U.K. Bank Credit Rallies as Johnson Strikes Brexit Deal With EU (UK CoCo Prices Jump, But Not Deutsche Bank’s 6% CoCo)

While the UK Parliament has to sign off on the Brexit agreement, bank credit rallies after Boris Johnson reached an agreement with the EU.

U.K. lenders’ riskiest notes jumped, leading a credit rally, after Prime Minister Boris Johnson reached a Brexit agreement with the European Union.

Barclays Plc’s 1.25 billion pound ($1.6 billion) 5.875% CoCo reversed earlier losses and hit 99.5 pence on the pound, the highest since May 2018, according to data compiled by Bloomberg.


Nationwide Building Society’s 600 million-pound perpetual bond, sold last month, hit a record. Oddly, NBS’s perpetual bond started rising on October 10th, well before PM Boris Johnson announced his Brexit agreement.


A contingent convertible bond (CoCo), also known as an enhanced capital note (ECN) is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs.

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A famous CoCo bond is the Deutsche Bank 6% Perpetual.


While issued at par (100), the G-spread on the Deutsche’s 6% CoCo bond is … 11%.


Odd, that DB’s CoCo bond remained relatively calm after the Brexit deal was announced.


Is that UK PM Boris Johnson or Martin Kernsten, the Nipple King from Parks and Recreation?


Its always sunny in the UK!

Iron Man! Copper And Iron Futures Prices Decline As Global Growth Continues Slowing (Gold-Copper Ratio Similar To 10Y Treasury Yield)

Iron Man!

As a sign of continued slowing global growth, essential dry commodities like iron ore and copper have been declining since April/May of 2019.


The copper-gold ratio has shown a decline after peaking in June 2018.


The copper-gold chart looks similar to the 10Y US Treasury yield chart.


Is the global economy paranoid about China-US trade and Brexit impacts?


JPMorgan Chase’s BIG Earnings Surprise As Net Interest Margins Skyrocket! (Thanks Fed!)

In a day of wonderful earnings reports, one notable leader is JP Morgan Chase with a 9% surprise in Earnings Per Share (EPS).


Like other banks, JP Morgan Chase’s net interest margin and interest income are soaring!


Of course, recent Fed activities have lowered the short rate (deposit rates) relative to longer-term asset yields.


Life is so good in America, particularly for banks!


Dust In The Wind? Pound Gets Pounded As Brexit Hopes Dim

Is Brexit “dust in the wind?”

(Bloomberg) — European shares fell as enthusiasm about the potential for a U.S.-China trade breakthrough waned. China signaled it wants more talks to chisel details of any partial deal before signing it, including the removal of added tariffs planned for December, according to people familiar with the matter.

The  British Pound got pounded on the decline in Brexit enthusiam.


The forecast distribution for the Pound is skewing left.


The volatility surface is “hot” on delta.


Are you experienced enough to buy a call option on the GBPUSD?



Minneapolis Fed’s Kashkari Says Banks Didn’t Plan Well for Liquidity Needs (Did The Fed??) Bank Excess Reserves Positively Correlated With Home Price Growth

Neel Kashkari was one of the Godfathers of TARP when he was at Treasury under Henry Paulson,  Here is the longer version of the hearing in which I testified (you can see the back of my head at the beginning of the video).

(Bloomberg) — Minneapolis Fed President Neel Kashkari says banks don’t like to use a so-called discount window for emergency funding because “they think it makes them look weak,” according to an interview with Axios.

Says banks are supposed to plan for their own liquidity needs

Says banks did not do that adequately, “And now they’re complaining because they failed to plan”

Neel, one reason that banks may not want to use the discount window is that is 50 basis points higher than the upper bound of The Fed Funds Target Rate.


What Mr. Kashkari may be saying is bank excess reserves are positively with home price growth. As US home price growth is shrinking, so are bank excess reserves.


The good news for banks is that mortgage originations are a smaller part of their business models. Take JP Morgan Chase, for example. They went from over $60 billion in mortgage originations at the peak of the housing bubble in 2005 to $24.5 billion in Q1 2019.


JP Morgan Chase shifted away from residential mortgages to business loans, credit cards, etc. That is, shorter maturity loans.


Commercial bank credit continues to grow, but no where near the levels of the 2005-2007  credit boom years.

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So, Kashkari bashes banks, but The Fed certainly has their own history of policy errors.


Oyster Stew! Baltic Dry And Cass Freight Indices Still Above 2014-2017 Levels

The Trump Administration’s partial tariff truce with China drew swift criticism for not being enough. For example, from Bloomberg Economics, …

“Past experience is that U.S.–China trade agreements aren’t worth the paper they are written on, and this one hasn’t even been written down. For now, though, indications on trade are a little more positive. If that persists, it could help put a floor under sliding global growth.”

Tom Orlik and Yelena Shulyatyeva, Bloomberg Economics

Take two important shipping indices, the Cass Corp Freight Index (Shipments) and the Baltic Dry Shipping Index. Both indices are still higher today than at any time between 2014-2017.


Sure, the Baltic Dry Index is lower than it was in was in September 2019, just a month ago (white line). But it is still higher than at any time in the 2014-2017 time frame.

The same for the Cass Corp Freight Shipment index (green line) is below its peak in 2018, but still higher than at any point from 2012 to 2017.

So while trade tariff progress is moving along, the media and economists conveniently forget that shipping is still stronger than it was from 2014-2017.

Hence, the media’s negativity about the US-China trade negotiations is just a bowl of oyster stew.

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Inversion Reversal! U.S. And China Reach Partial Agreement Setting Stage For Broader Trade Deal (Stock Market Soars And UST 10Y-3M Goes Positive)

The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year, according to people familiar with the matter.

As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The pact is tentative and subject to change as Trump prepares to sit down with China’s Vice Premier Liu He later Friday.

Equity markets rejoiced!


And the US Treasury 10Y-3M curve went positive for the first time since end of July.


Time for a victory dance?

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Trade Fog! UK Industrial Production Falls 1.8% YoY In August, China’s Offshore Currency Goes Bananas And Gold Price/ Volatility Rises, V2X Volatility Goes Haywire

This is an update on key economic news relating to US/China trade and UK/EU Brexit talks. Better known as Trade Fog … or simply “The Fog.” 

On the Brexit side, the UK avoided recession by posting of 0.3% in August. Unfortunately, UK industrial production tanked to -1.8% YoY signaling a slowdown for the UK economy.


On the China/US trade arm wrestling match, China’s offshore currency is showing volatility as even the NBA is getting caught up in the trade scuffle.


The volatility surface for the CNH is quite steep.


Of course, trade fog helps assets such as gold to rise.


The volatility surface for gold is similar to that of the Chinese offshore currency.


Trade fog (or trade vacillation) is on the rise as seen in this chart of V2X volatility.


The V2X index is above its various historic moving averages.


As Brexit negotiation crawl along and the US meets with China or tariffs, we continue to see “The Fog” until Brexit and tariffs are finalized. Throw in Federal Reserve policy errors and we have a party!


In Historic First, Greek Debt Carries Negative Interest Rate (Greeks PAID To Borrow!) Greece Sells E487.5M 91-Day Bills At -0.02%

Remember when Greek debt was a joke? Not anymore! Greece just held a T-bill auction and sold E487.5 million in 91-day bills at … drumroll … -0.02%.


Athens, Greece (AP) — More than a year after Greece exited its bailout programs, investors — in a historic first — have bought its short-term debt at a loss.

The country’s debt management agency said Wednesday it raised 487.5 million euros ($535 million) selling 13-week treasury bills, for which the yield was -0.02%.

That means investors will get back slightly less than they paid, following a trend in other European countries.

Greece’s last 13-week treasury bill sale, in August, carried a yield of 0.095%.
At the start of its financial crisis, in 2010, Greece was locked out of bond markets as investors feared they wouldn’t get their money back. Bondholders were in fact later forced to accept large losses on their investments.

From then till August 2018 Greece survived on international bailouts.

But it is a cautionary tale: A Beware of Greeks Central Banks like the ECB bearing gifts.

At least Greece’s GDP is growing at 1.9% YoY.


The ECB president, Mario Draghi. deserves all the plaudits for saving the euro, but the “doom loop” between large banks and sovereign debt hasn’t gone away.

You know we are in monetary Bizarro world when “investors” loan money to Greece with a debt to GDP ratio of 181.80%.

The last known photo of outgoing ECB President Mario Draghi.