Credit Bubble Bulletin2020-05-20T17:01:05-06:00

Presented by Doug Noland

Weekly Commentary

September 23, 2022: Putin & The Vigilantes

It really got going Tuesday. Chinese “big four” bank CDS each surged about 10 bps, the largest single-session gains since the July 15th peak “risk off.” Heightened risk aversion was not limited to Chinese banks. European bank CDS shot higher, with (subordinate) bank debt CDS jumping 19 bps (largest move since July). UK banks Barclays (123bps) and Natwest (115bps) saw CDS prices jump 16 bps. Credit Suisse CDS rose 10 bps, Commerzbank eight (118bps), Deutsche Bank eight (137bps) and UBS eight (89bps). US banks were certainly not immune. JPMorgan CDS rose five (92bps) Tuesday, Citigroup six (108bps), Goldman five (113bps) and Morgan Stanley five (106bps)

The dollar index gained 0.6% Tuesday, trading back above 110. EM currencies were under pressure, with the Polish zloty, Chilean peso, Hungarian forint and Czech koruna all down about 1%. More notably, currency markets were on edge fearing central bank intervention. The Bank of Korea had moved to prop up the won, while Japanese officials’ intervention warnings had reached fever pitch. Meanwhile, the People’s Bank of China was clearly struggling with its own efforts to maintain currency stability.

September 19 – Bloomberg: “The yuan fell, an indication that China’s latest attempts to beef up the currency with a record pushback in the reference rate and verbal warnings is barely holding back a selling wave. The People’s Bank of China fixed the yuan at 6.9396 per dollar, 647 pips stronger than the average estimate in a Bloomberg survey of analysts and traders, the widest difference on record since Bloomberg started the survey in 2018. The onshore yuan dropped as much as 0.6% Monday even after state media cited the regulator as saying last week companies shouldn’t bet on the direction and extent of currency moves.”

Global bond markets also showed heightened instability. Ten-year yields shot up 10 or 11 bps Tuesday in Italy and throughout European peripheral bond markets, with bund yields up 12 bps to a nine-year high (1.92%). Treasury yields also traded up Tuesday to multi-year highs.

Such big moves, especially in bank CDS, usually have a relatively clear catalyst. It was unclear what was behind Tuesday’s market instability. Sweden’s Riksbank surprised markets with a 100 bps hike – “its most aggressive tightening in almost three decades” (Bloomberg), following the largest y-o-y inflation (9%) in 30 years. Importantly, the Swedish krona sank 1.1% for the session (4.9% for the week!) despite the forceful hike. It was another indication of acute currency market vulnerability and waning central bank control.

A crucial week for global central banks got off to an ominous start. Also Tuesday, Japan reported its strongest CPI reading (2.8%) since 2014, with goods prices up 5.7% y-o-y. In an escalating battle with the markets, the Bank of Japan moved forward with “more aggressive and unscheduled” bond buying. Adding to the chorus of hawkish central banks, the Bank of Canada stated it would take “whatever actions” necessary to curb inflation. (more…)

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