Unwinding Carry Trades and Unintended Consequences

Submitted by Jim Quinn  –  The Burning Platform

The European Central Bank under the auspices of Mario Draghi has created a market destabilizing condition known as the euro carry trade. Mr. Draghi recently telegraphed to the markets a more aggressive attack on the value of the currency heading into the ECB meeting held on December 3rd. In fact, he went on record saying the ECB’s imperative is to, “Do what we must to create inflation as quickly as possible.” Because Draghi promised to destroy the euro at an even quicker pace than it was already falling, financial institutions front ran the ECB’s increased bid for bonds and equities, sending these prices soaring in the weeks prior to the meeting.


The euro carry trade was in full swing. These banks and hedge funds also borrowed euros and bought higher-yielding dollar denominated assets. And, the falling euro/rising USD furthermore served as a green light to sell short most commodities, including precious metals.


A great example of how the euro carry trade works can be found in the market for U.S. Treasuries. In the weeks leading up to the December 3rd ECB meeting the U.S. Ten-year Note Yield fell from 2.88% on November 9th, all the way down to 2.26% on December 2nd, as traders sold euros and bid up Treasury prices. The trade was a double-win because Treasuries offered a higher yield than European bonds and was denominated in a rising currency. European traders could earn more income on their money while also benefitting from an improving currency translation.


But Mr. Draghi threw a wrench into this carry trade when traders became disappointed with the outcome of the meeting. The ECB did not increase the amount of monthly QE purchases as was highly anticipated. Draghi kept the level of monthly purchases at 60 billion euros. However, he did extend the program by 6 months and lowered the deposit rate by 10bps. This caused the euro to soar against most major currencies and sent carry trade speculators scrambling to sell bonds and stocks, and then sell dollars to cover their short euro position. Continue reading

Very Disturbed: Selloff Accelerates and Spreads

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

This belongs with the last post on the highly “disturbed dollar” but I felt it deserved its own separate piece to feature downstream of funding. Given the liquidity backdrop describing a broad range of extraordinarily disconcerting prices and liquidity rates, the selloff picking up pace in junk is anticipated. Even still, the nature of the crash and that it is spreading is so noteworthy. And a reminder (at the bottom) about what we are dealing with here, nothing like some inconsequential annoyance.

ABOOK Dec 2015 Funding BofAML HY CCCABOOK Dec 2015 Funding BofAML HY Master IIABOOK Dec 2015 Funding BofAML HY CCC 2008ABOOK Dec 2015 Funding Leveraged Loans

ABOOK Nov 2015 Debt Bubble Gross

India and gold

Submitted by Alasdair Macleod – FinanceAndEconomics.org

The Indian government made headlines recently with its attempts to obtain possession of the gold held by its citizens. It claims it is in the national interest to restrict gold imports, which would reduce India’s trade deficit. Accordingly, Indians are being asked to deposit their physical gold in the banks for a promised yield of 2½%.

The government said the gold will be used to supply jewellers and other domestic users, replacing imports. Furthermore, the government announced the launch of a gold-backed bond, which in the words of Prime Minister Modi, and I quote, “People will not get any gold bar but a piece of paper that will have the same value as gold. When you return that piece of paper you will get money as per the value of gold at that time. You will not need to buy gold and worry about where to keep it.”

The World Gold Council is lending its name to the coin issue, which is part of what the government is calling, with disarming honesty, its gold monetisation scheme. However, only 4 kilos will be minted initially in 5 gram and 10 gram coins, so it looks like little more than a PR stunt for the wider scheme drawing in the authenticity of the WGC.

Wisely the public, both as individuals and also as representatives of religious communities, are having none of it. They are obviously not interested in sharing possession with the government, and the response to the deposit scheme attracted a paltry 400 grammes in the first two weeks. The media speculates this is due to the reluctance of people to declare their assets because of tax implications. While there may be some truth in this, the real reason may be far simpler but unquotable: people do not trust the government with their gold. Continue reading

Bail-Ins “Undermine Confidence” In Banks – Bank of Italy

Submitted by Mark O’Byrne  –  GoldCore

Bank ‘bail-ins’ and the new international bail-in regime that impose losses on bank investors, bondholders and even depositors may undermine the confidence of small savers in the banking system, a senior Bank of Italy official warned on Wednesday.

GoldCore: Are your savings safe from Bail-in?
Protect Your Savings From The Wrecking Ball

“The bail-in can exacerbate – rather than alleviate – the risks of systemic instability caused by the crisis of individual banks,” Carmelo Barbagallo, head of supervision at the central bank, astutely noted during a hearing before the Chamber of Deputies in Italy according to Reuters:

“It can undermine confidence, which is the essence of banking; transfer the costs of the crisis from taxpayers at large to a smaller category of people no less worthy of protection – small investors, pensioners – who directly or indirectly invested in bank liabilities” said Barbagallo.

The comments are notable as they are the first time that a central bank official in the EU, and indeed, internationally has voiced concerns about the coming bail-in regime and the impacts on ordinary citizens – small businesses, investors, savers and pensioners. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Warning: Half Of Oil Junk Bonds Could Default (CNN)
• Junk Fund’s Demise Fuels Concern Over Bond Rout (WSJ)
• Kinder Morgan – Poster Boy For Bubble Finance (Stockman)
• Oil Producers Offset Fall In Prices By Raising Output (Reuters)
• Zombies Appear In US Oilfields As Crude Plumbs New Lows (Reuters)
• What Went Wrong in Oil-Price Forecasts? (WSJ)
• China Has Officially Joined the Currency Wars (ET)
• China Yuan Falls To Lowest Since August 2011 Versus Dollar (CNBC)
• Let’s Just Hope Shipping Isn’t Telling the Real Story of China (BBG)
• How to Break the Wall Street to Washington Merry-Go-Round (DaCosta)
• Give Me Only Good News! (Grantham)
• First Government Plane Carrying Refugees Arrives in Canada (AP)
• Greece Struggles With Creditors To Keep Bad Loans From ‘Vultures’ (Reuters)
• EU To Sue Greece, Italy, Croatia Over Migrants (AP)
• Stranded Migrants Relocated in Athens Arena, Many Disperse (GR)
• Behind Angela Merkel’s Open Door for Migrants (WSJ)
• Four More Bodies Found In Aegean After Boat Sinks (AP)
• EU Plans Border Force To Police External Frontiers (FT)