nor the financial sector is doing what it’s supposed to do. It appears that the flood of liquidity has disproportionately gone toward creating financial wealth and inflating asset bubbles, rather than strengthening the real economy. Despite sharp declines in equity prices worldwide, market capitalization as a share of world GDP remains high. The risk of another financial crisis cannot be ignored.
Anxiety over negative central bank interest rates and new bail-in laws send banking stocks spiralling in a turbulent day of trading
Russian Foreign Minister Sergey Lavrov made it absolutely clear (to Turkey and to everyone else) that Russia intends to close the border area between ISIS-held territory and Turkey: "The key point for the ceasefire to work is a task of blocking illegal trafficking across the Turkish-Syrian border, which supports the militants," he said. "Without closing the border it is difficult to expect the ceasefire to take place." Russia is politely telling Turkey that any incursion risks direct confrontation and war. Recently, for whatever reason, ISIS forces have appeared to start pulling out of that area.
The grey, ISIS-controlled corridor, especially the Jarablus border crossing with Turkey, remains effectively open. Turkey has proclaimed this represents its "red line." Were this corridor to be closed by the Syrian Kurds, the Turks have indicated they could respond by invading Syria. The YPG say nonetheless, that they are contemplating just such a move....
should Nusra members (who are mainly Syrian) and other rebels try to disperse and hide amongst local communities, there will be no water in which these fish can swim, to paraphrase the Maoist adage. They will find little or no public support. Syria has a very effective intelligence service. We may expect that within a year, most of the disbanded jihadists will have been found out and reported to the intelligence services by locals, who suffered grievously under their occupation. Most will be arrested or killed.
liquidity crisis always lead to financial crisis, and yes, dear readers, credit always lead equities....deteriorating liquidity is at the heart of and may be the primary driver of broader rising financial stress. If so, then continuation of the rising trend in liquidity stress may eventually lead to another spike in broader financial stress in the months ahead." - source Bank of America Merrill LynchCredit flows matters, because if indeed, the "credit tap" is about to be turned off, recovery and growth will be difficult particularly for China, in the absence of course of a sizeable real exchange rate depreciation. This would trigger a significant deflationary wave impulse for the rest of the world rest assured....
The next question that arises is: what can be done to stabilize liquidity, or even reverse the trend of liquidity deterioration? ...The only response to poor liquidity would be related to cause #2, the credit problems. We see two possible alternatives to watch for:
1. A coordinated global policy response. Here we are referring to what BofAML Chief Investment Strategist Michael Hartnett is calling the “Shanghai Accord,” a coordinated policy response from G20 Finance Ministers and Central Bankers at the February 26-27 Shanghai meeting.
2. Coordinated oil supply cuts from OPEC and Russia, which would help alleviate the downward pressure on oil, and the associated credit stress.
Barring developments on these fronts, further liquidity deterioration seems inevitable.