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.
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.
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.
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.
- First and foremost is falling oil prices. More on this in another analysis.
- 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.
- 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.
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
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.
The weak Chinese manufacturing PMI figure from HSBC this morning surely didn't help as AUD was hit hard.
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.