Day Nine
Doug Nolan
On Day Two, it was pretty clear that Day One developments were history-changing.
Here at Day Nine, there’s absolutely no doubt.
Between Day Two and Day Nine, the situation has deteriorated beyond what anyone thought likely.
The evil is more extreme; the courage and determination of the Ukrainians even more phenomenal.
Myriad risks are of an extreme nature.
We can only hope the current trajectory is not maintained through Day 16 and beyond.
March 4 – CNN:
“Russia now seems prepared to ‘bombard cities into submission,’ one senior western intelligence official said on Friday, which could include a significant increase in the number of civilian casualties.
‘It’s a very crude approach,’ the official said.
‘The heavier weapons are not just heavier in the weight, they’re also heavier in terms of the damage that they can inflict.
And they’re far less discriminant.’
Other officials have noticed a shift in Russian strategy from military targets to civilians, with more attacks becoming focused on population centers.
‘The days to come are likely to be worse, with more death, more suffering, and more destruction, as the Russian armed forces bring in heavier weaponry and continue their attacks across the country," NATO Secretary General Jens Stoltenberg said…”
March 3 – New York Times (Marc Santora and Mike Ives):
“One week into their invasion of Ukraine, Russian forces are ramping up assaults on civilian areas, making strategic advances in the coastal south and beginning to lay siege to major cities.
The invasion by President Vladimir V. Putin’s troops… kicked off Europe’s largest ground war since World War II.
In the days since, parts of towns and cities along Ukraine’s eastern border with Russia have been reduced to rubble by Russian forces…
Major cities, including the capital, Kyiv, have faced significant onslaughts…
As the war moves to an increasingly brutal phase, Russian artillery and rocket fire have cut off electricity, water and heat to many communities.
Reports are also multiplying of Russian strikes against hospitals, schools, apartment complexes and critical civilian infrastructure.
And a humanitarian crisis looms: More than a million people have already fled the country, according to the head of the United Nations refugee agency.”
March 3 – Reuters (Natalia Zinets, Pavel Polityuk, Alessandra Prentice):
“Russian forces are trying to blockade the southeastern Ukrainian port city of Mariupol, knocking out power, water and heating supplies with bombardment that is preventing residents from fleeing, local authorities said…
As Russia's invasion of Ukraine enters its second week, the port city is seeing some of the fiercest fighting with constant shelling for the past 24 hours, Mayor Vadym Boichenko said in a video broadcast.
The city authorities likened the Russian onslaught to Nazi Germany's protracted deadly siege of the then-Soviet city of Leningrad during World War Two.
‘Mariupol remains under fire.
Women, children and the elderly are suffering.
We are being destroyed as a nation.
This is genocide of the Ukrainian people,’ the city's council said…”
March 2 – Reuters (Pavel Polityuk, Natalia Zinets and Aleksandar Vasovic):
“Ukraine's second biggest city, Kharkiv, suffered heavy bombardment on Wednesday as Russia's week-long invasion was denounced by the United Nations in a historic vote and dozens of countries referred Moscow to be probed for potential war crimes.
The biggest attack on a European state since 1945 has caused over 870,000 people to flee, led to a barrage of economic measures against Russia, and stoked fears of wider conflict in the West unthought-of for decades.
March 4 – CNN:
“Ukrainian authorities have released video from inside the control room at the Zaporizhzhia nuclear power station, which was taken over by Russian forces late Thursday.
The video shows the inside of the control room as an announcement rings out on a PA system aimed at the Russian forces outside.
Here is what the announcement said: ‘Stop shooting at a nuclear dangerous facility.
Stop shooting immediately!
You threaten the security of the whole world!’
‘The work of the vital organs of the Zaporizhzhia station may be disrupted.
It will be impossible for us to restore it.’
‘You are endangering the security of the entire world.
Attention!
Stop shooting at a nuclear hazardous facility.
Stop shooting at a nuclear hazardous facility!’
‘Stop shooting at a nuclear hazardous facility!
Attention! Stop it!’”
March 4 – Daily Mail (Chris Pleasance, Chris Jewers, Harriet Alexander and Kaya Terry):
“Boris Johnson has accused Russia of ‘threatening the security of the whole of Europe’ after Putin's troops attacked the continent's largest nuclear power plant overnight, sparking a fire that raged for hours before emergency crews were eventually allowed to extinguish it as Russian soldiers seized the complex.
Mr. Johnson condemned the attack as ‘reckless’ after a phone call with President Volodymyr Zelensky who branded it ‘nuclear terrorism’.
Jens Stoltenberg, who is in Brussels today to meet with NATO allies, denounced attacks on all civilian infrastructure and said the fire at the plant underlined the need to end Putin's war as soon as possible.”
Meanwhile, panic buying overwhelmed global commodities markets.
The Bloomberg Commodities Index surged 13.0% to the high since 2014 - the “most stunning weekly surge in records that go back to when Nikita Khrushchev was in the Kremlin.”
WTI Crude jumped $24.09, or 26.3%, to $115.58 (up 54% y-t-d).
Palladium jumped 27.1%, Nickel 18.7%, Iron Ore (DCE) 15.5%, Aluminum 14.6%, Zinc 11.9%, Copper 10.1%, and Tin 6.9%.
In the precious metals, Golds rose 4.3%, Silver 5.9%, and Platinum 6.5%.
Too much “money” chasing limited supplies.
March 4 – Bloomberg (Megan Durisin and James Poole):
“This week will go down in wheat trading history.
Chicago futures for the grain have soared 40% -- the most ever -- as Russia’s war in Ukraine upends global grain supplies.
That puts prices at a 14-year high, and milling wheat in Paris reached an unprecedented 400 euros ($438 per ton).
The war is stalling shipments from one of the world’s most vital breadbaskets.
Ukraine and Russia together account for a quarter of global trade of the staple, used in everything from bread to couscous and noodles.”
It was an ominous week for the global food supply and its price.
Wheat (May contract) surged 40.6%, increasing y-t-d gains to 57%.
Corn jumped 15% (up 27% y-t-d), and Soybeans rose 5.4% (up 26%).
Representative David Scott (A question to Chair Powell during Tuesday’s House Financial Services Committee hearing):
“I want to sound the alarm here this morning, and I want you to listen to me and I want the nation to because I’m the chairman of our House Agriculture Committee - and I’m very worried about this turmoil over in Ukraine and Russia’s violent, illegal and criminal action that they are taking and the impact that this has on global trade and most importantly, our own food security.
We could very well be on the verge of a hunger crisis all over this world…
I want to ask you, Chairman Powell, the disruptions and rising prices from these commodities will destabilize global food markets and threaten our food stability and social stability.
So, my question to you, Mr. Chairman Powell, to what extent could these developments create a financial stability risk here at home and abroad, and what must we do?
We can go without a lot of things in this world, but the one thing we cannot go without is food.
And when you have this much power on our food security for the world in the hands of these two countries warring at each other at this time, what can you do about it?”
Chair Powell:
“Sir, your point is very well taken and I think… it’s shipping, it’s corn, it’s wheat, as you pointed out, it’s fertilizer, and we see that getting into food prices and into the food supply just -- just in these early days after the sanctions have been put in place and the war less than two weeks old now.
I really -- the Fed doesn’t really have the tools to address this.”
During the hearings, Powell was queried on energy prices and a potential energy crisis, along with global supply chain issues.
He was grilled on inflation.
At least Powell asserted that the Fed had some control over inflation.
“Hindsight says we should have moved earlier… We’re going to use our tools, and we’re going to get this done.”
Going back three decades to the Greenspan Fed, the almighty Federal Reserve seemingly had a solution for just about any problem.
Wars, financial crises, economic downturns, terrorist attacks, and a pandemic.
Fed acted as boundless Superman to the rescue with ever lower rates and more powerful monetary inflation.
And the bigger the crisis, the more aggressive the inflationary measures.
At least for financial markets, crises were no longer something to fear.
Indeed, they were money-making opportunities.
And this perception became ever more deeply embedded in financial asset and derivative prices – and Market Structure - across the world.
Here at Day Nine, Everything Has Changed.
The Fed and global central bank community have no solutions for the worst European military crisis since WWII. No solutions for spiking energy, food and materials prices.
No solution for unfolding shortages of so many vital commodities.
No solution for panic buying.
No solution if China decides to use its horde of dollars to procure additional supplies of commodities – at any price.
No solution for a worsening global supply chain crisis.
No solution for Russian bank insolvencies, collapsing securities values and illiquidity.
None for the paralyzed Central Bank of the Russian Federation.
No solution for a new “iron curtain.”
No solution for the risk of a nuclear crisis (damaged energy facilities or warheads).
No solution for the risk of war expanding to include the U.S. and NATO.
There is today little central bankers can say or do to mitigate the myriad risks that have overwhelmed the markets and world.
European bank Credit default swap (CDS) prices surged this week to highs since 2020.
UniCredit CDS jumped 14 to 111 bps, Deutsche Bank 14 to 81 bps, Credit Suisse 13 to 118 bps, and Societe Generale 12 to 69 bps.
An index of European subordinated bank bond CDS surged a whopping 40 to 182 bps (began the year at 108), the largest weekly gain since April 2020.
It’s worth noting European markets rapidly approached dislocation during Tuesday’s session.
Sovereign yields nosedived, with 10-year Italian yields collapsing 30 bps, Greek yields 21 bps, Portuguese yields 27 bps and Spanish yields 26 bps.
For the week, German 10-year bund yields sank 30 bps, closing Friday at negative 0.07%.
German (-10.1%), French (-10.2%), and Italian (-12.8%) equities indices all suffered double-digit declines for the week.
There were levered trades coming unraveled.
February 28 – Bloomberg (Greg Ritchie and Garfield Reynold):
“Money markets are showing the most stress since the early days of the pandemic, as traders race for dollars in the wake of toughened sanctions against Russia, prompting calls for help from central banks.
The cost of converting both euro and yen payments into dollars using three-month cross-currency basis swaps hit the most since March 2020.
The gap between future Libor and Federal Reserve rates, a key gauge of funding stress known as the FRA/OIS spread, also widened for one-month contracts by the most since March 2020.”
European Bank Stocks (STOXX 600) sank a brutal 16.0% this week, with Italian Banks collapsing 23.5%.
U.S. Banks (BKX) were drilled 7.7%. JPMorgan sank 9.2%, Bank of America 9.0% and Citigroup 8.7%.
The Broker/Dealer Index fell 6.7%.
Morgan Stanley dropped 8.7%, and Goldman Sachs lost 5.8%.
Citigroup CDS jumped 13 this week to 91 bps, the largest weekly gain since June 2020.
Bank of America CDS rose 13 to 81 bps, the largest weekly rise since May 2020. JPMorgan CDS jumped 12 to 77 bps (biggest since June ’20).
A Friday Bloomberg headline:
“Banks Sit on Billions of LBO Financings as Demand for Debt Falls.”
Corporate debt was not immune.
U.S. corporate Investment-Grade bond CDS jumped eight to 74 bps, and High-Yield CDS surged 33 to 359 bps (both biggest weekly gains since October ’20).
Contemporary finance is burdened by serious latent fragilities.
In simple terms, it doesn’t work in reverse.
The current financial structure is viable only so long as the Bubble is inflating – only while credit, leverage and speculative flows are expanding.
In the event of serious de-risking and deleveraging, markets are prone to illiquidity, dislocation and panic.
In Day Nine, Market Structure has Become a Critical Issue.
The entire financial universe is underpinned by expectations of liquid markets.
Derivatives, in particular, operate on the assumption of liquid and continuous markets.
This is despite the long history of markets demonstrating recurring bouts of illiquidity, panic and, on occasion, crashes.
Derivatives players (and their computer algorithms) readily disregard market history.
They focus instead on the relatively short-term history of central bankers doing “whatever it takes” - ensuring liquidity and backstopping market Bubbles.
At Day Nine, markets again indicate heightened illiquidity and dysfunction.
It’s by now a well-worn dynamic – with stress not yet near the extremes of March 2020.
What is different is the status of the Fed’s liquidity backstop.
The global system is moving toward a major de-risking/deleveraging episode, just as the Fed is preparing to commence a tightening cycle.
This is no environment for leverage.
“Risk off” is attaining powerful momentum, with inflation already highly elevated and everything pointing to even more robust pricing pressures (global commodities, supply-chain issues, overheated labor markets, etc.).
The Fed was quick with QE when de-leveraging began to gain momentum in the summer of 2019.
Successive dramatic policy measures – including announcements of ballooning QE – thwarted market collapse in March 2020.
With the focus on runaway inflation, nothing indicates the Fed is ready to open the liquidity floodgate one more time.
Risk is high that the Fed moves tardily, and with less firepower than markets will require to avert dislocation.
Worse yet, if the Fed (and global central banks) orchestrate another major monetary inflation, does much of this liquidity bypass Financial Assets in favor of Commodities and other Hard Assets?
March 2 – Bloomberg (Rebecca Choong Wilkins and Alice Huang):
“Credit stress in China’s property market is spilling over to some of the nation’s stronger developers. Chinese developers’ dollar bonds tumbled 4 to 8 cents on the dollar Wednesday…”
The last thing its faltering apartment Bubble needed was for China’s partner – “with no limits” – to instigate a horrific war, unleash global financial crisis and turn Abominable Global Pariah.
This week was a real estate developer bloodbath.
Evergrande yields jumped 218 bps to 94.24%, but that was the least of the worries.
Country Garden, builder number one and former perceived rock-solid enterprise, saw its yields surge 436 bps to 15.66% (yields were at 3.25% in September).
Sunac yields were up a full 19 percentage points this week to 57.71%; Lonfor 24 percentage points to 77.95%, and Kaisa 12 percentage points to 84.35%.
I could go on and on. WSJ:
“China’s top 100 developers’ monthly contracted sales volume fell for the eighth straight month in February, plunging 47% from a year earlier…”
March 2 – Reuters (Kevin Yao):
“China will not join in sanctions on Russia that have been led by the West, the country's banking regulator said on Wednesday, adding that he believed the impact of the measures on China would be limited.
China, which has refused to condemn Russia's invasion of Ukraine, has repeatedly criticised what it calls illegal and unilateral sanctions.
‘As far as financial sanctions are concerned, we do not approve of these, especially the unilaterally launched sanctions because they do not work well and have no legal grounds,’ Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, told a news conference.”
While China’s banks appeared to move cautiously this week, we can safely assume China will backstop Russia financially and economically.
Difficult to believe this will go over well with the U.S. and its allies.
Beijing has made some catastrophic mistakes.
Its bubble collapse is accelerating, and now it is in the thick of global strife and a new “iron curtain.”
China’s $55 TN banking system is an accident in the making, and it’s worth noting that Chinese bank (and China sovereign!)
CDS traded this week to the highs since March 2020.
How long can the perception hold that Beijing has everything under control?
It made, a couple weeks back, a rather provocative headline:
“One Serious Catalyst Away From A Megaquake.”
At Day Nine, it’s become reality.
At least I haven’t witnessed a catalyst as potentially serious.
Perhaps things won’t look as dire on Day 16.
But here in the evening of Day Nine, it’s as if Worst Fears are all Coming to Fruition in Unison.
On its current trajectory, Russia appears determined to pulverize Ukraine.
It’s shocking and horrendously disturbing.
The U.S. and Europe will aggressively run sophisticated arms to help Ukrainians defend themselves.
Do the Russians tolerate NATO’s wide-bodied transport aircraft operating at airstrips along the Ukraine border loaded with Javelins, Stingers, rocket launchers and other advanced weaponry to be trucked in to bolster Ukrainian defenses?
How about if Ukrainian fighter pilots come flying in from NATO airspace?
Might this evolve more into a proxy war?
Will Putin be tempted to make good on his threats?
March 3 – Reuters:
“The head of Russia's foreign intelligence agency said… it was wrong to speak of a new Cold War between Russia and the West because the situation was already ‘hot’.
‘Western politicians and commentators like to call what is happening a 'new cold war.'
It seems that historical parallels are not entirely appropriate here,’ Sergei Naryshkin said…
‘If only because in the second half of the 20th century Russia fought with the West on the distant approaches, and now the war has come to the very borders of our Motherland.
So for us it is definitely not 'cold', but quite ‘hot’.”
March 4 – Reuters (Peter Baker):
“NATO will defend all its allies and territory against a Russian attack, U.S. Secretary of State Antony Blinken said…, as he arrived for a meeting of the alliance's foreign ministers in Brussels.
‘Ours is a defensive alliance.
We seek no conflict.
But if conflict comes to us we are ready for it and we will defend every inch of NATO territory,’ he told reporters, while condemning what he called Russian attacks on civilians in Ukraine.”
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