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El Salvador’s Bitcoin decision: Tracking adoption a year later

El Salvador made history last year in September by making BTC a legal tender. One year later, the falling BTC prices and delayed Volcanic bonds have fueled…

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El Salvador made history last year in September by making BTC a legal tender. One year later, the falling BTC prices and delayed Volcanic bonds have fueled skepticism.

El Salvador, the small Central American nation that made history just over a year ago when it made Bitcoin (BTC), recently marked its first year of BTC adoption.

The Salvadoran government touted BTC as a tool to attract foreign investment, create new jobs and cut reliance on the United States dollar in the country’s economy at the time of adoption. Many BTC proponents and the libertarian community rallied behind the small nation despite mounting pressure from global organizations such as the World Bank and International Monetary Fund (IMF) to remove BTC as a legal tender.

A lot has changed over the past year since El Salvador became the first “Bitcoin nation.” Enthusiasm and public interest rose immediately after the recognition of BTC, with the price surging to new highs.

Salvadoran President Nayib Bukele joined the growing league of Bitcoin proponents to buy several market dips and even reaped the benefits of their BTC purchase in the early days as the country built schools and hospitals with its profits.

As market conditions turned bearish, however, the frequency of BTC purchases slowed down, and the president, who was often seen interacting with the crypto community on Twitter and sharing future Bitcoin endeavors, cut back his social media interactions significantly.

El Salvador has purchased 2,301 BTC since last September for about $103.9 million. That Bitcoin is presently worth roughly $45 million. The most recent purchase was made in mid-2022 when the nation bought 80 BTC at $19,000 a piece.

As the price of BTC tanked, critics who have long been raising concerns about a crypto bubble felt validated, with several comments along the lines of “I told you so.” However, market experts believe El Salvador’s BTC experiment is far from a failure.

El Salvador’s Bitcoin Volcanic bond, a project meant to raise $1 billion from investors to build a Bitcoin city, has already been delayed on numerous occasions now and skepticism is growing not just around the project but on the overall BTC adoption itself.

Samson Mow, a Bitcoin entrepreneur who played a key role in designing the Bitcoin Volcanic bond — also called the Volcanic token — told Cointelegraph that contrary to common outside perceptions, El Salvador is building through the bear market. He noted that the Volcanic bond was delayed due to several reasons and is currently awaiting the passage of a digital securities law. He explained:

“We’re still waiting on the new digital securities laws to go to congress, and once passed, El Salvador can start the capital raise for the Bitcoin Bonds. I’m hopeful that it happens before the end of this year. Much like Bitcoin companies, El Salvador is focused on building through the bear market. I can’t see President Bukele not stacking more at these prices.”

The BTC price recorded a new all-time-high of $68,789 just a month after El Salvador’s adoption on Nov. 10. Since then, however, the price has tanked by over 70% and currently trading at around $19,000. Many critics believe that the future of the Volcanic bond and its native token is highly dependent on the crypto market and thus it could only gain traction during bull markets.

Paolo Ardoino, chief technical officer at Bitfinex, told Cointelegraph that the Volcanic tokens would generate interest from investors irrespective of the market conditions, he explained:

“The Volcanic token will be the first of its kind. While investor appetite for new offerings is typically greater during a bull market, we are confident that the unique proposition that this token represents will garner significant interest regardless of market conditions. The Volcanic token has widespread support in the Bitcoin community and there is manifestly a great appetite for the offering regardless of if we are in a bear or bull market.”

Bitfinex is the key infrastructure partner of the El Salvador government responsible for processing transactions from the sale of Volcanic tokens. 

Bitcoin adoption boosted remittance and tourism

While critics have called El Salvador’s Bitcoin experiment a failure since the start, proponents see it as a revolution of sorts and believe El Salvador’s adoption could create a domino effect for other nations with similar financial challenges such as a high number of unbanked citizens and significant remittance volumes. 

Bukele has previously mentioned that the primary focus of recognizing BTC was to offer banking services to more than 80% of unbanked Salvodrans. Within six months of the law passing, the country’s national Bitcoin wallet managed to onboard four million users, ensuring that 70% of the unbanked population got access to payment and remittance services without having to go to a bank.

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Aarti Dhapte, a senior research analyst at Market Research Future, told Cointelegraph that El Salvador’s BTC adoption has proven a success on several fronts, be it banking the unbanked or boosting tourism:

“We should accept that the digital currency has helped the Central American nation of El Salvador rebuild its tourism industry, despite the country still having difficulty enduring the long crypto winter. According to information from the Ministry of Tourism, El Salvador’s spending on travel has increased by 81% in the post-pandemic period. In 2021 the nation welcomed 1.2 million visitors and 1.1 million during the first half of 2022.”

Statista data shows that more than 9% of El Salvador’s GDP is made up of the tourism industry, so a near doubling of tourism is a significant boon for the country.

Share of tourism in El Salvador’s GDP. Source: Statista

Apart from tourism and offering financial services to the unbanked, BTC adoption has also proven beneficial in terms of cross-border remittances, cutting transaction costs significantly.

The El Salvador Central Reserve Bank estimates that from January to May 2022, remittances from citizens residing abroad totaled more than $50 million. The adoption of Bitcoin and the Chivo wallet, an initiative supported by the government of El Salvador, helped boost Lightning Network transactions by 400% in 2022.

The downsides of Bitcoin adoption

The biggest downside of El Salvador’s Bitcoin adoption has been macroeconomic factors that have led to a decline in BTC price along with the amount of pushback it has gotten from around the world. The pushback wouldn’t matter in a bull market, but being a small nation-state with financial challenges, the country cannot afford to be on bad terms with international monetary organizations. 

Right now, the vast majority of El Salvador’s Bitcoin was purchased at a higher value than it currently enjoys. Bitcoin has been tracking closely with traditional assets, like the stock market — particularly tech stocks. They, too, have taken a beating this year as the world tries to cope with the aftermath of pandemic-related government handouts.

Beyond the price of Bitcoin, the bigger problem for El Salvador is how the international financial world views the move.

The country’s move toward Bitcoin has limited the country’s access to traditional financial markets, causing Bukele some real problems in financing the repayment of its bond obligations. Moody’s, earlier this year, credited disagreements about Bitcoin as a reason El Salvador was having difficulty coming to terms with the IMF.

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Richard Gardner, CEO at institutional infrastructure service provider Modulus, told Cointelegraph that maybe in five years, Bukele’s decision won’t look that bad, but currently, it’s controversial:

“Bukele’s move to Bitcoin doesn’t look wise. Even with high inflation for the USD, Bitcoin has ultimately failed as an inflation hedge, given its dip. However, we’re looking at a one-year snapshot during a recession. For a country like El Salvador, access to funding through organizations like the IMF is vital. That makes Bukele’s Bitcoin gambit difficult to defend.”

El Salvador’s future depends a lot on the success of the delayed Volcanic bonds, which could bring billions in revenue and set a precedent for others to follow. Until the launch of the bond, the outside world will continue to measure its success based on its BTC purchases.

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Bonds

Druckenmiller: “We Are In Deep Trouble… I Don’t Rule Out Something Really Bad”

Druckenmiller: "We Are In Deep Trouble… I Don’t Rule Out Something Really Bad"

For once, billionaire investor Stanley Druckenmiller did…

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Druckenmiller: "We Are In Deep Trouble... I Don't Rule Out Something Really Bad"

For once, billionaire investor Stanley Druckenmiller did not say anything even remotely controversial when he echoed what we (and Morgan Stanley) have been warning for a long time, and said the Fed's attempt to quickly unwind the excesses it itself built up over the past 13 years with its ultra easy monetary policy will end in tears for the U.S. economy.

“Our central case is a hard landing by the end of ’23,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit in New York City Wednesday. “I would be stunned if we don’t have recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”

And the legendary investor, who has never had a down year in the markets, fears it could be something even worse. “I don’t rule out something really bad,” he said effectively repeating what we said in April that "Every Fed Hiking Cycle Ends With Default And Bankruptcy Of Governments, Banks And Investors" "

He pointed to massive global quantitative easing that reached $30 trillion as what’s driving the looming recession: “Our central case is a hard landing by the end of next year", he said, adding that we have also had a bunch of myopic policies such as the Treasury running down the savings account, and Biden's irresponsible oil SPR drain.

Repeating something else even the rather slow "transitory bros" and "team MMT" know by now, Druckenmiller said he believes the extraordinary quantitative easing and zero interest rates over the past decade created an asset bubble.

“All those factors that cause a bull market, they’re not only stopping, they’re reversing every one of them,” Druckenmiller said. “We are in deep trouble.”

The Fed is now in the middle of its most aggressive pace of tightening since the 1980s. The central bank last week raised rates by three-quarters of a percentage point for a third straight time and pledged more hikes to beat inflation, triggering a big sell-off in risk assets. The S&P 500 has taken out its June low and reached a new bear market low Tuesday following a six-day losing streak.

Druckenmiller said the Fed made a policy error - as did we... repeatedly... last summer - when it came up with a “ridiculous theory of transitory,” thinking inflation was driven by supply chain and demand factors largely associated with the pandemic.

“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that they just sat there and bought $120 billion in bonds,” Druckenmiller said. “I think the repercussions of that are going to be with us for a long, long time.”

“You don’t even need to talk about Black Swans to be worried here. To me, the risk reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.

Commenting on recent events, Druck was more upbeat, saying “I like everything I’m hearing out of the Fed and I hope they finish the job,” he said. Now, the tightening has to go all the way. “You have to slay the dragon.” The problem is that, as the BOE demonstrated with its QT to QE pivot today, it's impossible to slay the dragon and sooner or later every central banks fails.

What happens then? According to Druck, once people lose trust in central banks - which at this rate could happen in a few weeks or tomorrow - he expects a cryptocurrency renaissance, something which may already be starting...

... and not just there, but in the original crypto - gold - as well...

Excerpts from his interview below:

Tyler Durden Wed, 09/28/2022 - 12:26

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Economics

Interest rates, the yield curve, and the Fed chasing a Phantom (lagging) Menace

  – by New Deal democratThere’s a lot going on with interest rates in the past few days.Mortgage rates have increased above 7%:This is the highest…

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 - by New Deal democrat

There’s a lot going on with interest rates in the past few days.


Mortgage rates have increased above 7%:



This is the highest rate since 2008. Needless to say, if it lasts for any period of time it will further damage the housing market.

The yield curve has almost completely inverted from 3 years out (lower bar on left; upper bar shows a similar curve in April 2000, 11 months before the 2001 recession):



As of this morning, the curve is normally sloped from the 3.12% Fed funds rate up through the 3year Treasury, which is yielding 4.22% (which, as an aside, is a mighty tasty temptation to buy medium maturity bonds). Beyond that, with the exception of the 20 year Treasury, each maturity of longer duration is yielding progressively less. If this is like almost all recessions in the last half century, the short end of the yield curve will fully invert (i.e., Fed funds through 2 years as well) before the recession actually begins. Although I won’t show the graph, the yield curve *un*-inverted before the last two recessions even began, immediately or shortly after the Fed began to lower rates again.

On the issue of rents, house prices, and owners equivalent rent, Prof. Paul Krugman follows up on the fact that OER is a lagging measure. Today he touts the monthly decline in new rental lease prices as possibly signaling a downturn in inflation:





He’s referring to the “National Rent Index” from Apartment List, which Bill McBride has also been tracking. Because it tracks rents in only new or renewed leases, it picks up increases or decreases more quickly than those indexes that measure all rentals (including those that were renewed, e.g., 9 months ago).

I don’t think the index is quite the signal Paul Krugman does, because it is not seasonally adjusted, and rents typically decrease in the last 4 months of each year:



Here is the cumulative yearly index for each of the past 5 years:



The -0.1% non-seasonally adjusted decrease in September this year is on par with that of 2018, and less of a decline in September 2019 or 2020. For the first half of this year, rents were increasing at a faster, and accelerating, rate compared with 2018 and 2019. Since June have rent changes been comparable with (and not more negative than) those two years.

I thought I would take a look at Apartment List’s rental index and compare it with the Case Shiller house price index:



Note that house prices broke out to the upside YoY beginning in late spring 2020, while apartment rents did not do so until early 2021. There were rent increase moratoriums in place during the pandemic, which may have affected that comparison. Still, it is cautionary that for the limited 5 year comparison time we do have, house price indexes moved first.

Finally, what would the Fed have done if it had used the Case Shiller index instead of owners equivalent rent in its targeted “core inflation” metric?

Via Mike Sherlock, here’s what the “Case Shiller [total, not core] CPI” looks like through last month:



Here’s another way of looking at the data, comparing the monthly % changes in the Case Shiller national house price index (blue), owners equivalent rent (red, right scale), and core CPI (i.e., minus food and energy) (gold, right scale):



Rent + owner’s equivalent rent are 40% of core inflation. Unsurprisingly, core inflation tends to track similarly to OER. But between May 2021 and May 2022, OER only averaged +0.4% monthly, whereas the Case Shiller index increased 1.5% on average monthly. If 40% of core inflation increased at 1.5% monthly instead of 0.4% monthly, core inflation would have on average been +0.4% higher each month for that entire year.

In other words, the Fed would have had a much earlier warning that an upsurge in core inflation was not going to be “transitory.” 

By contrast, during the last 3 months of the period through July that we have house price index data, OER has averaged +0.4%, whereas house prices have increased on average +0.6%. This would have brought core inflation down by -0.1% each month. If we use the last two months, OER is +0.6% and house prices have been unchanged. Core inflation would have been -0.3% lower in June and July.

In fact, if the trend of the last several months continues, by year end OER is going to be higher than house price appreciation on a YoY as well as m/m basis. And while OER has been increasing, house price indexes have been decelerating. 

In other words, if the Fed keeps raising rates, it is most likely chasing a phantom menace, a lagging indicator which leading measures for which will have already peaked and come down sharply.

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Government

Futures Rebound From 2022 Low After Bank Of England Panics, Restarts Unlimited QE

Futures Rebound From 2022 Low After Bank Of England Panics, Restarts Unlimited QE

With everything biw breaking, including an explosive move…

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Futures Rebound From 2022 Low After Bank Of England Panics, Restarts Unlimited QE

With everything biw breaking, including an explosive move in bond yields in the UK, 10Y yields rising above 4.00%, and Apple "suddenly" realizing there was not enough demand for the latest iteration of its iPhone 5, it was only a matter of time before some central bank somewhere capitulated and pivoted back to QE, and this morning that's precisely what happened when the BOE delayed the launch of QT and restarted QE "on whatever scale is necessary" on a "temporary and targeted" (lol) basis to restore order, which sent UK bond surging (and yields tumbling the most on record going back to 1996 erasing an earlier jump to the the highest since 1998)...

... the pound first surged before falling back as traders realized the UK now has both rate hikes and QE at the same time, the dollar sliding then spiking, the 10Y US TSY yield dipping from 4.00%, the highest level since 1998, and stock futures spiking from fresh 2022 lows, but then fizzling as traders now demand a similar end to QT/restart of QE from the Fed or else they will similarly break the market.

Needless to say, the BOE has opened up the tap on coming central bank pivots, and while the market may be slow to grasp it, risk is cheap here with a similar QE restarted by the Fed just weeks if not days away. Indeed, look no further than the tumbling odds of a November 75bps rate hike as confirmation.

As if the BOE's pivot wasn't enough, there was also a barrage of company specific news: in premarket trading, the world's biggest company, Apple tumbled 3.9% after a Bloomberg report said the company was likely to ditch its iPhone production boost, citing people familiar with the matter. Shares of suppliers to Apple also fell in premarket trading after the report, with Micron Technology (MU US) down -1.9%, Qualcomm (QCOM US) -1.8%, Skyworks Solutions (SWKS US) -1.6%. Other notable premarket movers:

  • Biogen shares surged as much as 71% in US premarket trading, with the drugmaker on track for its biggest gain since its 1991 IPO if the move holds, as analysts lauded results of an Alzheimer’s drug study with partner Eisai.
  • Lockheed drops as much as 2.3% in premarket trading as it was downgraded to underweight at Wells Fargo, which is taking a more cautious view on the defense sector on a likely difficult US budget environment into 2023.
  • Mind Medicine slid 35% in premarket trading after an offering of shares priced at $4.25 apiece, representing a 31% discount to last close.
  • Watch insurers, utilities and travel stocks as Hurricane Ian comes closer to making landfall on Florida’s Gulf coast.
  • Keep an eye on southeastern US utilities including NextEra Energy (NEE US), Entergy (ETR US), Duke Energy (DUK US), insurers like AIG (AIG US), Chubb (CB US), as well as airline stocks
  • Netflix (NFLX US) was raised to overweight from neutral at Atlantic Equities, the latest in a slew of brokers to turn bullish on the outlook for the streaming giant’s new ad- supported tier, though the stock was little changed in premarket trading

In other news, Hurricane Ian became a dangerous Category 4 storm as it roars toward Florida, threatening to batter the Gulf Coast with devastating wind gusts and floods.

European stocks dropped for a fifth day as Citigroup strategists said investors are abandoning the region at levels last seen during the euro area debt crisis. Miners underperformed as the strong dollar and concerns about demand for raw materials sent commodity prices to the lowest level since January. Retail stocks slumped, with the sector underperforming declines for the broader Stoxx 600, as concerns mount about a consumer spending crunch. UK retail stocks are particularly weak amid Britain’s market meltdown and after online clothing retailer Boohoo issued a profit warning. Boohoo cut its guidance for the year, with soaring energy and food bills stopping consumers from splashing out on clothes and shoes; peers including Asos (-7.5%) and Zalando (-3.5%) sank. Here are the biggest European movers:

  • Roche gains as much as 6.5% in early trading, most since March 2020 after Eisai and partner Biogen said their drug significantly slowed Alzheimer’s disease. Roche partner MorphoSys rises as much as 22%. BioArctic jumps as much as 171% in Wednesday trading, its biggest intraday rise since 2018; the Swedish biopharma company is a partner of Eisai
  • Sanofi shares rise as much as 2.2% after saying it sees currency impact of approximately 10%-11% on 3Q sales, according to statement.
  • Burberry rises as much as 4.5% as analysts welcome the appointment of Daniel Lee, formerly of Bottega Veneta, to succeed Riccardo Tisci as creative director at the luxury designer.
  • Retail stocks slide, with the sector underperforming declines for the broader Stoxx 600, as concerns mount about a consumer spending crunch. Boohoo slumped as much as 18% after cutting its guidance for the year, with soaring energy and food bills stopping consumers from splashing out on clothes and shoes; peers fell, with Asos down as much as 9.4% and Zalando -4.3%.
  • Financial sectors including banks, real estate and insurance were the worst performers in Europe on Wednesday as hawkish comments from Fed officials stoked concerns over the economic outlook. HSBC fell as much as 5.3%, Barclays 6%, and insurer Aviva 7.9%
  • Norway unveiled a plan to tap power and fish companies for 33 billion kroner ($3 billion) a year to cover ballooning budget expenditures, sending salmon farmers’ stocks falling. Salmar down as much as 30%, Leroy Seafood dropped as much as 26%, and Mowi slid as much as 21%
  • Truecaller, which offers an app to block unwanted phone calls, falls as much as 23% in Stockholm after short seller Viceroy Research says it’s betting against the stock.

Adding to concerns, Deutsche Bank CEO Christian Sewing predicted a severe downturn in the lender’s home region and said the volatility whipsawing markets will continue for another year as central banks tighten rates to fight inflation, while ECB President Christine Lagarde said borrowing costs will be raised at the next “several meetings,” with several Governing Council  members favoring a 75 basis point hike in October.

Meanwhile, natural gas prices in Europe surged after Russia said it may cut off supplies via Ukraine and the German Navy was deployed to investigate the suspected sabotage to the Nord Stream pipelines. Putin moved to annex a large chunk of Ukrainian territory amid a string of military setbacks in its seven-month-old invasion.

Asian shares also fell: Japanese equities slumped after the latest hawkish comments from Fed officials on raising interest rates in order to bring inflation down. The Topix fell 1% to close at 1,855.15, while the Nikkei declined 1.5% to 26,173.98. Toyota Motor Corp. contributed the most to the Topix decline, decreasing 1.6%. Out of 2,169 stocks in the index, 943 rose and 1,137 fell, while 89 were unchanged. “From here on, U.S. CPI inflation will be the most important factor,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management. “Now that the FOMC meeting is over, we will be getting a good amount of statements from Fed officials, and wondering what kind of statements will come out.”

Key equity gauges in India posted their longest stretch of declines in more than three months, as investors continued to sell stocks across global markets on worries over economic growth.  The S&P BSE Sensex dropped 0.9% to 56,598.28 in Mumbai, while the NSE Nifty 50 Index fell by an equal measure. The indexes posted their sixth-consecutive decline, the worst losing streak since mid-June. Fourteen of the 19 sector sub-indexes compiled by BSE Ltd. declined. Metals and banking stocks were the worst performers. Healthcare and software firms gained.  Reliance Industries and HDFC Bank contributed the most to the Sensex’s decline. Reliance Industries has erased its gain for the year and is headed for its lowest close since March. Out of 30 shares in the Sensex index, 12 rose, while 18 fell

In FX, the dollar’s rally brought losses to other currencies, including the euro and onshore yuan, which tumbled to its weakest level since 2008. A regulatory body guided by the People’s Bank of China urged banks to protect the authority of the yuan fixing after the onshore yuan fell to the weakest level against the dollar since the global financial crisis in 2008, amid an incessant advance in the greenback and speculation China is toning down its support for the local currency.  The yen remained near the key 145 mark versus the dollar and within sight of levels that have drawn intervention from Japan. Speculation the sliding yen will compel Japan to intervene further, potentially funded by Treasuries sales, weighed on US debt.

“The fact we have such a strong increase in US yields is attracting flows into the US dollar,” said Nanette Hechler-Fayd’herbe, chief investment officer of international wealth management for Credit Suisse Group AG. “As long as monetary and fiscal policy worldwide are really not coming to strengthen their own currencies, we should be anticipating a very strong dollar.”

In rates, Treasury yields fell, following a more aggressive bull flattening move across the gilt curve, after Bank of England announced it would step into the market and buy long-dated government bonds, financed with new reserves. The Treasury curve remains steeper on the day however, with front-end yields richer by 7bp and long-end slightly cheaper. US session focus on 7-year note auction and a barrage of Fed speakers scheduled.  Treasury 10-year yields around 3.93%, richer by 1.5bp on the day and underperforming gilts by around 25bp in the sector -- gilts curve richer by 3bp to 50bp on the day from front-end out to long-end following Bank of England announcement. US auctions conclude with $36b 7-year note sale at 1pm, follows soft 2- and 5-year auctions so far this week

In commodities, WTI trades within Tuesday’s range, falling 0.5% to around $78.14. Spot gold falls roughly $11 to trade near $1,618/oz. 

Looking to the day ahead, there are an array of central bank speakers including Fed Chair Powell, the Fed’s Bostic, Bullard, Bowman, Barkin and Evans, ECB President Lagarde, the ECB’s Kazimir, Holzmann and Elderson, as well as BoE Deputy Governor Cunliffe and the BoE’s Dhingra. In the meantime, data releases include pending home sales for August.

Market Snapshot

  • S&P 500 futures down 0.6% to 3,637
  • MXAP down 1.9% to 139.41
  • MXAPJ down 2.3% to 452.49
  • Nikkei down 1.5% to 26,173.98
  • Topix down 1.0% to 1,855.15
  • Hang Seng Index down 3.4% to 17,250.88
  • Shanghai Composite down 1.6% to 3,045.07
  • Sensex down 0.3% to 56,939.09
  • Australia S&P/ASX 200 down 0.5% to 6,462.03
  • Kospi down 2.5% to 2,169.29
  • STOXX Europe 600 down 1.4% to 382.97
  • German 10Y yield little changed at 2.31%
  • Euro down 0.3% to $0.9561
  • Brent Futures down 0.4% to $85.94/bbl
  • Brent Futures down 0.4% to $85.94/bbl
  • Gold spot down 0.6% to $1,619.74
  • U.S. Dollar Index up 0.36% to 114.52

Top Overnight News from Bloomberg

  • ECB President Christine Lagarde said borrowing costs will be raised at the next “several meetings” to ensure inflation expectations remain anchored and price gains return to the 2% target over the medium term
  • The ECB is on track to take interest rates to a level that no longer stimulates the economy by December, Governing Council member Olli Rehn told Reuters
  • Germany’s federal government will increase debt sales by €22.5 billion ($21.5 billion) in the fourth quarter compared with an original plan to help fund generous spending to offset the impact of the energy crisis
  • The cost of protection against European corporate debt has surpassed the pandemic peak as investors fret over the effect of central bank tightening at a time of mounting recession risk
  • The Federal Reserve’s delicate balance between curbing demand enough to slow inflation without causing a recession is a “struggle,” said San Francisco Fed President Mary Daly
  • This week a gauge of one-month volatility in the majors hit its strongest level since the pandemic mayhem of March 2020, as wide price swings in the pound lifted hedging costs across the G-10 space
  • Moscow declared landslide victories in the hastily organized “referendums” it held in the territories currently occupied by its forces and prepared to absorb them within days. The United Nations has condemned the voting as illegal with people at times forced at gunpoint.

 

 

 

 

US Event Calendar

  • 07:00: Sept. MBA Mortgage Applications, prior 3.8%
  • 08:30: Aug. Retail Inventories MoM, est. 1.0%, prior 1.1%
    • Wholesale Inventories MoM, est. 0.4%, prior 0.6%
  • 08:30: Aug. Advance Goods Trade Balance, est. -$89b, prior -$89.1b, revised - $90.2b
  • 10:00: Aug. Pending Home Sales (MoM), est. -1.5%, prior -1.0%
    • Pending Home Sales YoY, est. -24.5%, prior -22.5%

Central Bank Speakers

  • 08:35: Fed’s Bostic Takes Part in Moderated Q&A
  • 10:10: Fed’s Bullard Makes Welcome Remarks at Community Banking...
  • 10:15: Powell Gives Welcoming Remarks at Community Banking Conference
  • 11:00: Fed’s Bowman Speaks at Community Banking Conference
  • 11:30: Fed’s Barkin Speaks at Chamber of Commerce Lunch
  • 14:00: Fed’s Evans Speaks at the London School of Economics

DB's Jim Reid concludes the overnight wrap

I had my worst nightmare yesterday. One of my wife's friends, who vaguely knows I work in financial markets, urgently contacted me for mortgage advise. She needed to make a decision within hours on what mortgage to take out from a selection of unpalatable options here in the UK. I'll be honest, when I speak to you dear readers and give advice I know you're all big and brave enough to either ignore it or consider it. However it felt very dangerous to be giving my wife's friend my opinion. Hopefully they'll be no fall out at the end of the period I advised on!

After the tumultuous events of recent days, market volatility has remained very high over the last 24 hours, with plenty of negative headlines to keep investors alert. In Europe, we got a fresh reminder about the energy situation after leaks in the Nord Stream 1 and 2 pipelines, whilst Gazprom warned that sanctions on Ukraine’s Naftogaz could put flows from Russia at risk. In the meantime, investors’ jitters surrounding the UK showed few signs of abating, with 30yr gilt yields surpassing 5% in trading for the first time since 2002 and a level it hasn't consistently been above since 1998. And even though we got some better-than-expected data releases from the US, they were also seen as giving the Fed more space to keep hiking rates over months ahead, adding to fears that they still had plenty of hawkish medicine left to deliver.

We’ll start here in the UK, since it was gilts once again that were at the epicentre of the ongoing repricing in rates, with plenty of signs that investors remain very nervous about the current economic situation. Gilt yields rose to fresh highs across the curve, with the selloff accelerating late in the session to leave the 10yr yield up by +26.1bps at a post-2008 high of 4.50%. Furthermore, the 30yr yield surged +44.8bps to a post-2007 high of 4.97%, closing just beneath the 5% mark that it had exceeded at one point right before the close. This for me is a fascinating development as recently as last December we were at 0.83% and then 2.28% in early August. For many many years the demand for long end gilts were seen as one of the most price insensitive assets in the fixed income world with huge regulatory and asset/liability buying. So the fact that even this has cracked shows the deep trouble the UK market is in at the moment. The moves have been so drastic that even the IMF announced yesterday they were closely monitoring developments in Britain and were engaged with UK authorities. Their rebuke was quite scathing.

Staying in the UK, there was an even more significant repricing of real yields, with the 10yr real yield surging by another +52.9bps on the day to 0.77%, having been at -0.84% only a week earlier, so a massive turnaround. Sterling ended a run of 5 consecutive daily losses to strengthen by +0.41% against the US Dollar, taking it back up to $1.073. However it was higher before the IMF statement and is at $1.065 this morning with their rebuke reverberating around markets.

Whilst UK assets continued to struggle, we did hear from BoE Chief Economist Pill yesterday, who sits on the 9-member Monetary Policy Committee. The main headline from his remarks was the comment that “this will require a significant monetary policy response”. Investors are still pricing in over +155bps worth of hikes by the next meeting on November 3, as well as a terminal rate above 6% next year. However, investors also continued to lower the chances of an emergency inter-meeting hike, particularly after Pill said that it was better to take a “considered” and “low-frequency” approach to monetary policy.

Elsewhere in Europe, the question of energy remained top of the agenda yesterday, with a fresh surge in natural gas futures (+19.65%) that marked a reversal to the declines over the last month. That followed the news of leaks from the Nord Stream 1 and 2 pipelines, which officials across multiple countries said could be the result of sabotage. Danish PM Frederiksen said that it was” hard to imagine that these are coincidences” and the FT reported German officials who said there was concern that a “targeted attack” had caused the sudden loss of pressure. A real nightmare scenario is if the sabotage attempts extended to other pipelines. Indeed Bloomberg reported that Norway was looking to increase security around its own infrastructure. However these pipes are long so it would take a lot of effort to protect them all.

On top of the leaks, we also heard from Gazprom, who said that there was a risk that Moscow would sanction Ukraine’s Naftogaz. That would stop them from paying transit fees, which in turn would put gas flows to Europe at risk, and led to a significant jump in prices after the news came through later in the session.

Against that unfavourable backdrop, European assets continued to suffer over the last 24 hours across multiple asset classes. Sovereign bonds didn’t do quite as badly as gilts, but it was still a very poor performance by any normal day’s standards, with yields on 10yr bunds (+11.3bps) reaching a post-2010 high of 2.22%. Peripheral spreads continued to widen as well, with the gap between 10yr Italian yields over bunds closing above 250bps for the first time since April 2020. In the meantime, equities lost ground thanks to a late session reversal, leaving the STOXX 600 (-0.13%) at its lowest level since December 2020. And there was little respite for credit either, with the iTraxx Crossover widening +15.2bps to 670bps, which is a closing level we haven’t seen since March 2020.

On top of sour risk sentiment, results from Russia’s referendum in four Ukrainian territories unsurprisingly revealed lopsided votes in favour of Russian annexation, topping 85% in each of the regions. That stoked fears that Russia will move to officially annex the territories as soon as this week, thereby claiming any attack on those territories is an attack on sovereign Russia itself and enabling yet further escalation. President Putin is scheduled to address both houses of the Russian Parliament this Friday, which British intelligence reports may be used as a venue to push through an official annexation ratification.

Over in the US, there was some better news on the data side that helped to allay fears about an imminent slide into recession. First, the Conference Board’s consumer confidence reading for September rose to 108.0 (vs. 104.6 expected), which is its highest level since April. Second, new home sales in August unexpectedly rebounded to an annualised pace of 685k (vs. 500k expected), which is their highest level since March. Third, the preliminary durable goods orders for August were roughly in line with expectations at -0.2% (vs. -0.3% expected), and core capital goods orders exceeded them with +1.3% growth (vs. +0.2% expected) and a positive revision to the previous month. Finally, the Richmond Fed’s manufacturing index for September came in at 0 (vs. -10 expected), adding to that theme of stronger-than-expected releases. A word of caution, the housing data is typically noisy and subject to revision, so despite the bounce in sales, we don’t think this marks a sea-change in housing markets, which have been battered by tightening financial conditions to date.

In the end however, those data releases didn’t manage to stop the S&P 500 (-0.21%) losing ground for a 6th consecutive session, which takes the index back to its lowest closing level since November 2020. In fact for the Dow Jones (-0.43%), yesterday’s losses left it at its lowest closing level since 6 November 2020. That was the last trading session before the news on Monday 9 November from Pfizer that their late-stage vaccine trials had been successful, thus triggering a massive global surge as the way out of the pandemic became much clearer. All-in-all though, equities were a side show to fixed income yesterday.

When it came to Treasuries, there was a notable steepening in both the nominal and real yield curves yesterday, and 10yr yields ended the session up +2.1bps at 3.95%. This morning in Asia 10yr yields did trade at 4% for the first time since 2010 before dipping to around 3.98% as I type. In terms of Fed speak yesterday, we heard from Chicago Fed President Evans, who implied that the Fed might take stock of the impact of rate hikes in the spring, saying that “By spring of next year we are going to get to a funds rate that we can sort of sit and watch how things are behaving,” In the meantime, St Louis Fed President Bullard (one of the most hawkish members of the FOMC) said that inflation was a serious problem and that the credibility of the Fed’s inflation target was at risk.

This morning Asian equity markets are extending their downtrend. As I type, The Kospi (-3.01%) is sharply lower in early trade with the Hang Seng (-2.40%), the Nikkei (-2.21%), the CSI (-0.77%) and the Shanghai Composite (-0.75%) all trading in negative territory.

After a steady start, US stock futures got caught up in the bearish mood with contracts on the S&P 500 (-0.71%) and NASDAQ 100 (-0.98%) both moving lower.Apple reversing plans for an iPhone production boost on waning demand seemed to be a catalyst. The US dollar index (+0.43%) has hit a fresh two-decade high of 114.69 this morning.

Early morning data showed that Australia’s August retail sales advanced for the eighth consecutive month, rising +0.6% m/m, faster than the +0.4% increase expected although the pace of growth slowed from the +1.3% rise seen in July.

To the day ahead now, and there are an array of central bank speakers including Fed Chair Powell, the Fed’s Bostic, Bullard, Bowman, Barkin and Evans, ECB President Lagarde, the ECB’s Kazimir, Holzmann and Elderson, as well as BoE Deputy Governor Cunliffe and the BoE’s Dhingra. In the meantime, data releases include Germany’s GfK consumer confidence reading for October, and France and Italy’s consumer confidence reading for September. In the US, there’s also pending home sales data for August.

Tyler Durden Wed, 09/28/2022 - 07:53

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