Ugly - and the Q4 2021 Z.1
Doug Nolan
March 11 – Reuters (Steve Holland and Susan Heavey):
“President Joe Biden… took new steps along with U.S. allies to punish Russia economically over its invasion of Ukraine, targeting trade and shutting down development funds while also announcing a ban on imports of Russian seafood, vodka and diamonds.
Biden also criticized voices in the United States clamoring for an active U.S. military presence in Ukraine or American backing of a ‘no-fly zone’ to protect Ukrainians from Russian forces.
‘The idea that we're gonna send in offensive equipment and have planes and tanks and trains going in with American pilots and American crews ...that's called World War Three, OK?
Let's get it straight here, guys,’ Biden told Democrats…
‘We will defend every inch of NATO territory, every single inch,’ including NATO members bordering Russia...
‘Granted, if we respond it is World War Three, but we have a sacred obligation on NATO territory ... although we will not fight the Third World War in Ukraine.’”
What a distressingly Ugly week.
The Russian military increased bombardment of Ukrainian cities, as 2.5 million refugees inundated neighboring countries.
Peace negotiations made little or no progress, while the Ukrainian military’s success in inflicting damage likely ensures Putin doubles-down with “scorched earth” measures.
Contemporary finance showed its Ugly side.
Acute instability is worrying, to say the least.
WTI crude traded to $130 in early Monday trading, before reversing sharply lower to end the week down 5.5% at $109.33.
Aluminum was up as much as 6%, before ending the week down 9.5%.
Palladium spiked 14% higher Monday – then ended the week down 6.8%.
Platinum gave up its earlier 5% advance to close the week 4% lower.
After trading as high as $2,070, Gold ended the week up $18 to $1,988.
Copper traded with a 10% high-to-low range for the week, while wild Wheat saw a 23% swing.
But this was all little sissy volatility compared to nickel.
One (fiasco) for the history books.
March 8 – Wall Street Journal (By Jing Yang, Rebecca Feng and Joe Wallace):
“Chinese nickel titan Tsingshan Holding Group faces billions of dollars in trading losses, people familiar with the company said, after Russia’s war in Ukraine set off an unprecedented rise in the price of a key metal used in stainless steel and electric-vehicle batteries.
The paper loss stood at $8 billion on Monday, before violent moves in nickel prices led the London Metal Exchange to suspend trading…”
March 10 – Financial Times (Helen Thomas):
“After the collapse of Lehman Brothers, pushing more financial contracts on to exchanges backed by a central counterparty was important in the regulatory recovery plan.
Exchange trading brought transparency about exposures for different players.
Clearing gave certainty and protection in the event of a default.
What could possibly go wrong?
Plenty, it seems, given the disarray at the London Metal Exchange which on Tuesday suspended trading in nickel after a 250% spike in the price and cancelled several hours of trades.”
March 10 – Financial Times (Andy Home):
“The global nickel market is in a pricing black-out.
The London Metal Exchange (LME) three-month nickel price sits in suspended animation at $48,048 per tonne, Monday's closing price and the last trade with even a semblance of legitimacy.
Tuesday's mayhem and the resulting decision by the LME to suspend all trading has frozen what is the core reference price for the global supply chain stretching from miners to stainless steel mills and electric vehicle battery makers.
China is also in black-out. The Shanghai Futures Exchange has suspended trading until Friday.
Today there is no global nickel trading and no price formation.”
March 11 – Bloomberg (Jack Farchy and Alfred Cang):
“JPMorgan... is the largest counterparty to the nickel trades of the Chinese tycoon caught in an unprecedented short squeeze, putting the bank at the center of one of the most dramatic moments in metals market history.
About 50,000 tons of Xiang Guangda’s total nickel short position of over 150,000 tons is held through an over-the-counter position with JPMorgan, according to people familiar with the matter.
Based on that figure, the tycoon’s company, Tsingshan Holding Group Co., would have owed JPMorgan about $1 billion in margin on Monday.
The nickel producer has been struggling to pay margin calls to its banks and brokers…”
Commodities markets were an absolute mess, with those hedging derivatives exposures facing the harsh reality of illiquid and discontinuous markets.
Meanwhile, the specter of a $40 billion Russian debt default – with zero liquidity in the underlying instruments – threw a big monkey wrench into hedging strategies.
March 10 – Bloomberg (Loukia Gyftopoulou and Laura Benitez):
“Pacific Investment Management Co. built up billions of exposure to Russian debt, opening up its funds to losses as markets price in a default by the sovereign.
The… asset manager had at least $1.5 billion of sovereign debt, according to the latest fund filings...
It had also placed about $1 billion of bets on Russia via the credit-default swap market as of Dec. 31, according to fund documents on its website.
The Financial Times… said Pimco faces billions of dollars of losses should Russia default on its debt.”
And how did so-called “safe haven” sovereign bonds far in all the chaos?
Bloodied.
Ten-year Treasury yields jumped 26 bps to end the week at 1.95%.
German bund yields surged 32 bps to 0.32%.
French yields were up 29 bps (0.72%), Spanish yields 27 bps (1.24%), and Italian yields 31 bps (1.85%).
Yields were up 28 bps (1.49%) in the UK; 27 bps (1.99%) in Canada; 26 bps (2.39%) in Australia; and 25 bps in New Zealand (2.97%).
Even Swiss 10-year yields more than doubled this week to 0.29%.
Myriad levered strategies (including “risk parity”) are badly faltering, while the vulnerability of the conventional 60-40 stock and bond portfolio is being exposed.
And the hawks take a stand at the ECB...
It was an alarming week with respect to a problematic dynamic for (over-levered, untenable derivatives risk intermediation, and trend-following dominated) contemporary finance: surging sovereign yields, widening Credit spreads and rising CDS/risk hedging prices.
Investment-grade corporate spreads (to Treasuries) jumped this week to the high since July 2020, with high-yield spreads widening to 16-month highs.
ETF bond outflows are gathering momentum.
Notably, investment-grade bonds are performing poorly, with the popular iShares Investment-Grade Corporate Bond ETF’s (LQD) 2.8% decline for the week, boosting y-t-d losses to 8.95%.
This week witnessed market function beginning to break down.
The highly unstable and uncertain backdrop dictates de-risking/deleveraging, a problematic dynamic for a Fragile Bubble Market Structure.
Ominously, the big U.S. financial institutions led the global bank CDS leaderboard this week.
Citigroup CDS jumped 12 to 102 bps; JPMorgan eight to 85 bps; Morgan Stanley 10 to 100 bps; and Goldman Sachs eight to 103 bps.
Bank CDS are now at the highs since the spectacular 2020 pandemic panic.
It’s surreal; no longer is it wachoism to contemplate the use of nuclear weapons or even nuclear war.
Certainly bolstering Crisis Dynamics, there is now the clear and present danger of full-fledged Economic Warfare.
With all the talk of the mounting risk of World War III, history will view this week as the start of an international war of finance and economics.
March 5 – Reuters:
“President Vladimir Putin said… that Western sanctions on Russia were akin to a declaration of war, and warned that any attempt to impose a no-fly zone in Ukraine would lead to catastrophic consequences for the world.
Putin reiterated that his aims were to defend Russian- speaking communities through the ‘demilitarisation and de-Nazification’ of the country so that Russia’s former Soviet neighbour became neutral and no longer threatened Russia…
‘These sanctions that are being imposed are akin to a declaration of war but thank God it has not come to that,’ Putin said…”
March 9 – Reuters (Guy Faulconbridge):
“The Kremlin accused the United States… of declaring an economic war on Russia that was sowing mayhem through energy markets, and put Washington on notice it was considering its response to a ban on Russian oil and energy.
Russia's economy is facing the gravest crisis since the 1991 fall of the Soviet Union after the West imposed heavy sanctions on almost the entire Russian financial and corporate system following Moscow's invasion of Ukraine.
Kremlin spokesman Dmitry Peskov cast the West's sanctions as a hostile act that had roiled global markets and he said it was unclear how far turbulence on global energy markets would go.”
March 10 – Wall Street Journal (Josh Zumbrun):
“The U.S.-led effort to expel Russia from international commerce marks another fracture in the free-trade vision that guided American policy for nearly 30 years, signaling a future where nations and companies shift away from trading with adversaries and focus more on like-minded partners.
The actions taken by the U.S. and Western European allies since Russia invaded Ukraine have been swift and punishing—including banning or scaling back purchases of Russian oil, gas and coal to pressure Russian President Vladimir Putin to call off his troops.
The West has also moved to oust Russian banks from international financial networks, while a bipartisan coalition of U.S. lawmakers has introduced legislation calling on the U.S. to press for Russia’s suspension from the World Trade Organization—an action that would have no precedent in WTO history.
‘The trading system as we’ve known it, with the World Trade Organization at its core and with a basic set of rules that everyone traded under, is coming apart,’ said Jennifer Hillman, a trade lawyer and former jurist on the WTO’s trade court…”
There will be no putting humpty dumpty back together.
The question is only the dimensions and ramifications of the developing financial and economic “iron curtain.”
With sanctions in the process of strangling the Russian economy, how aggressively will the West penalize nations subverting sanctions to trade with or assist Russia?
March 7 – Associated Press (Ken Moritsugu):
“China's foreign minister… called Russia his country’s ‘most important strategic partner’ as Beijing continues to refuse to condemn the invasion of Ukraine…
Wang Yi said Chinese ties with Moscow constitute ‘one of the most crucial bilateral relationships in the world.’
China has broken with the U.S., Europe and others that have imposed sanctions on Russia after its invasion of Ukraine…
‘No matter how perilous the international landscape, we will maintain our strategic focus and promote the development of a comprehensive China-Russia partnership in the new era,’ Wang said at a news conference on the sidelines of the annual meeting of China’s ceremonial parliament.
‘The friendship between the two peoples is iron clad,’ he added.”
March 10 – Financial Times (Tom Mitchell, Demetri Sevastopulo, Sun Yu and James Kynge):
“When the Russian invasion of Ukraine started two weeks ago, Jane Yan, a senior executive at a machine parts maker in eastern China, said she was not too worried about the impact.
After all, buyers in Russia and Ukraine accounted for less than 5% of the company’s overseas sales...
But as the full ferocity of the Russian onslaught started to become apparent, the outlook shifted dramatically.
Important clients in countries such as Poland and Germany cancelled orders...
‘A Munich-based client said ‘it feels terribly wrong to send money to a country that is tolerating war in Ukraine — sorry’,’ said Yan…
She added that inquiries from European buyers have also fallen sharply since the conflict started…
For Xi Jinping, some of the very same pressures are starting to build.
In the early days of the Russian invasion, China tried to keep its head down — perhaps in the hope that a short, sharp incursion would not cause too many reverberations.
But over the past week, as Russia has intensified its bombardment of urban areas, Xi has found himself facing the potential for two interlocking crises.
As the biggest importer of oil and a big buyer of food from around the world, China’s economy is very exposed to the market turmoil that the war and subsequent sanctions have unleashed.
It also risks a deep diplomatic backlash, especially in Europe, where many see it as little short of an accomplice to the invasion.”
“Many see [China] as little short of an accomplice to the invasion.”
After all, Putin and Xi did vociferously proclaim their anti-West partnership with “no limits” only days ahead of the invasion.
Resulting military and economic wars come at a critical juncture for China’s historic Bubble.
While attention was elsewhere, China’s developers were in meltdown this week.
Evergrande bond yields surged 22 percentage points to a record high 116.7%.
More alarmingly, Country Garden (China’s largest developer) yields surged a stunning 922 bps to 24.88%.
Bonds that traded at par (100) in September - and in the 80s last month - closed Friday trading at 50.
Kaisa yields were up 20 percentage points to 114%; Longfor 32 percentage points to 110%; and Sunac nine percentage points to 66.9%.
An index of Chinese high-yield bonds (trading at 12% in September) saw yields surge 345 bps this week to a record high 26.29%.
Panic, as Bubble collapse gathers a head of steam.
Meanwhile, China's zero-tolerance policies will be challenged by the worst Covid outbreak since the beginning of the pandemic.
March 9 – Bloomberg (Alice Huang):
“Spreads on Chinese commodity firms’ dollar bonds rose sharply Wednesday as state-owned enterprises are considering possible investment in Russia’s energy and commodities sector.
China Minmetals’ 3.75% perpetual note widened 57bps to 218bps…, set for the biggest increase since April…”
The Shanghai Composite sank 4.0% this week, increasing y-t-d losses to 9.1%.
The Hong Kong China Financials Index dropped 4.2%.
Providing a hint of the myriad risks buried in the $55 TN Chinese banking system, a unit of China Construction Bank missed a margin call Monday in nickel-related trading.
March 11 – Financial Times (Neil Hume, Helen Thomas and Philip Stafford):
“Beijing is exploring a plan to rescue the billionaire owner of Tsingshan Holding Group from billions of dollars of potential losses after a backfiring bet brought global nickel trading to a halt.
China’s leading stainless steel producer is at the centre of a surge in nickel prices, after its wager that the price would fall collided with a rally in the metal sparked by the war in Ukraine, forcing it to buy contracts linked to the metal in huge volumes.”
New China Credit data was out Friday. Following gangbuster January lending, February is typically a seasonally slow month for Chinese Credit.
Still, last month’s lending was notably weak.
At just over half of expectations, Aggregate Financing (China’s key Credit metric) increased $188 billion, down from January’s booming $974 billion and 31% below February 2021.
At $195 billion, growth in Bank Loans was about 20% below forecasts and 9% behind February 2021.
Lending weakness was across the board.
And while corporate and government bond issuance slowed markedly from January, it was the contraction in Household borrowings that must have set off alarm bells in Beijing.
Household (chiefly mortgages) Loans fell $53 billion, down from January’s $132 billion expansion and the first contraction since pandemic February 2020.
At $138 billion, three-month Household loan growth was down 55% from the year ago period.
One-year growth dropped to 10.8%, the weakest in data back to 2007.
With so many major developments, it would have been reasonable to let the Fed’s Q4 2021 Z.1 report slip.
But such an important quarter needed to be documented.
With Q1 2022 a historic Bubble inflection point, it’s worth delving into Credit and Flow of Funds data at the Pinnacle of Bubble Excess.
To be sure, Powerful Inflationary Dynamics Permeate virtually all aspects of Q4 data – the Fed, Treasury and Agency Debt, Mortgage Credit, Banking system Assets, Deposits, the Broker Dealers, the Securities markets, the Household Balance Sheet, and Rest of World.
Non-Financial Debt (NFD) expanded at an 8.24% annualized pace during Q4.
Outside of the two massive pandemic stimulus quarters (Q1 and Q2 2020), it was the strongest pace of Credit growth since Q3 2008.
Household Mortgages expanded at 8.0%, the strongest rate since Q2 2007.
The Credit system is firing on all cylinders, consistent with a highly inflationary backdrop.
Consumer Credit grew at a 6.9% rate, and Business borrowings expanded at a 6.7% pace.
For 2021, NFD expanded 6.17%.
Excluding 2020’s booming 12.34%, it was the strongest annual Credit growth since 2007’s 8.17%.
Last year’s 7.57% expansion in Household Mortgages was the biggest percentage gain since 2006’s 11.19%.
On a seasonally-adjusted and annualized basis (SAAR), NFD surged during Q4 a blistering $5.253 TN – with Treasury debt expanding SAAR $2.663 TN, Total Household borrowings SAAR $1.402 TN, Business Borrowings SAAR $1.216 TN and Foreign borrowings SAAR $509 billion.
For 2021, NFD expanded $3.783 TN, second only to 2020’s $6.733 TN.
Prior to 2020, the record for annual NFD growth was 2007’s $2.534 TN.
For perspective, NFD averaged $1.847 TN annually during the decade 2010 to 2019.
Federal Reserve Assets inflated an additional $273 billion during Q4 to a record $8.887 TN.
Fed Assets expanded $1.231 TN for the year, with stunning growth of $4.877 TN over the past 10 quarters (122%).
The Fed’s Treasury holdings ended the year up $778 billion to a record $6.032 TN.
Treasury holdings have increased $3.666 TN, or 155%, since Q3 2019.
Agency Securities holdings jumped $512 billion last year to a record $2.676 TN, having expanded $1.145 TN since Q3 2019.
Treasury borrowings expanded SAAR $2.663 TN during Q4.
Outstanding Treasury Securities expanded nominal $1.035 TN during Q4 to a record $25.285 TN.
It’s worth adding that Q4 federal government expenditures (SAAR $5.959 TN) were 24% higher than pre-pandemic Q4 2019.
For 2021, Treasury Securities rose $1.684 TN, with 10 quarter growth of an unprecedented $7.470 TN, or 41.9%.
Since 2007, Treasuries Securities has inflated $19.234 TN, or 318%.
Treasury Securities ended the year at 122% of GDP, up from 55% to close 2007.
Agency Securities expanded $130 billion during the quarter to a record $10.666 TN, with one- and two-year growth of $579 billion and $1.237 TN.
Combined Treasury and Agency Securities expanded $2.263 TN last year – an outrageous $8.873 TN over 10 quarters - to 150% of GDP.
Household Mortgages expanded SAAR $900 billion during Q4, compared to the $226 billion annual average for the decade 2010 to 2019.
Total Mortgage borrowings expanded a nominal $378 billion during Q4, the strongest quarter since Q3 2006.
Total Mortgages surged $1.203 TN (strongest since 2006), or 7.2%, to a record $17.980 TN.
Home Mortgages rose $879 billion during 2021, the largest increase since 2006’s $1.082 TN.
Commercial Mortgages gained $184 billion in 2021, the strongest since 2007’s $265 billion.
Total Debt Securities (TDS) expanded nominal $1.275 TN during Q4 to a record $56.188 TN (largest increase since Q2 2020).
TDS jumped $3.078 TN y-o-y and $10.443 TN (22.8%) over 10 quarters.
Total Debt Securities ended the year at 234% of GDP, up from 201% to end 2007 and 158% to close out 1999.
Total Equities surpassed $80 TN ($80.184 TN) for the first time during Q4, expanding $4.710 TN for the quarter and $14.800 TN (22.6%) for the year.
Total Equities were up $29.416 TN, or 58%, over 10 quarters.
Total Equities ended the year at a record 334% of GDP, up from previous cycle peaks 188% (Q3 2007) and 210% (March 2000).
Total (Debt & Equities) Securities expanded $17.879 TN last year to a record $136.372 TN, or 568% of GDP.
This compares to previous cycle peaks 387% (Q3 ’07) and 368% (Q1 ’00).
It’s worth adding that the total value of ETFs surged $610 billion (37% annualized) to a record $7.191 TN, with 2021 growth of $1.741 TN, or 32%.
Equities ETFs inflated $529 billion (53% annualized) during the quarter to a record $4.522 TN, with one-year growth of $1.339 TN, or 42%.
The Household Balance Sheet exemplifies historic systematic monetary inflation.
Household Assets inflated another $5.684 TN during Q4 to a record $168.642 TN.
Household Liabilities gained $387 billion (8.6% pace) to a record $18.353 TN.
Household Net Worth (Assets less Liabilities) surged $5.297 TN during the quarter to a record $150.290 TN.
Net Worth surpassed $100 TN for the first time in 2017.
Household Net Worth inflated a record $18.946 TN in 2021, with three-year growth of $44.771 TN, or 42%.
For comparison, Net Worth expanded on average $5.447 TN annually over the decade 2010 to 2019.
Household Net Worth ended the year at a record 626% of GDP, compared to previous cycle peaks 491% (Q1 ’07) and 445% (Q1 ’00).
Bank (“Private Depository Institutions”) Assets jumped $478 billion (7.6% annualized) during Q4 to a record $25.606 TN.
Bank Assets expanded $2.160 TN (9.2%) over the past year and $5.550 TN (27.7%) in two years – for the most rapid expansion of Bank Assets since the early seventies.
Bank Loans expanded nominal $425 billion during Q4, second only to Q1 2020’s $561 billion.
Bank Mortgage loans grew $108 billion during the quarter, the biggest gain since Q2 2016.
Consumer Loans increased $95.7 billion, second only to Q1 2010’s anomalous $312 billion.
The Bank Asset “Reserves at the Fed” dropped $215 billion during the quarter to $3.644 TN, while Treasuries jumped $190 billion to a record $1.646 TN.
Treasury holdings surged $443 billion, or 36.8%, during 2021 (two-year gain $767bn).
Bank Agency/MBS holdings rose $56 billion during the quarter and $512 billion for the year – to a record $3.888 TN.
Agency holdings inflated $1.253 TN over the past two years, or 47.6%.
On the Bank Liability side, Total (Checking and Savings) Deposits jumped $573 billion (11.2% annualized) during the quarter to a record $20.986 TN.
Total Deposits were up $2.124 TN in four quarters and $5.453 TN, or 35.1%, over two years.
Broker/Dealer Assets expanded $112 billion during the quarter (10.2% annualized) to a record $4.504 TN.
Assets were up $306 billion, or 7.3%, over four quarters and $560 billion, or 14.2%, in two years.
The Broker/Dealer asset Loans rose $24.9 billion to a record $841 billion.
Loans were up $179 billion, or 27%, over the past year, and $412 billion, or 95.8%, over two years.
Miscellaneous Assets gained another $115 billion to $1.504 TN, with one-year growth of $383 billion, or 34.2%.
The Z.1 category “Federal Funds and Security Repurchase Agreements” jumped $689 billion (57% annualized) during Q4 to a record $5.833 TN.
The Fed’s “repo” Liability rose $278 billion for the quarter to a record $2.183 TN, with one-year growth of $1.967 TN.
Money Market Funds’ “Repo” Asset increased $231 billion during the quarter to a record $2.496 TN (one-year growth $1.427 TN).
In some of the more enigmatic data, Rest of World (ROW) holdings of U.S. Financial Assets surged a nominal $2.504 TN (23% annualized) during the quarter to a record $46.984 TN.
ROW holdings were up $7.141 TN (17.9%) over four quarters and $12.062 TN (34.5%) over two years.
The value of ROW Equities holdings inflated $1.000 TN during the quarter to a record $14.531 TN, with one-year growth of $3.053 TN (26.6%) and two-year growth of $5.436 TN (59.8%).
Debt Securities holdings increased $161 billion during the quarter to a record $13.576 TN, with one-year expansion of $705 billion (5.5%) and two-year growth of $1.505 TN (12.5%).
Amazingly, ROW Assets have almost tripled since the end of 2008.
I’m already looking forward to the Q1 2022 Z.1 report.
0 comments:
Publicar un comentario