Finance, markets etc…
A chart to behold, courtesy of Steve Englander at Standard Chartered:
As Englander notes in his Tuesday commentary:
…the Eurodollar rates curve two to three and two to four years out is more inverted than it has been at any point over the past 33 years.
This is usually the sign of an incoming recession. But not always. Such as in 1994 and 2019.
Nonetheless he continues (my emphasis):
Rates market participants may feel that the Fed’s optimism on the resilience of the US economy is incorrect – rates investors agree with the FOMC on the hiking path but strongly disagree on the economic outcome. Interestingly, 1Y implied breakevens (BEs) two years forward are 3%, and even three years forward are out of the Fed’s comfort zone, so investors either see the Fed as compromising on its target or making a forecast that inflation is headed back to its target.
A second explanation is that investors see more downside than upside risks to the economy, independent of Fed policy moves. The risk of further rounds of COVID, unwinding of globalisation, probable expansion of military spending (the reverse of the ‘peace dividend’ of the 1990s), upward commodity price pressures and productivity-reducing structural shifts and regulation may leave investors seeing a higher likelihood of negative than positive shocks down the road. Maybe the market is not doubting the Fed but doubting long-term upside. Despite the Fed’s stiffening inflation resolve, implied long-term real interest rates 10 years out are still below 2019 levels, suggesting intensified secular stagnation ahead.
Doesn’t sound good. And as Englander notes in the piece the risk is that persistent (or should we recurring inflation) will likely to lead to stop and go monetary policy.
Meanwhile, anyone keeping track of exorbitant privilege in the market may have noticed there’s been a bit of an epic fail on the old “sanctions will annhilate the rouble” front. It’s stubbornly resisting being killed off:
I did note last Friday that I thought it was a bit weird that all finance media everywhere were framing the Russian market story as one of continuing demise when my own lying eyes were seeing patterns of recovery in the charting.
How Russian gas is paid for – Say hello to the RuskiEuro.
The Russian Rouble Get Out Clause
Russia has the legal right to pay coupons and redemptions in Roubles to investors on bonds issued after 2018. There can’t even be a technical default on these.
For those where there could be a technical default, the envisaged process is farcical. It goes roughly like this:
Russia issues an instruction to pay to its correspondent bank in the US. The correspondent bank refuses the request to comply with sanctions. The bond holder declares a default and claims on their insurance. The insurance company, after paying out and marking up premiums elsewhere to compensate, then goes to court and has the Russian assets seized – which will be the bank deposit Russia was going to pay the bond holder with anyway.
A nice little earner for corporate lawyers and insurance firms.
Before we attribute too much prescience to the wisdom of crowds; consider the collapse of the bond market.
A barrel-of-oil in the bush, is maybe sometimes better than trillions of reserves in the hand?