15-16 December: Russian Ruble Falls to Record Low Despite Massive Rate Hike

Update: After surging 9% against the dollar in the early hours of European trading, the Ruble has resumed its slump towards 70 to the dollar, as Bloomberg reports. Seems like all is not fixed even in the surface.

Update 2: USDRUB breaches 80, RTS index down a whopping 15%. Alarm bells going off. Dollar is at session lows and safety is massively bid.

 The markets only bought the CRB's measures for around 5 minutes, after which it was all dumping of rubles even as the market was more or less closed. Selling or RUB accelerated once continental Europe opened for trading. A 2030 pip low-high move defies history. It is difficult to tell if we have seen the lows for the ruble just based on sentiment

The markets only bought the CRB's measures for around 5 minutes, after which it was all dumping of rubles even as the market was more or less closed. Selling or RUB accelerated once continental Europe opened for trading. A 2030 pip low-high move defies history. It is difficult to tell if we have seen the lows for the ruble just based on sentiment


Russia raises rates to 17% in unprecedented act of desperation

In what is now not news, the CBR (Central Bank of Russia) has once again hiked rates. But it's different this time. Recall that it was only last week when the bank raised rates by 100bp or 1% from 9.5% to 10.5%? That led the markets to believe that future rate hikes and FX interventions were imminent, but what the markets did not expect was what just happened hours ago as this post goes to print. Because if small piecemeal rate increases didn't out a debt on the weaken ruble's trend, we just have to do more of it. 6 times more in this case.

The CBR raised its main interest rate to 17% from the 10.5% last week, a 650bp hike, sending the ruble much higher as traders knew jerked to the eleventh hour decision to try halt to ruble's cataclysmic collapse amid even lower oil prices. The decision to raise the borrowing cost of interbank borrowing came at 1am local time, highlighting the desperation and intended impact of the measure; when most ruble based markets were shut for the night, liquidation of short ruble based positions will hopefully experience a mass exodus and capitulation when markets become lit in the morning. At least that was what the bank was praying for.

The CBR has allowed an expansion in FX repo auctions from $3.5bn to $5bn. The bank also warned that Russia's GDP may shrink 4.5% to 4.7% next year should oil prices average $60/bbl; which will be the case quid pro quo.

The Board of Directors of the Bank of Russia has decided to increase from December 16, 2014 the key rate to 17.00% per annum. This decision was driven by the need to limit significantly increased in recent devaluation and inflation risks.

In order to enhance the effectiveness of interest rate policy loans secured by non-marketable assets or guarantees for a period of 2 to 549 days from 16 December 2014 will be granted at a floating interest rate established at the level of the key rate of the Bank of Russia increased by 1.75 percentage points (Previously these loans for a period of 2 to 90 days, provided at a fixed rate).

In addition, to enhance the capacity of credit institutions to manage their own currency liquidity was decided to increase the maximum amount of funds to repurchase auctions in foreign currency for a period of 28 days from 1.5 to 5.0 billion. US dollars, as well as on similar operations for a period of 12 months on a weekly basis.
— CBR (Central Bank of Russia) Press Release

It is an open question as to when and where the sell-off in Russian assets will cease and actually see a significant rebound. However, Bloomberg is reported that the ruble is 9% stronger against the greenback in early European trading. Of course this is purely a knee jerk response to the most aggressive measure by the central bank yet, and the follow through remains in question. One this is for certain, such parabolas that are present in the USDRUB as seen below usually experience sharp moves in the opposite direction. The 9% decline as we go to print proves that point, although it was motivated by a Russian move instead of internally.

 In this trifecta, we learn what a parabola looks like. USDRUB has rallied more than 1500 pips in half a month, and implied volatility is through Zeus's roof. The 5 year credit default spread on Russian sovereign debt is also surging (close to doubling in half a December) as hyperinflation and fast diminishing revenues from energy hit home hard on both the consumers and corporates; especially on energy and financials. The RTS index has also cratered with no light at the end of the tunnel

In this trifecta, we learn what a parabola looks like. USDRUB has rallied more than 1500 pips in half a month, and implied volatility is through Zeus's roof. The 5 year credit default spread on Russian sovereign debt is also surging (close to doubling in half a December) as hyperinflation and fast diminishing revenues from energy hit home hard on both the consumers and corporates; especially on energy and financials. The RTS index has also cratered with no light at the end of the tunnel

 RSX (Russian equity ETF) has collapsed from highs of 27.68 in June this year to a YTD low of 12.50 today. That marks a 54.9% decline from high to low and makes Russia the worst performing major market in 2014

RSX (Russian equity ETF) has collapsed from highs of 27.68 in June this year to a YTD low of 12.50 today. That marks a 54.9% decline from high to low and makes Russia the worst performing major market in 2014


Succinct reasons for ruble collapse

A separate analysis discussing this topic in more depth is en route

There have been many factors contributing to the collapse in the rubble, pardon, ruble (the additional "b" should stay judging by current reality).

Without going too deep, I have concluded that there are 3 broad reasons for the tumble.

  1. First and foremost is falling oil prices. More on this in another analysis.
     
  2. Second remains financial sanctions against Russian banks and financial institutions (recall Russia has been bared from the global SWIFT telegraphic transfer system). This has led to locals and banks hoarding FX (or foreign currencies) in place of the ruble for obvious reasons. This behavior has fed into itself and has accelerated lately, a major contributor to the vertical decline of the ruble.
     
  3. Thirdly, ambiguity surrounding the policies of the Bank of Russia. Whatever it wants to signal to the markets has clearly not gotten through. The CBR is not the Fed, its signaling mechanism falls way short of optimal. Whether the CBR wishes to tame the ruble cash and repo markets by bringing its main rate to a draconian level, squeezing the ruble funding flows to a drip, or tightening liquidity by floating the repo rate (higher costs) while extending terms of such loans to limit the adversity to the local banking system, all this signals a deliberate and respite intention of the CBR to stem further weakness and volatility surrounding the currency. Analysts have commented that they mostly see this as a short term respite for the ruble, but not a fix in the medium run mainly because inflation expectations continue to spiral out of control and no one really knows where oil will bottom at.

Oil breaches $55, panic on Wall St

WTI printed at 54 handle while Brent a 58 handle as I type. Truly stunning!

As recently as 5 December many equity markets were trading at YTD or multi-month highs. 6 trading days later and the turmoil is being seen in Greece, Russia, Oil, many areas of EM and in DM equity and credit markets. In Europe virtually all equity markets are uncomfortably down for the year. Some markets have lost a few years of normal sized returns in the last few days alone so this has to impact 2015.

A quick look at the oil market where Brent drops for 5th day, falls below $60 for 1st time since July 7, 2009 as the market continues to look for signs that falling prices is crimping production. WTI breaks below $55, drops to lowest since May 6, 2009. “The race to the bottom continues, we are still not seeing any signs of supply disruption,” says Saxo Bank head of commodity strategy Ole Hansen. “There is very big negative momentum in the mkt and the fact people are starting to talk about breakeven levels of $35-$40 has put up a new red flag for mkts to aim at.... Jan. WTI options expire today and there is quite a lot of open interest ~$55 put strikes, that is probably the key level of potential support today.”
— RanSquawk
 Dubai's Financial Market General Index is now down 40% since the peak in oil prices in June this year. For now, only Qatar is clinging to gains YTD as the rest of the Middle Eastern equity markets give up 30-60% gains from mid-year and tumble to negative. Dubai and Abu Dhabi alone are  down over 8% since Friday. Saudi Arabia is down 7.3% today, the biggest drop in 6 years

Dubai's Financial Market General Index is now down 40% since the peak in oil prices in June this year. For now, only Qatar is clinging to gains YTD as the rest of the Middle Eastern equity markets give up 30-60% gains from mid-year and tumble to negative. Dubai and Abu Dhabi alone are down over 8% since Friday. Saudi Arabia is down 7.3% today, the biggest drop in 6 years

Bill Gross, ex. CEO of PIMCO now head Janus Capital, sees US growth falling to 2% going forward. Again, lower oil prices does not translate into higher growth even though the consumption constitutes 70% of output; so much for the higher disposable income memes.

I've been barking on this for some time already but I feel this story is hard to overplay. The adverse impacts of declining oil prices in the right context can spell disaster for the global financial markets as we've seen, while also weighing on consumer and business sentiment. As I've highlighted in previous posts, economies that are heavily reliant on every for their output have been hit exceptionally hard.

Here are some observations that are hard to overstate:

  • Venezuela on the brink of default with 5 year CDS indicating a >90% probability;

  • Russia literally up in flames as ruble becomes rubble, inflation looses itself, default risks across the energy and financial sectors soaring;

  • Norway has its hands forced to ease monetary policy with interest rate hike  in an attempt to avert a downturn;

  • Global inflation expectations slumping like never seen before with UK just printing the lowest CPI rate since 2002;

  • General market sentiment towards risk turns very sour as quality goes bid and risk is offered hard across various trading sessions, VIX yesterday closed above 20 again as up-in-quality bonds and treasuries are bought, bull curve steepening trades sought
 Credit leads, equities lag. Across the HY space, energy remains the weakest while financials are feeling the heat. The OAS (option adjusted spread, likable to a negative sharpe measure on fixed income) on a composite of energy names has spiked, indicating that liquidity is already a major concern amongst energy companies. HY credit continues to underperform its equity counterpart, signaling that there is further downside room for the broad index to fall

Credit leads, equities lag. Across the HY space, energy remains the weakest while financials are feeling the heat. The OAS (option adjusted spread, likable to a negative sharpe measure on fixed income) on a composite of energy names has spiked, indicating that liquidity is already a major concern amongst energy companies. HY credit continues to underperform its equity counterpart, signaling that there is further downside room for the broad index to fall

As contagion continues to inflict its damage, unhedged positions will experience considerable pain and ultimately lead to the final straw that breaks the camels back. As mentioned, there is a lot of room for further downside price action and equities play catchup to their less ebullient peers. According to my metric-based system, US equities will continue to head lower, at least until we see some form of positive macro data surprise.

 Realized volatility across the financial markets shows how selling in energy related assets spread to other asset classes. During the first phase of the volatility flare in energy, the rest of the market seemed to have took that as an isolated event and remained relatively insulated. It was not until early December that the contagion effect kicked in and all asset classes were on the same page

Realized volatility across the financial markets shows how selling in energy related assets spread to other asset classes. During the first phase of the volatility flare in energy, the rest of the market seemed to have took that as an isolated event and remained relatively insulated. It was not until early December that the contagion effect kicked in and all asset classes were on the same page

The weak Chinese manufacturing PMI figure from HSBC this morning surely didn't help as AUD was hit hard.

 HSBC/Markit’s China PMI fell to 49.5 in December, lowest in 7 months, from 50 in November, even after PBoC efforts to ease monetary conditions. The HSBC manufacturing PMI dipped below 50 for the first time since June this year, a contraction of manufacturing activity in the Chinese economy. Although there have been discrepancies between HSBC's and the official PMI figures, this seems to be a precursor for slack going forward

HSBC/Markit’s China PMI fell to 49.5 in December, lowest in 7 months, from 50 in November, even after PBoC efforts to ease monetary conditions. The HSBC manufacturing PMI dipped below 50 for the first time since June this year, a contraction of manufacturing activity in the Chinese economy. Although there have been discrepancies between HSBC's and the official PMI figures, this seems to be a precursor for slack going forward


Australian siege ends, leaving 3 dead

The shocking act of terrorism starting noontime in the heart of Sydney's CBD, has finally drawn to a close after exchanges of gunfire between the Muslim radical and special forces early into dawn.

The gunman had initially concealed his firearms in a blue bag as he proceeded into the chocolate cafe trough its main entrance. He then locked the door behind him, leaving patrons who wanted to enter the cafe knocking on the glass door as they were bewildered. It was only until the gunman withdrew his firearm from the blue bag that patrons outside the care realized what was happening. The situation quickly developed and started to acquire a mind of its own as chaos ensued. Staff working in the Reserve Bank of Australia across the street where the hostage occurred were placed in lockdown as streets were evacuated and a scene reeking of fear started to piece itself together.

The culprit was very quickly identified by local intelligence as Iran-born, Man Haron Monis.

Self-described cleric, Man Haron Monis, 50, first came to attention of police when he penned poisonous letters to the family of dead Australian soldiers seven years ago.

Last year he was charged with being an accessory to the murder of his ex-wife and mother of two.

Most recently, he was charged with more than 50 allegations of indecent and sexual assault relating to time allegedly spent as a self-proclaimed “spiritual healer” who dealt with black magic at a premises in western Sydney more than a decade ago.

Monis, who has also gone by the names of Sheikh Haron and Mohammad Hassan Manteghi, was born in Iran and most recently has been living at Bexley North in Sydney’s south.

He recently likened himself on his own webpage to Wikileaks founder Julian Assange, claiming the most recent charges against him have been laid for “political reasons”.

His website also carries a quote, posted earlier this month stating: “I used to be a Rafidi, but not any more. Now I am a Muslim, Alhamdu Lillah”.

It has been Monis’ on-going legal battle for his conviction for penning the poisonous letters to the families of dead Australian soldiers between 2007 and 2009 that has consumed him.

It is understood Monday’s incident followed an unsuccessful, last-ditch attempted in the High Court on Friday to have the charges overturned.

Monis was sentenced to 300 hours of community service and placed on a two year good behaviour bond for the “offensive and deplorable letters” sent with the assistance of his girlfriend Amirah Droudis.

They were sent to the families of Private Luke Worsley and Lance Corporal Jason Marks, who were killed in Afghanistan in 2007 and 2008.

He also sent a letter in 2009 to the family of the Austrade official Craig Senger, who was killed in the bombing of the Marriott Hotel in Jakarta in 2007.

Monis claimed the letters were his own version of a “flower basket” or “condolence card”.

Bree Till, widow of Sergeant Brett Till, killed while defusing a bomb on March 12, 2009, said at the time of his conviction: “We sat reading these letters (which) made out to be something supportive but then the juxtaposition of this man accusing my husband of being a child-killer while dictating how I should raise my children. It was scary,” she said.

He fought the validity of the charges all the way to the High Court arguing they were political and only sought to persuade the families to oppose Australia’s military involvement in Afghanistan.

But when he lost that battle, and had to stand trial, he pleaded guilty to all 12 charges against him in August 2013.

But his problems with the law did not end there. Monis is currently on bail in relation two separate, serious cases.

He was charged in November 2013 with being an accessory before and after the fact to the murder of his ex-wife Noleen Hayson Pal.

Ms Pal was stabbed and set alight in a Werrington apartment block.

Droudis has been charged with the murder.

And then in April this year, Monis was charged by sex crimes squad detectives with the indecent and sexual assault of a woman in western Sydney in 2002.

Police allege that Monis was a self-proclaimed “spiritual healer” who operated out of premises on Station Street at Wentworthville.

News of his arrest prompted more victims to come forward and Monis was hit with an additional 40 charges in October.

It is alleged that Monis placed ads in local newspapers offering “spiritual consultation”.

He claimed to be an expert in astrology, numerology, meditation and black magic.

Monis has posted online that the police charges are part of a witch hunt against him.

”Since the Australian government cannot tolerate Sheikh Haron’s activity, is trying to damage his image by these false accusations, and also for putting pressure on him to stop his activity and keep him silent, but God willing Man Haron Monis will not stop his political activity against oppression,” he writes in a description of himself on his website, sheikhharon.com

His former Facebook page, pulled down on Monday night as the siege continued had 14,725 “likes” when it was shut down.
— The Age (Australian News)