WTF Chart Of The Week

Authored by Jeffrey Snider via Alhambra Investment Partners,

Back in early October, I noted that repo fails had jumped above $250 billion (combined “to receive” and “to deliver”) for three weeks straight. That wasn’t an auspicious result, as sustained collateral problems like that don’t correlate to happy things. It all began the week of September 5, in what seemed like a minor one-day nuisance over the 4-week bill yield.

October was something of lull in repo and other things, too. Nothing ever goes in a straight line, of course, so it wasn’t surprising to find by mid-November a resumption of concerns based so much in repo. The week of Thanksgiving, fails totaled again more than $400 billion, similar in scale to that week of September 5. Then they spiked by 50% more to $600 billion the week after.

FRBNY records $523 billion in repo fails now for the first week of December. That’s three straight more than $400 billion, two in a row better than half a trillion.

The 8-week average is even just shy of $350 billion. You can get rich being a collateral owner under these terms, raising the question where are they all?

While these are good charts, important charts, neither is our Chart of the Week. What we are looking for in this context of really another burgeoning “dollar shortage” episode is, as always, escalation.

I’m going to go out on a limb and claim there is something seriously wrong in repo.

 

All jokes aside, I know it sounds like a broken record but the dimension that matters is not intermittent collateral problems so much as the greater intensity to them and in a condensing timeframe. Escalation is a description you really don’t want to fit the circumstances.

Just as raging wildfires have a horrific tendency to jump fire-lines and even whole valleys given enough energy, funding issues can jump markets. The global “dollar” market is not a monolithic whole and never has been. It may be (very likely is) more fragmented today than at any point in the past owing to persistent balance sheet capacity problems (therefore the breakdown of covered interest parity that used to keep various funding markets working together in what sure seemed like a seamless whole). It would be a clear point of magnification, then, to find serious problems in one part of the eurodollar system spilling over into another one.

Leading us to our Chart of the Week:

The 3-month €/$ cross currency basis swap has plunged this week, a descent that really started the week after Thanksgiving. It has reached a level today last seen during the 2011 crisis. And this latest detour clearly marks its inflection where else but the week of September 5. In other words, you rarely find an exact match like the one we have here repo to €/$ swaps.

This particular instrument isn’t alone among XCurrBasisSwaps, either, it is merely the tenor and counterpart currency that right now is at the most extreme.

Because these are two very different funding mechanisms, repo and FX (Footnote dollars), there can be little doubt what is really at issue – “dollar” shortage as a matter of supply and therefore balance sheet capacity.

That’s the one common element linking collateral flow with the severe unwillingness (broken covered interest parity) to make a killing lending FX dollars to euro counterparties.

 

This doesn’t mean there is a crash right ahead. It does, however, suggest coming difficulties in various markets and more than that the global economy.

You can blame regulations all you want, as the mainstream has already rushed to do, being forced by such a huge move in €/$ cross to at least report on it, but there is no way this comes out as anything other than an escalating warning.

As a reminder, what negative premiums on XCurrBasisSwaps mean:

The cross currency basis swap is somewhat unique in that by fixing exchange values at both the outset and back end, it reveals purely financial perceptions in its values and changing values about the differences in interest payments. For example, in the 1990’s the basis swap for Japanese banks (again, not companies) was structurally negative, meaning that they had to pay a premium to swap into dollar funding because of negative perceptions of creditworthiness. This is the legacy of the downside of the “global dollar short”, as Japanese banks had accumulated large dollar asset positions (long US$ assets, short US$ funding) leaving them susceptible to such vagaries in dollar funding, whether repo or basis swaps or anything else someone on Wall Street or in London might dream up that wasn’t gold or actual cash…

 

The negative yen basis swap acts like leverage where even yields on the interim “investment” are negative. Any speculator or bank with spare “dollars” could lend them in a yen basis swap meaning an exchange into yen. Because you end up with yen you are forced into some really bad investment choices such as slightly negative 5-year government bonds, but that is just part of the cost of keeping risk on your yen side low. Instead, the real money is made in the basis swap itself since it now trades so highly negative. The very fact of that basis swap spread means a huge premium on spare dollars; which is another way of saying there is a “dollar” shortage.

 

Because of the shortage and its premium, you can swap into yen and invest in negative yielding JGB’s in size and still make out handsomely. There has been, in fact, a rush of foreign “money” into Japan to take advantage of this dollar shortage; the fact that there has been such enthusiasm and it still has not alleviated the imbalance proves scale and intractability.

Ugly, Tailing 10Y Auction: Lowest Indirects Since 2016

If yesterday"s 3Y auction was ugly, today"s $20 billion 9-year-11 month reopening was just as abysmal.

With a high yield of 2.18%, this was not only a whopping 1.1bp tail to the 2.169% When Issued, it was the 6th consecutive "tail" in a row, with just 2 10Y auction stopping through so far in 2017 (January and March). That said, the yield was also the lowest since November, which may explain some of the weak bidside interest.

The internals were ugly, with a Bid to Cover of 2.28, fractionally above August"s 2.23, but well below the 6 month average. Just like yesterday, foreign bidders balked, and the Indirect award was a paltry 55.3%, down from 57.9% last month, and below the 63.4% average. This was the lowest Indirect award since November 2016. With Directs once again in line, at 6.0%, just below the 6.8% last month, it was the Dealers who had to step up and they do, taking 38.7% of the final allottment, the highest since November, and well above the 29.3 6 month average.

Finally, what likely prevented today"s auction from printing notably better, is that the recent record specials in repo, which last week hit a sub-fails rate of -3.75%, was completely gone as of this morning, and the 10Y traded at 0.00% in repo at 8am on Tuesday. And with no shorts to squeeze, the result was as expected.

Ugly, Tailing 3Y Auction: Bid to Cover Tumbles, Lowest Indirects Since 2016

Whether due to the broader risk-on move, or as a result of a surge in inflation fears in the aftermath of Hurricanes Irmas and Harvey, today"s auction of $24 billion in 3Y paper was arguably the ugliest yet in 2017.

Printing at a high yield of 1.4330%, while this was the lowest yield since February, it was also a 0.6 bps tail to the 1.427% When Issued. The internals were even uglier, with the Bid to Cover tumbling from 3.13 to 2.70, and below the 6 month average of 2.85. Just as notable was the plunge in the Indirect award, which slumped from 64.1% in August to just 46.2% in August, the lowest since December 2016. And while Directs were largely unchanged from last month, at 10.4%, above the 8.7% 6M average, the Dealer award soared from 25.8% to 43.4%, nearly eclipsing the Inidrect take down, well above the 6 month average of 35.6%, and the highest since December 2016.

Overall, an unexpectedly ugly auction in light of last week"s plunge in bond yields, although perhaps not all that surprising in light of the broad elimination, if only for the time being, of both geopolitical and climate-linked risk. And now, we look forward to the upcoming 10Y auction which may be just as ugly, if not worse should today"s risk on euphoria persist, despite 10Y paper still trading quite special in repo as of this morning.

"We've Never Seen Anything Like This": Repo Market Snaps As 10Y Suffers "Epic Fail"

It"s been a while since we saw any major dislocations in the Treasury repo market, i.e., collateral shortages as a result of surging TSY shorts, for the simple reason that after the first quarter when everyone was certain that Trump reflation trade would kick in but didn"t, the record number of built up spec net shorts got trampled by the rising price, rapidly shifting over to record longs.

However, the peace and quiet quiet in the repo market was shattered this week, when almost overnight the 10Y went from "normal" in repo, at a rate of 0.50% on Friday, to a special -2.00% on Monday, and then a Super Special, if not record, "fails rate" of -3.50% this morning.

Commenting on this dramatic move in 10Y repo rates, Stone McCarthy"s Alan Chernoff, in a note titled "Epic Fail", writes that "the 10-year note has been below the fails rate and shows no signs of moving! It opened at -350 basis points, and though pressure has eased off of it slightly, it is STILL below the fails rate at -300 basis points."

As a reminder, the fails rate is the 300 basis points below the lower end of the target fed funds rate, putting it at -200 basis points currently. And, if an issue falls below the fails rate, it becomes cheaper to just pay the fails charge of 200 basis points rather than deliver than issue, which is what is happening. In dollar terms, the agency repo fails nominal was at $131BN on  Sept. 6 vs $153.6 BN on Sept. 5, above the 5-DMA $90.7b, according to DTCC data.

To be sure, some firms that want to maintain good client relationships will likely want to deliver the trade at such a low rate, although it appears that not many are rushing to do so.

As Bloomberg writes, confirming what we have said repeatedly in the past 3 years when we commented on these sudden repo market dislocations, the "specialness is due to lack of supply as shorts roll from triple-issued old 10Y into single issue current 10Y."

No matter the reason, Chernoff observes that he has never seen a move quite like this and that "this is one of the lowest rates that we"ve ever seen the 10-year note repo trade at, and definitely the furthest below the fails rate."

One final observations: while even term 10-year repos are below the fails charge at -215 basis points, the 3-year note is only modestly tight at 65 basis points, while and most other issues are trading near GC.

Some final parting words: keep a close eye on the 10Y - a positioning move of this magnitude does not take place in a vacuum, and either "someone knows something" or another busload of specs is about to be crushed once more.

About That Debt Ceiling Crisis...

With just one month left until the "X Date", better known as the first day on which Treasury has exhausted its borrowing authority and no longer has sufficient funds to pay all of its bills in full and on time, and also known as the date the US is technically in default on its debt obligations and would be forced to prioritize debt payments according to that infamous 2011 Fed transcript...

... traders were hoping if not for resolution, then at least a modest dose of optimism in the days ahead: after all with Houston reeling, the last thing the US needs is a full government shutdown in addition to the emergency crisis in Texas.

Alas, that"s precisely the opposite of what is taking place in the market, where the September/October Bill Spread has again blown out to record levels...

... making the October T-Bill "hump" the worst it has been yet.

One potential catalyst for the spike in odds of an adverse outcome is that earlier today, the chairman of the conservative House Freedom Caucus said aid for victims of Hurricane Harvey should not be part of a vehicle to raise the debt ceiling.

Quoted by The Hill, Rep. Mark Meadows (R-N.C.), a Trump ally who leads the conservative caucus, said disaster aid should pass on its own, apart from separate measures the government must pick up in September to raise the nation"s borrowing limit and fund the government.

“The Harvey relief would pass on its own, and to use that as a vehicle to get people to vote for a debt ceiling is not appropriate,” he said an interview with The Washington Post, signaling agreement with Trump on the approach. It would “send the wrong message” to add $15 to $20 billion of spending while increasing the debt ceiling, Meadows added.

Ironically, it was precisely the Harvey disaster that prompted Goldman yesterday to lower its odds of a debt ceiling crisis from 50% to 33%, on the assumption that it would make conseratives more agreeable to a compromise, when in fact precisely the opposite appears to have happened, and the new dynamic is now playing out in the market where the odds of a government shutdown have never been greater.

So what does it mean for the US if the T-Bill market is correct and a debt ceiling deal is not reached in time over the next 30 or so days? For an unpleasant perspective on what may happen next, here is Deutsche Bank"s preview of what a debt ceiling crisis would look like:

Guide to a Debt Ceiling Crisis

If Congress doesn’t act in time and the above fallbacks are deemed untenable, the Treasuries with affected principal or coupon payments would likely be handled in two ways, according to scenarios considered by SIFMA. The first option would extend maturity and coupon payments, where payment decisions are explicitly announced by Treasury one day at a time, and both coupon and principal payments are ultimately made in full once the debt limit is raised. These securities would be able to be transferred normally, and a market for them would develop. While the security is not “defaulted” as its maturity date has been extended in systems, the extension would likely constitute a change in terms that triggers CDS.

The other outcome would a failure pay , where Treasury does not set a date for future payment, and there is no pre-announcement (or it comes last minute). A failure to pay would mean the affected securities drop off the Fed system and cannot be transferred normally. A market would eventually develop, but once there is a failure to pay and the securities are not extended in systems, they cannot be “unmatured” and maturity extended.

Regardless of whether it is a payment extension or a failure to pay, the longer Treasury remains in default, the worse the situation for financial markets. Market reactions and market functioning might be comparatively stable at first, but the concern is of widespread panic and systemic market disruptions.

As for immediate ramifications, noted that CDS would likely triggered either default scenario , as sovereign CDS is triggered by either a failure to pay, repudiation/moratorium, or a restructuring. A failure to pay occurs when a sovereign doesn’t pay principal or interest when due, with a 3 day grace period applying to that due date in the case of the US. In our view, a CDS trigger would apply to all debt obligations backed by the full faith and credit of the US government (including GNMA, FHA securities, etc.). A CDS event is unlikely to have much direct market impact, however, as net CDS exposure is a modest $1bn as of the end of July, down from about $4bn in 2013 and its peak near $6bn in 2011. As long there is no one particular bank that is overly short protection, we do not expect any knock-on CDS event. 5y CDS is currently suggesting no real concern, sitting at the bottom end of its 19-24bp ytd range. While the supply of deliverable securities is more than adequate to satisfy the outstanding contracts, demand deliverable bonds may cause distortions . The 2.25% Aug 2046 bonds are currently the cheapest-to-deliver into the CDS, and would likely trade upward in price towards recovery value.

Among Treasury market investors, money market funds are a key group possible propagation risk . Even after money fund reform, government funds continue to be quoted at a stable $1 NAV, leaving them vulnerable to perceptions around “breaking the buck,” and therefore large scale investor redemptions in an extreme scenario. Treasuries accounted for $678bn of money funds $2.7tn AUM as of the end of July, while Treasury repo makes up another $595bn (with about $150bn of that made up by RRP’s with the Fed). Money funds’ Treasury holdings tend to be concentrated in securities maturing in the first month – more than 40% of their Treasuries held at the end of July matured in August. This suggests that the bias will be for money funds to accumulate more securities maturing around the debt ceiling, though they may be cautious around specific issues. However, it’s worth noting that they then owned over $40bn combined in the October 5 bills, October 12 bills, and October 15 coupon maturities – more than 20% of the amount  outstanding. Of the $1.3tn of Treasuries (bills and coupons) that mature between October and mid-January, money funds own about 19% - potentially an important factor in the event that a default drags out. Also note that maturing notes and bill holdings are concentrated in a relatively few fund families.

Potential outflows from money funds has implications repo market . Possible forced selling of Treasuries, money funds would likely cut back on their provision of financing to banks through repo. While reforms have reduced banks’ reliance on short term funding and put them in a place to better withstand a significant reduction in availability of things like repo funding, a sharp contraction in overall repo financing would likely have ramifications for market functioning and liquidity.

In terms of market plumbing, given the reliance Treasuries managing credit risk derivatives , a default event could spread quickly to derivatives market via a sudden drop in the valuation of UST collateral. This loss in value would trigger calls for additional collateral, and given the widespread use of UST’s, it is possible that a number of market participants fail to post sufficient collateral; this would constitute a default in a centrally cleared trade. The requirement that the surviving counterparty replace the risk of that trade could subsequently result in a major revaluation of all related trades, triggering new collateral calls, and potentially create a vicious cycle.

How might the Fed might react to a major disruption?

The question is complicated by a possible reinvestment decision in the September meeting, but extracting that for the time being, there is nothing immediately apparent in the Federal Reserve Act that would preclude the Fed from purchasing defaulted Treasury securities. This would likely not be a proactive step, as the Fed would not want to be seen “bailing out” the Treasury, but given the extremity of a default situation, the Fed would be governed by its financial stability mandate.

The Fed could intervene by removing defaulted securities from the market and sell or repo non-defaulted issues to provide the market with good collateral. Additional emergency facilities similar to those seen in 2008 are another option wherein the Fed could support money funds by accepting their assets and providing liquidity. To the extent that liquidity concerns became extreme the Fed could obviously move to add further monetary accommodation especially if it perceived knock on effects to the growth and inflation outlook.

US Stock Buybacks In Biggest Slide Since The Financial Crisis

In light of today"s euphoric market reaction, which has seen the VIX plunge by over 3 vols, or 20% lower, to just over 12 and sent both the Nasdaq and S&P higher by 1% on relief that there were no mushroom clouds of the weekend, the jury is out whether last week"s sharp risk off, short-vol mauling will persist or be just another BTFD opportunity. But while last week"s tension may already be forgotten, some disturbing trends persist. As SocGen"s Andrew Lapthorne writes, while the S&P trades near all time highs, the smaller cap Russell 2000 dropped a much sharper 2.7%, leaving this index up just 1.3% for the year and down 5% over the last couple of weeks on what we discussed last week was a growing concern for the US economy and companies who do not have exposure to international revenue.

Furthermore, High Yield Credit also fell sharply. Along with the Russell 2000, HYG has also unwound most of this year’s positive performance in a matter of weeks. As Lapthorne writes, "in our view, high yield credit and the Russell 2000 are all the same trade with different wrappers. Their continued success is highly dependent on asset volatility remaining as subdued and debt markets as generous as they have been, both of which we think is highly unlikely."

But the most interesting observation made by the SocGen strategist in his overnight report is that the sudden aversion to balance sheet risk is not restricted to US small caps or HYG, "indeed within the S&P 500 ex financials such a strategy remains the most profitable of our US investment styles this year."

"What might be contributing to this performance trend", Lapthorne asks rhetorically? Here is the most likely explanation: "share buybacks have slumped by over 20% YoY." Ominously, this is the sharpest drop in corporate buybacks since the financial crisis effectively shut down bond markets in 2008, as a result of the market no longer rewarding companies that lever up just to repurchase their own stock. 

SocGen"s conclusion: "Perhaps over-leveraged US companies have finally reached a limit on being able to borrow simply to support their own shares." If so, this is a big problem because as Credit Suisse showed recently, corporate buybacks have been the only source of equity injection since the crisis.

If this phase is now officially over, it is unclear what - if any - new source of capital inflows, central banks notwithstanding, will replace corporations as the main buyers of US equities going forward.

Debt Ceiling Deal Doubts Rise - USA Default Risk Hasn't Done This Since Lehman

The US Treasury Bill market remains notably inverted around the uncertain timing of the US debt limit debacle.

As Bloomberg reports, while Treasury bills maturing in October continue underperforming against November and December securities, the market has a murky view on the drop-dead date for the U.S. debt ceiling.

At the start of last week, concerns shifted to early October after the Treasury said in its 3Q refunding statement that it expects to be able to fund the govt through the end of September.

Focus then shifted back toward mid-October after the head of the House Freedom Caucus said he is ready to accept a debt ceiling increase without other conditions

However, one more worrisome market is starting to notably wake up to the reality of a deeply divided congress unable to agree on anything. The market for sovereign credit risk is flashing red with USA 5Y CDS now trading at its most extreme levels to German 5Y CDS since Lehman.

Note that the current credit-risk-premium for US Treasuries is higher than it was during 2013"s government shutdown and 2015"s down-to-the-wire debt ceiling debate.

But while Treasury and credit markets are flashing red anxiety levels, the VIX curve is doing the exact opposite and pricing in a relative drop in volatility... before a resurgence in the start of 2018...

So T-Bills worry about early October... VIX worries about year-end... and CDS confirm they have a problem. Who will be right?

European Stocks Soar To 2nd Biggest Day In 10 Months

Aside from the post-Macron first-round-win in April, stocks across Europe surged to their best day since last September today, surging higher after Yellen"s dovish comments, presumably due to the market"s belief that as goes The Fed, so goes the rest of the hawkish hangers-on...

As Reuters reports, a run higher for energy shares and miners, as well as strong updates from Norwegian lender DNB, and a more dovish tone from U.S. Federal Reserve Chief Yellen, helped drive European shares up on Wednesday, though renewed pain for publisher Pearson weighed on the media sector. European shares made early gains and were given a second wind in afternoon trading when Federal Reserve Chair Janet Yellen dampened expectations of more than one interest rate hike this year. All sectors were in positive territory, with miners, construction and healthcare sectors leading. A slower pace of interest rate raises is positive for equities, which benefit when their yield is relatively higher than other asset classes such as bonds.

So much for "it"s all about earnings"...

Mediocre, Tailing 30Y Auction Concludes This Week's Treasury Issuance

With the 30Y trading comfortably in repo today, with no tightness as indicated by the +0.7% repo rate, it seemed possible that the auction would join this week"s previous 2 auctions of 3 and 10 Year paper by printing with a modest tail. So when the Treasury announced results from today"s 29-Year 10-Month reopening, few were surprised that the High Yield of 2.938% tailed the When Issued of 2.929% by 0.9bps, suggesting yet another mediocre auction. 27.01% of the bids at the high yield were accepted.

The internals confirmed the poor result: the bid/cover was 2.23, down from 2.34 at last month"s auction and below the 2.31% 6 month average. This was the lowest bid to cover since November 2016.

Indirect bidders took down 64.5% of the auction, just above the 62.9% average, while Direct bidders took down 5.8% of the auction, a sharp drop from last month"s 13.1%, and below the 6 month average of 8.4%. Dealers were left with 29.7% of the allotment.

The conclusion of this week"s TSY issuance left quite a bit to be desired in terms of primary demand, and since the recurring tails suggest that many of the TSY shorts have been mostly closed out, it implies a growing possibility that a new layer of shorts will be put across the curve in the near future.

China Manufacturing PMI Jumps To Five Year High

China"s reflation story (on the back of a record amount of debt created last year) was put on display on Friday morning when both the Chinese manufacturing and non-manufacturing PMI rose more than expected, with the Manufacturing PMI rising to a level not seen since April 2012. According to the NBS, China"s Mfg PMI rose from 51.6 to 51.8 in March, the highest in almost five years, and above the 51.7 consensus estimate, while the non-manufacturing PMI also jumped, rising from 54.2 to 55.1, the highest in two years.

The National Bureau of Statistics reported that New Orders rose from 53.0 to 53.3 while new export orders rose to 51, the highest since early 2012. Broken by firm size, the state-measured PMI showed largest enterprises were the strongest at 53.3, followed by medium-sized companies, while small firms remained in contraction at 48.6. Perhaps the most notable internal metric was the employment index, which hit the 50 level for the first time since May 2012, marking the first time the manufacturing sector has not lost jobs in nearly 5 years.

As the chart below shows, the catalyst for the move higher has been the recent surge in producer prices, which have soared as much as 7% Y/Y on the back of soaring commodity prices; both have since peaked and it is expected that in the coming months, China"s inflationary pressures will subside especially given the recent efforst by Beijing to reign in out of control credit, especially shadow, issuance.

A subindex for construction activity rose in March for the first time since the start of the year, hitting 60.5. As a reminder, and as Deutsche Bank explained two weeks ago, the only thing that matters for both China, and the rest of the world, is making sure China"s housing bubble, as explained in "Why The Fate Of The World Economy Is In The Hands Of China"s Housing Bubble," does not burst.

"The first quarter is off to a good start," said Wang Qiufeng, an analyst at China Chengxin International Credit Rating in Beijing, quoted by Bloomberg. "The upbeat momentum may last through the first half of this year, as the government is pushing investment."

“The fact that the real strength is with the non-manufacturing PMI suggests that there’s fundamentally a good story going on here,” said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. “Manufacturing is where you’d expect to see the effects of stimulus showing up.”

So is China worried by the potential inflationary signals carried by today"s PMI prints? Oh yes, which is why the PBOC did not conduct a reverse repo liquidity injection for the sixth consecutive day, saying in a statement that the liquidity level if "relatively high" despite traditional month-end liquidity demands; as a result in the past 6 days, the PBOC has now drained some 320 billion yuan from the banking system.

In recent days this has led to a sharp move higher in various repo tenors, most notably the benchmark 7-Day repo, which on Thursday fell w bps to 2.81%, but has jumped sharply in the past week as interbank funding problems have emerged, leading to the biggest drop in months in the Shanghai composite index overnight. Keep an eye on the the repo market in Friday"s session for any acute liquidity shortages, especially since China"s onshore market is closed on Monday and Tuesday.

Manhattan Luxury Housing In Freefall: J.Crew CEO Slashes Tribeca Loft Price By Over 40%

While in recent weeks we have documented various instances of sharp pullbacks in the ultra-luxury segment of New York"s housing market (here, here and here), a dramatic example of just how sharp the drop in the high-end housing segment has been comes courtesy of Mansion Global which reports that J. Crew CEO Mickey Drexler has slashed a whopping $15 million from the asking price of his Tribeca loft after it languished on the market for close to two years, unable to find a buyer.

The 72-year-old fashion boss’s 6,226-square-foot spread has just reappeared for sale with a $19.95 million price tag, way below the original $35 million it was first listed for in April 2015, according to listing records. Between its original listing in 2015 and today, there were several other price cuts, with the loft last appearing on the market for $22.5 million last August. That listing was removed entirely in January, only to reappear for $2.5 million less.

Listing images reveal the five-bedroom pad’s stylish interiors designed by French architect Thierry Despont, including arched windows, original columns and industrial doors, par for the course for what one would expect from a fashion industry bigwig. The building located on Franklin Street is a boutique, 12-unit, full-service condominium with 24-hour doorman and is just down the block from Taylor Swift"s Tribeca pad.

Even with the hefty haircut, Drexler stands to make a nearly $6 million profit should he find a buyer: property records show that 140 FRANKLIN STREET LLC paid $14.3 million for the apartment in 2012. PropertyShark’s records link the LLC to J. Crew’s headquarters in New York.

China Bonds, Stocks, Commodities Extend Gains As Yuan Tumbles To One-Month Lows After Renewed Liquidity Injection

As China got back to work after Golden Week, it appeared a renewed exuberance appeared in every orifice of liquidity provision (even as PBOC sucked up excess for 6 straight days). Stocks are up, bonds are up, and commodities are soaring (all as Yuan tumbles) and tonight authorities unleashed 100bn reverse-repo (for the first time in 7 days) as leverage seems nothing to worry about again yields drop and asset prices rise.

As Bloomberg reports, China’s central bank restarted the use of an instrument that adds cash to the financial system, helping ease liquidity concerns before $153 billion of funds come due this week.

The monetary authority sold a total 100 billion yuan ($14.5 billion) of reverse-repurchase agreements, the first auction after a six-day pause, a statement posted on its website showed. While the open-market operations resulted in a net withdrawal of 90 billion yuan because of maturing contracts, the resumption signals that policy makers don’t want a sudden tightening of money supply, according to Bank of Tokyo-Mitsubishi UFJ (China) Ltd. The People’s Bank of China last week allowed 625 billion yuan of reverse repos to mature, mopping up cash after adding record funds in the days before the week-long Lunar New Year holidays. Some 900 billion yuan of the contracts are set to mature this week, as well as 151.5 billion yuan of loans under the Medium-term Lending Facility, data compiled by Bloomberg show. That adds up to 1.05 trillion yuan, or $153 billion.

“The PBOC restarted the use of reverse repos to stabilize market sentiment because large maturities are on the way,” said Li Liuyang, a Shanghai-based market analyst at Bank of Tokyo-Mitsubishi UFJ (China).

“The net result will probably continue to be a withdrawal this week, but the pace will be controlled to avoid any crunch. We also expect it to conduct MLF, given the maturities.”

And Lo and Behold - China soars...so much for all that worry about Trump trade wars!!

Stocks are up...

Bonds are up...

And every industrial commodity is exploding higher...

And all of this as the Yuan tumbles in a Trump-infuriating way... dropping to 5-week lows

Is a Global Wide Cash Ban Coming?

Anyone who has been paying attention over the last four years knows the Europe is ground zero for Central Planning insanity.

Europe was created as a union with open borders with the open flow of capital. However, the elites have clearly demonstrated that they are willing to lie cheat and steal in order to maintain their agenda.

Case in point, Europe has already seen:

1)   The implementation of border and capital controls during a crisis (2012-2013).

2)   The confiscation of bonds or savings deposits to “bail-in” insolvent entities (Netherlands in 2011, Spain in 2012, Cyprus in 2013).

3)   The implementation of Negative Interest Rate Policy or NIRP in which savings are taxed by banks (2014 until today).

Put simply, Europe is where Central Planners in the developed world first implement their policies to see if they can get away with them.

Which is why the following should be on everyone’s radar.

Proposal for an EU initiative on restrictions on payments in cash

As preventing the anonymity linked to cash  payments  is  the  main  driver,  the objective  can  be  attained  by restricting cash payments through an EU legislative instrument, and thereby forcing payments through means that are  not  anonymous  (bank  transfers,  checks,  etc.).  But the same objective could also be attained by, while  still allowing  unrestricted  cash  payments,  imposing  a  declaration  to  a competent  authority.  This would allow the continuous reliance on cash payments, with its benefits in terms of simplicity and cost.

http://ec.europa.eu/smart-regulation/roadmaps/docs/plan_2016_028_cash_re...

Put simply, Europe is now proposing a potential “threshold” on cash payments for the EU as a whole.

Individual EU member countries have already passed similar laws: France has banned any transaction over €1,000 Euros from using physical cash. Spain has banned transactions over €2,500. Germany is now proposing banning cash from transactions of €5,000 or higher.

However, the above proposal marks the first such proposal for a cash ban that would exist across the entire EU.

As we have been stressing for the last few months, the elites war on cash is not over, by any means. If anything it’s about to intensify.

Indeed… we"ve uncovered a secret document outlining how the US Federal Reserve plans to incinerate savings.

We detail this paper and outline three investment strategies you can implement

right now to protect your capital from the Fed"s sinister plan in our Special Report

Survive the Fed"s War on Cash.

We are making 1,000 copies available for FREE the general public.

To pick up yours, swing by….

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Chinese Interbank Lending Freezes; Government Bond Trading Halted After Massive PBOC Liquidity Drain

Earlier today, we were surprised to note that having aggressively drained liquidity from the interbank funding market, on the first trading day of 2017, the PBOC not only fixed the Yuan well lower (sy 6.9498 vs 6.9370 on the last day of 2016, even if this was well stronger than the Offshore Yuan), but the People"s Bank of China withdrew even more liquidity. It did that by injecting CNY20 billion via 7-day reverse repos and another CNY20 billion via 14-day reverse repos in its open-market operations Tuesday, according to traders, while continuing to skip 28-day reverse repos.

The move resulted in a net drain of CNY155 billion for the day, and followed a substantial drain of a net CNY245 billion last week - the first removal of liquidity in three weeks. We promptly followed up with a warning:

PBOC drains a net CNY155 billion for the day. Keep an eye on overnight SHIBOR/ HIBOR/ Repo

— zerohedge (@zerohedge) January 3, 2017

Just over an hour later, it appears our warning was warranted, because according to the latest daily fixing of the Treasury Market Association, as a result of the PBOC"s massive liquidity drain which soaked up a nearly a third of a trillion Yuan in the past two weeks, the interbank market is freezing again as follows:

• 1-month yuan interbank rate in Hong Kong rises 1.16ppts to 13.01%,


• 3-month CNH Hibor +89bps to 10.02%;

Most importantly, the overnight CNH Hibor rate soared 4.95% to 17.76%, the highest since September, andconfirming of yet another daily freeze in interbank lending simply so that the PBOC can punish all those who are still short the Yuan. 

The good news: at least the UCDCNH tumbled by as much as 200 pips on the session. The bad news, it is unclear how much more of this daily volatile punishment Chinese and Hong Kong banks can take.

But wait, because the interbank freeze was not all, and in a repeat of two weeks ago when China"s halted the trading of its government bond future, the Shanghai Stock Exchange announced that Shanghai halted trading of the 3.99% government bond due May 2065 after "abnormal fluctuations."  It was not exactly clear what that particular phrase meant aside from "aggressive selling" as per the chart below.

According to a statement, trading was set to resume at 11:06 am after being halted at 10:36am, but not before the exchange called on investors to "remain rational and reminded them of trading risks." In other words, please don"t sell, especially when the central bank just yanked a near record amount of liquidity from the market.

German 2Y Yields Hit All-Time Lows As ECB Fails To Fix Record Collateral Shortage

When the ECB announced last week that it would expand the universe of eligible collateral for use by Eurozone institutions to include up to €50 billion in cash cash, it - and the market - hoped that the severe collateral shortage manifesting itself in an unprecedented squeeze in the repo market would be alleviated. As a reminder, last Thursday the ECB Governing Council decided that Eurosystem central banks will have the possibility to also accept cash as collateral in their PSPP securities lending (SL) facilities without having to reinvest it in a cash-neutral manner.

The ECB added that "the introduction of cash as collateral in the context of PSPP securities lending is intended to enhance the effectiveness of the SL framework, thereby supporting the smooth implementation of the PSPP as well as the euro area repo market liquidity and functioning. "

Following the news, 2Year Bunds quickly sold off last Thursday, with the yield rising by 6 bps to start, as suddenly it makes more sense to park cash with the ECB than to be penalized by -0.7% to hold German short-term debt.

However, it was not meant to last, and less than a week later, even with overall Eurogroup liquidity hitting new all time highs earlier this week, German 2Y yields fell as much as 2.9bps to all time low of -0.773% as repo pressures continue to support the front-end, Bloomberg reported citing two traders.

The traders added that the €50 billion in securities lending put forward by the ECB are seen as not enough, with structural issues remaining, exacerbated by year-end window dressing.

Additionally, a second trader added that some dealers prefer not to trade with the Bundesbank, due to higher failure fees.

Curiously, while Schatz futures rise to all time high of 112.275, downside continues to be bought in options, says a third trader based in London with a buyer again emerging in Feb. Schatz 112.00/111.90 put spread, 17k trades at 1 tick.

Should the collateral squeeze continue, the ECB may be forced to unveil further intervention mechanisms, as well as additional jawboning by Mario Draghi, potentially before the next scheduled ECB council meeting, especially if the year-end repo shortage drives 2Y yields meaningfully lower.

Crushing The $50 Trillion Sideline Cash Conundrum

Submitted by Michael Shedlock via MishTalk.com,

Blackrock estimates there is a whopping $50 trillion in cash “sitting on the sidelines”.

Bloomberg writer Lisa Abramowicz calls it the $50 Trillion Conundrum.

As most Mish readers understand, there is no conundrum. Let’s go over why, one more time.

There’s been a lot of discussion about how much cash investors are holding these days.

BlackRock puts the figure at more than $50 trillion, a figure that includes a host of different metrics, from central-bank assets to financial-firm reserves and consumer savings accounts.

Other measures show a similar trend. Private-equity firms are amassing great piles of liquid securities, with Blackstone saying that nearly one-third of its assets are in cash. Fund managers in general have boosted reserves as a share of their portfolios to levels that match the highest since 2001.

So what is the meaning of this trend toward bigger cash cushions? Several weeks ago, my response was to say that all this money will support asset values going forward. That may have been too simplistic.

Just because there’s more cash in the financial system doesn’t necessarily mean that it’s available to buy securities, nor that it’ll prevent a repricing of debt and equities that have been propped up by years of unconventional monetary policies. In fact, it could even indicate more risk out there, as one reader astutely noted. Fund managers may be holding more cash to offset a bigger pool of leveraged derivative bets, which may or may not be sufficient to compensate for the risk.

Sideline Cash Silliness

Barring trivial exceptions, sideline cash can never support asset prices for the simple reason for every buyer of equities there is a seller.

Money cannot flow into stocks or bonds. If $50 trillion in sideline cash purchased equities and bonds, there would still be $50 trillion in sideline cash.

The minor exception to the rule there is a seller for every buyer are new or secondary offerings, trivial in comparison to the alleged sideline cash theory.

Sideline cash is a function of Fed printing and the ability of banks to borrow money into existence.

Statement 1: Several weeks ago, my response was to say that all this money will support asset values going forward. That may have been too simplistic.

Wrong

Statement 2: Just because there’s more cash in the financial system doesn’t necessarily mean that it’s available to buy securities, nor that it’ll prevent a repricing of debt and equities that have been propped up by years of unconventional monetary policies.

Better, but still wrong, and missing a key point: In aggregate it cannot be used to buy securities.

No Conundrum

Sideline cash will keep rising as long as debt expansion and Fed printing continues, but not a penny of it can come into the markets, except for new or secondary offerings.

There is no conundrum. Nor is there any such thing as “sideline cash”. Someone has to hold every penny printed into existence, at every point in time until reverse repos drain the cash.