2015.01.29 News


Let’s start with the unfolding situation in Greece, where the new finance minister Yanis Varoufakis has been calling the austerity program imposed by the troika a ““fiscal waterboarding”. A vivid description indeed.

Greek government bond yields spiked on Syriza’s escalating rhetoric as well as on the right-wing anti-austerity party (Independent Greeks) becoming Syriza’s new coalition partner. Think about it – the only thing the two parties have in common is their hatred for the Eurozone and the fiscal pain that was imposed on Greece. The battle lines have been drawn.

The Greek government bond yield curve has become more inverted as markets price in principal reductions that are likely to apply evenly across the curve (which is what typically causes such inversion).

It is expected that if such haircuts are applied, they would hit both official and unofficial accounts (including bonds held by the ECB). Debt forgiveness would also cut principal on the government bonds held by Greek banks – who are some of the largest holders. That’s why shares of Greek banks got decimated today. New bank bailouts will be required if there is any hope for sustained credit availability to the private sector. For now most credit activity will come to a grinding halt – and with it any hopes for nearterm economic recovery.

The overall equity market fell over 9% today as government officials halt privatization and the rhetoric escalates.

Greece also extended an olive branch to Russia. Both nations apparently feel they’ve been mistreated by the EU. And Putin now has a new ally within the Eurozone.

Global yields continue to fall as investors focused on relative value. One of the places to look of course is the US where some see the 30yr treasury as relatively cheap. And as the stock market sold off (due to the Fed staying with status quo), treasury yields went with it – with the 30yr yield hitting a new record low.

Investors also went after other (relatively) high yielding sovereign bonds. The 10-year New Zealand, Australia, Canada, and South Korea government bond yields hit record lows.

Speaking of New Zealand, the central bank governor Graeme Wheeler hinted that with commodity prices falling, the next rate move could potentially be lower.

Thus we could see yet another central bank joining the BoJ, ECB, BoC, RBI (India), SNB, PBoC, Riksbank, etc. in policy easing. Wheeler has another reason to talk NZD lower. The nation’s trade deficit has worsened (chart below)and a weaker currency could help. Why not join the currency war?

Looking back on the US shale revolution, it’s easy to see how the oil production cost curve had changed – once you get above $80-$85/bbl, production spikes. Which tells me that for some time to come, that will be the cap on oil prices.

Related to the above, Russian sovereign CDS spread hit a new high in the last couple of days. Ugly.


– An equity sell-off swept across Asia after the S&P 500 index fell overnight on indications the US Federal Reserve is on course to raise short-term interest rates this year. Sam Fleming parsed the Fed statement to see what to expect out of the next meetings. (FT)


– Japanese retail sales unexpectedly fall 0.3% – fastFT: Market-moving news and views, 24 hours a day – FT.com
– Homeowners in Poland Borrowed in Swiss Francs, and Now Pay Dearly – NYTimes.com
– Greek Bank Sell-Off: $11.4B Gone in Just Three Days – Bloomberg Business
– Shell cuts $15bn of spending after crude collapse – fastFT: Market-moving news and views, 24 hours a day – FT.com


Water shortage has become a serious threat for Sao Paolo…


Australia’s Central Bank on Track for Rate Cut

“Interest rate swap markets are pricing in a 50% chance that the central bank will cut rates next week, and a 100% chance for March, with two cuts firmly priced in by the end of the year.”

Earlier Thursday, Australia’s benchmark 10-year bond yield hit a fresh low of 2.478%, below the short-term interest rate of 2.5%, one of the strongest indications yet that investors believe the central bank will resume cutting rates next week. Long-term interest rates typically exceed short-term rates”


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