11-13 December: Ruble Sees No Respite Despite Rate Hike; Oil Continues Massacre; Weak TLTRO Results

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.

 Outright FX interventions and rate hikes have had non lasting impact on a fast depreciating Ruble as shown by this chart from ZeroHedge. So it there abut reason to expect a deviation from this trend?

Outright FX interventions and rate hikes have had non lasting impact on a fast depreciating Ruble as shown by this chart from ZeroHedge. So it there abut reason to expect a deviation from this trend?

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.

 This chart courtesy of Zerohedge show how the price (inverted yield) on the 2014 series of Gazprombank (a major state-owned bank tied to the energy giant) bonds denominated in Swiss Francs yielding 5.125%, has crashed from a year-to-date high of around 104 to under 65; and from an implied yield of under 5.125% to over 11.5%

This chart courtesy of Zerohedge show how the price (inverted yield) on the 2014 series of Gazprombank (a major state-owned bank tied to the energy giant) bonds denominated in Swiss Francs yielding 5.125%, has crashed from a year-to-date high of around 104 to under 65; and from an implied yield of under 5.125% to over 11.5%

 Probability of Russia defaulting on its obligations quantified by it's 5 year CDS has surged to April 2009 heights in the current episode of panic selling; with a spread that has more than doubled from 2014 lows

Probability of Russia defaulting on its obligations quantified by it's 5 year CDS has surged to April 2009 heights in the current episode of panic selling; with a spread that has more than doubled from 2014 lows

 The extent of selling in the Russian stock market as tracked by the market capitalization of the MICEX Index is evident as the market value of America's largest company surpasses the whole of Russia; above valuations are in USD

The extent of selling in the Russian stock market as tracked by the market capitalization of the MICEX Index is evident as the market value of America's largest company surpasses the whole of Russia; above valuations are in USD


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.

 This chart from Zerohegde is good evidence that it is not entirely price inelasticity that has pressured crude oil prices lower. Although correlation is not always causation, it is hard to deny this observation

This chart from Zerohegde is good evidence that it is not entirely price inelasticity that has pressured crude oil prices lower. Although correlation is not always causation, it is hard to deny this observation

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.

 The negative contagion since peak oil across the currencies of oil producing nations (where energy makes up a significant share of output) continues to rear its ugly head as assets are liquidated to cover losses. Ever since the zenith of crude oil the Ruble, Mexican Peso, and Brazilian Real have been affected most. Government bonds of said countries have also seen widespread liquidation as CDS spreads widen with Russia hit the hardest

The negative contagion since peak oil across the currencies of oil producing nations (where energy makes up a significant share of output) continues to rear its ugly head as assets are liquidated to cover losses. Ever since the zenith of crude oil the Ruble, Mexican Peso, and Brazilian Real have been affected most. Government bonds of said countries have also seen widespread liquidation as CDS spreads widen with Russia hit the hardest


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.

 Selling of the Krone accelerates after Norwegian central bank unexpectedly cut rates while hinting of easier monetary policy in 2015; even against a relatively weak Euro the Krone has already massively underperformed, what more against the relatively strong Dollar

Selling of the Krone accelerates after Norwegian central bank unexpectedly cut rates while hinting of easier monetary policy in 2015; even against a relatively weak Euro the Krone has already massively underperformed, what more against the relatively strong Dollar

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.