Russia on ice
Russian central bank raises its benchmark rate by 100bps or 1% to 10.5% amid tanking Ruble and global oil prices, and surging default risks. This comes shy of the 200bps expected hike. Analysts have opined that they believe the rate hike was motivated by inflation and related expectations, other than slumping revenues tied up with collapsing energy prices. The central bank commented that it expects inflation to increase to 10% by year's end and holding around that ballpark through 1Q15 before easing off in late 2015.
Other than rate adjustments, the central bank has used other tools in the past such as direct FX interventions bidding up the Ruble, and there is talk that it may well start to embark on an unsterilized operation to tighten liquidity in the already isolated Russian interbank network.
The action across Russian financial assets continues to point to Energy as the main factor responsible for the chaos. Although the possibility remains that this horse has been beaten to death, a quick glance across the energy sphere, giants like Gazprom and Rosneft, indicates that there is widespread liquidation of positions in the equity and debt components of these corporations.
Steady supply into slumping demand
The IEA (international Energy Association) cuts global oil demand forecast for fourth time in 5 months as OPEC refuses to blink and global growth forecasts dim to a twinkle. This has sent WTI prices below $60 and printed a low of $57.31, the weakest since July 2009. Across the board, Brent and Canadian Heavy prices are also crashing through the floor. Corporate credit and equity of companies in the energy sector continue to take relentless beatings as analysts continue to predict ever lower prices. The contagion effect has major oil producing countries all over the world scurrying to prevent their respective economic meltdowns as revenues are clawed back by the markets for every additional cent oil prices decline.
It is not all a supply issue, as as evident in the above chart. As expectations of global growth going forward continue to stumble, the correlation between the most current 2015 GDP estimate and crude oil prices cannot be eschewed.
Weak interest for ECB's loans
ECB's TLTRO sees tepid take up as only €129.84bn in long term loans were allotted to 306 institutions, far less than the expected range. Demand for the ECB's long term loans at preferred rates was dispersed across 51 more institutions than the first auction. This aggregates the total take up amount of €212bn on the central bank's new TLTRO program. This figure is a little under half the ECB's maximum of €400bn for the program. Under LTRO 1 & 2 (precursors to the latest TLTRO), €271bn was allocated to European financial institutions, leaving the current program shy of €59bn.
Be reminded that rumors surfaced last week alleging possible expansion of the ECB's current cover bond purchase program to sovereign debt, although this has not yet been creditors by officials.
Also, note that although these TLTRO loans have a maximum maturity of 3 years, they can be repaid prematurely. When both the earlier LTRO programs had ended, there was a substantial amount in early repayments as deposits at the ECB's overnight deposit facility, although that yielded a negative carry. In other words, wait for further details as it is net and not gross that matters at the end of the day.
Norway blinks as oil takes next victim
The Norwegian central bank unexpectedly cut its main interest rate by 25bps to 1.25%, sending the Krone more than 2% lower against the Euro in European trading, the weakest since July 2009. This was the first rate cut after 3 years of the status quo, echoing concerns across the entire European Union and Eurozone that deflationary risks are most prevalent than they have been since the European Sovereign Debt Crisis in 2011. The impetus to ease monetary policy for the country is obvious; almost a quarter of Norway's economy owns itself to the energy industry and the wealth from the black gold has blessed the country with the world's largest Sovereign Wealth Fund with around $863bn in reserves.
Europe's largest oil producer has been hurt by rapidly falling crude oil prices and concern amongst Norwegians has shifted broadly to avoiding a severe downturn. The central bank also added that there was a "50-50 chance" of another rate cut come 2015.
Greece threatens to set Europe alight with economic and political fire
Greek markets continue to plunge as its Prime Minister commented on the possibility of a Greek exit from the Eurozone. Those concerns are backed by a heightened possibility that the anti-EU party Syriza might win in the next early election and take the nation independent. As a result, yields on shorter dated GGBs have sky rocketed, with the 3 year spiking above 10% and is 143bps higher than that of the 10 year, indicating increased fears of a adverse event in the shorter term.
5 year CDS on Greek debt has also broken to the upside and is at the highest spread since September 2013. The Athens Stock Exchange Index has also seen its ugliest crash since the 1987 Black Monday debacle, cratering a massive 20%. It remains to be seen if the upheaval in Greece remains a relatively isolated event or spreads through the anti-EU seeds that have been sown previously in the periphery nations.