A Good Old-Fashioned Panic

Friday, November 27, 2009

Sometimes, those little guys matter. That seems to be the message of the past twenty-four hours where rumours/uncertainty over a possible default by Dubai has created a good-old fashioned panic in asset markets. It's been what...eight and a half months since we've felt remotely like this? Seems like a lifetime ago...

In fairness, this isn't quite the same as the post-Lehman maelstrom. While Dubai's debts are not inconsiderable, they pale in significance when placed side-by-side with queries over the viability of the entire global banking system. Still, those itching for a good crisis will take what they can get, and the implication for financial market pricing is exacerbated by the fact that the US is on its Black Friday post-Thanksgiving hangover and that Dubai itself (with the rest of the Muslim world) is out 'til Tuesday for the Eid al-Adha holiday.

Oh dear. So in impaired liquidity conditions, we are unlikely to see any real news on the catalyst for a few days. You can almost see the boogey-man emerging from the closet, can't you, coming to fan your darkest fears (or at least to aim a shotgun at your favourite position flamingo.) Those Nakheel bonds, the chart of which Macro Man posted yesterday, have been quoted as low as 32 mid this morning, and are now trading around 45 mid. For a bond that went 112 paid on Tuesday, that's got to hurt.

Now, while the good times might roll again on Tuesday if, as many suspect, Abu Dhabi rides to the rescue on a white camel to backstop/guarantee Dubai's debts. Still, there's been quite a bit of technical damage exacted on the marketplace. Frankly, Macro Man isn't sure how much appetite there will be to reload next week (and month)...he is curious to hear informed readers' views.

Anyhow, gold has crashed through its steep uptrend, at least temporarily, today....
...and while EUR/USD is still clinging on to its uptrend (as well as the 55 day moving average), its hold looks precarious. A crash below 1.48 could confirm the reversal in gold. Jeez, that breakout above 1.5064 seems like a looonnnggggg time ago...

It's squeaky-bum time for owners of equities, many of which have crashed through interesting levels in these illiquid markets. Owners of the Hang Seng, for example, must feel like they are riding the London Underground. "Mind the gap...."

A key to whether this sell-off has further to go or is merely an early Christmas sale (it is Black Friday, after all!) may well be what happens to LIBOR. The entire risk-asset orgy has been propelled by the normalization (and then some!) of LIBORs since the imposition of QE. Should LIBORs begin to move out as we approach the end of the year, that could spark concerns of a more systemic kind...and likely give this sell-off legs.

Punters have already come to that conclusion, and there has been good interest from "smart money" to sell the front LIBOR contracts. It's a nice trade at the highs, as your stop is the current LIBOR fix. Selling at a 8-10 bp discount to curent LIBOR, with settlement just 3 weeks away, is perhaps less interesting.
So there you go. Not only do you have to watch for news of an Abu Dhabi bailout of Dubai, but you've also got to see if LIBOR bloows out or not. If it's "yes" on the former and "no" on the latter, then we may well revert to an "as you were" risk/reflation rally (particularly if today's jitters dissuade the ECB from monkeying with the LTRO next week.) If it's "no" and "yes", however....well, then maybe we really could see a good old-fashioned panic...

Posted by Macro Man at 8:57 AM  

25 comments:

tough call. thin markets so potentially poor signal and execution. my informed contact in the ME says that the gulf region cannot afford to lose face/allow this to happen - if that is the case why allow an effective default (restructuring)?

which is what i thought originally, but it makes it all so confusing. is there a limit to bailouts? is that what we are seeing? will abu dhabi ride to the rescue? if not, what about other players in the region? do they care that much about dubai?

Anonymous said...
9:46 AM  

Maybe they can reassure the markets they will support the bonds then sneakily buy them back at the cheaper price

Anonymous said...
9:56 AM  

Well, for thos waiting for a 'Kreditanstalt' happening sometime soon, this event simply brings them a few steps closer...

Which banks will take tha pain here? Some important Swiss, or perhaps Austrian (like last time) or other?

Who will be next to default, perhaps some in Easterln Europe? Will Croatia now finally join the club of small EE states in considerable trouble? Will the Austrians, again, bleed out on EE debt defaults?

Surely, the prospect for an ugly follow up is present, although not necessarily the most realistic scenario...

Tord Steiro said...
10:39 AM  

Didn't mention the drop in oil !
I think we may be in for a couple of down weeks at least for the reflation trade.Just too many technical breaches across the board for this to be a tune for a couple of days.

Anonymous said...
10:43 AM  

It is a good analogy, 'Kreditanstalt'. Perhaps the debt restructuring of a small, albeit indebted emirate in the ME may spark a cluster of these events. Phase II ?

Anonymous said...
10:50 AM  

I see this as a buying opportunity. I had bought AUDUSD at 0.80950.

Forex Educator said...
10:53 AM  

Its also less of an issue to default if everyone else is doing it - the likelihood of Ukraine or Latvia not paying up is way higher if they look less bad doing so because everyone else is doing it.

Having seen a few coercive buybacks over the last 12 months (Greentow China, Davomas, Gajah Tunggal) this would not be too shocking.

Nemo Incognito said...
10:54 AM  

That would be ironic to see a middle east default being the straw that broke the camel's back of the "risk-on" rally.

Sorry, I couldn't resist...

Charles said...
11:26 AM  

My favorite chart in terms of significance is crude. On BBG if you make a log weekly chart of CL1 and add a 200-week MA you can see that 75.50 is very significant. We recently tested it twice, most recently on Wednesday when we got close to it and then shot up to 79. But here with the day's low at 72.39 it looks to have been broken definitively.

That, and the yen in the clouds, signals deflation.

I think Japan will be the lead story next year. It also seems probable to me that the S&P high, just shy of the 1121 level that absolutely everyone was watching, is in.

Steve said...
12:14 PM  

And I was feeling like a complete idiot/moron/sucker for cutting back on the gold on Wednesday. . . Looks like the Costanza trade (thanks, MM) worked again. . .

But What do I Know? said...
12:25 PM  

The market is responding to a very litle detailed comment but the reaction shows how much the " never mind buy any dip on anything fiat currencies financial model works" As MM points out the illiquidity is total . Regarding the news the Nakheel bond will get a 14days grace period so to speak 28th dec to see whether there is default or not ( this does not imply that all companies within DW will ). Anyway this enlightens the big difference in systemic view between the ability to pay versus the willingness to pay and the chase for yields may be put on holds --> rather focus on differentiating between fundamentals and good asset allocation rather than everything is a bargain especially at these perky fiat levels. There are rollover risks going into next year as MM said vis à vis Libor ( do you want to be short USD cash at year end ?)so all in all this is a very genuine trigger event to all investors to cash in some profits and enjoy the year end while some liquidity prevails. As many in this post mentioned wehave some good reversal patterns in different asset classes ( beautiful hammer in usd/yen for instance , crude , usd/chf , front end financial and co. I guess next week early management meetings will think and assess the bien fondé of the reflation trade. Time to cash in . FWIW Jean-Marie

Anonymous said...
12:56 PM  

Nemo notes that he has once again, called the A share market. Taking former CASS economists out to dinner now and then pays a better IRR than anyone else I've taken out to dinner recently.

Nemo Incognito said...
1:00 PM  

Hot money in EM's will be re-homed until the end of the year, at least

Anonymous said...
1:10 PM  

Sadly China much like copper is more local hot money driven. Ie, what happens in BRI might not necessarily happen in C.

Nemo Incognito said...
1:11 PM  

The sand pit problem isn't that huge a deal.

This is how I see it playing out.

European banks are in the hock for $40 Billion said WSJ. So they negotiate it down and provide for $10 billion meanwhile the rest of the desert will anchor it down with say $10 billion in equity.

Global CBS see this as another example of the clusterfuck and lengthen the liquidity provision period , or rather the market sees they will.

Market will buy risk assets as they see ample liquidity left in the system for a longer period.

I bought and will buy equities on this.

I also bought Aussie and Euro Aussie right around here (ish)

jc said...
1:43 PM  

This isn't a surprise but lots of senior folks at NY Hedge funds (i.e. my boss, friends bosses, etc) who weren't supposed to be in the office have come in today.

I think it'll be an interesting to see if US volume is better than expected today.

Our Man in NYC said...
2:19 PM  

Trifecta of Mexico, Vietnam, and Greece? In addition to Dubai that is. And I thought the real trend line on gold was 960?

A little early here in San Fran for a panic, especially after all that wine last night.

Professional Gringo said...
4:55 PM  

At the very least, we have now learned the true meaning of DGDF: Dubai Going Down Forever.

Crisis Management said...
5:28 PM  

SM, Surely it's "Dubai Gonna De-Fault"?

Macro Man said...
5:44 PM  

Touche. I happened to attend the DIFC Week conference last year, the keynote speaker was the head of Emaar (Nakheel's little brother) Mohammad Al Aabar, and the cocktail party was hosted by Omar bin Suleiman, head of the DIFC.

Both have recently been purged by the dear leader, who I imagine must be feeling a bit like the Dick Fuld of the desert at this point.

Crisis Management said...
6:01 PM  

Ironically it was one of "God's" bankers who had the temerity to challenge the panel of Islamic finance experts on the soundness of the sukuk structure.

His contention was that paper like the Nakheel sukuk was no more structurally stable than a CDO. It was quite a controvertial thing to do but in the end he was right.

Crisis Management said...
6:21 PM  

Well I guess the recession is still not over yet. I think more problem will start to surface

Stephen said...
7:53 PM  

I tend to look at financial markets in the context of both Macro Economic fundamentals and catchy narratives. This story clearly has the attention of the global financial community. Is it scary from a Macro Economic standpoint.....not really. I think it will be the tipping event for a significant sell off in the emerging market equities. I do believe long term, we are moving to a multi-polar world. I doubt this story will significantly impact those long term events. But the ability to slam a 6 month risk asset orgy...absolutely. I agree that Libor is the big daddy for a significant leg down.

3:26 AM  

Does anyone have any experience using Bloodhound? (www.bloodhoundsystem.com) It looks like a good investment tool, but I'd like to hear from someone who has experience with it.

Thanks.

Anonymous said...
9:33 PM  

@ Anon 9.33 pm

Nobody has, and nobody wants to have any...

aptrader said...
8:56 PM  

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