"Armageddon Risk" Returns: North Korea Predicts "Catastrophe" As Massive U.S. War Games Begin Monday

Traders barely had time to enjoy the lull from the "Armageddon trade" - the rising possibility of a nuclear exchange between the US and North Korea, which peaked over the weekend when various US officials said a nuclear war is not imminent, echoed by a statement by N. Korea's state-run news agency KCNA, before a new set of worries promptly took over, chief among them the ongoing slow motion train wreck in Donald Trump's administration coupled with yesterday's double terrorist attacks in Spain. Alas, "nuclear war" risk is about to come back with a vengeance because on Monday US and South Korea are scheduled to begin joint military exercises, a massive show of force which every time in the past has infuriated North Korea, sometimes triggering a show of force.

Held every fall in South Korea, the Ulchi-Freedom Guardian war games are the world’s largest computerized command and control exercise. Some 30,000 U.S. soldiers and more than 50,000 South Korean troops usually take part, along with hundreds of thousands of first responders and civilians, some practicing for a potential chemical weapons attack.

Scheduled long before the recent diplomatic fallout between Washington and Pyongyang, the U.S. and South Korean militaries will simulate warfare with North Korea from Aug. 21 to 31, well aware that North Korea could respond with another missile test, according to McClatchy.

In light of this perceived provocation by North Korea, which will almost certainly prompt some reaction, Scott A. Snyder, a Korea specialist with the Council on Foreign Relations said “Over the course of the next two weeks I expect tensions to escalate. This is always a sensitive issue, but it is more hair-trigger as the North Koreans are very sensitive to the likely additional nuclear-capable aircraft flyovers.”

While the Pentagon has repeatedly stated that the biannual exercises are "defensive" in nature, both North Korea and China have long criticized them as a provocation and an affront to regional security. “There certainly will be some reaction,” said J.D. Williams, a retired Marine colonel and defense policy researcher at the RAND Corporation in California. He said he wouldn’t be surprised if North Korea conducted some kind of missile launch — not a test but a defiant demonstration of might.

As discussed earlier in the week, North Korea’s Kim backed off a threat to launch missiles at Guam, saying he’d watch “the foolish and stupid conduct of the Yankees” before deciding on the launch, a decision that Trump quickly tweeted was “very wise and well reasoned.” While the exchange suggested that cooler heads were prevailing in the latest U.S. standoff with North Korea. But next week’s war games could rekindle hostilities. On Thursday, North Korean state media declared that the military exercises will “further drive the situation on the Korean Peninsula into a catastrophe.”

It's not just North Korea: Beijing will likely be rather unhappy too.

The exercise, along with one in March, often triggers anti-war protests in South Korea and condemnation from China. While Chinese President Xi Jinping has been noticeably cool toward Kim Jong Un, and has been critical of North Korea’s development of nuclear weapons, China has long wanted the United States to shrink its military footprint in Asia, including some 12 bases in South Korea and Japan.

In an editorial Monday, China’s Global Times newspaper, an arm of the Communist Party’s People’s Daily, lambasted the decision by the United States and South Korea to go ahead with Monday’s exercises.

“The drill will definitely provoke Pyongyang more, and Pyongyang is expected to make a more radical response,” the newspaper said. “If South Korea really wants no war on the Korean Peninsula, it should try to stop this military exercise.”

In other words, China - which is largely expected to rein in North Korea - is already hedging in case North Korea does something impulsive, suggesting the exercise itself could be the provocation that sets Kim off. And set him off, it will: in the past North Korea has reacted strongly during the biannual war games. In 2014, the north fired off scud missiles during the March exercises held by the U.S.-South Korean command, called Foul Eagle.

During the 2015 Ulchi-Freedom Guardian exercises, North Korea and South Korea exchanged artillery and rocket fire over their border. That exchange came after two South Korean soldiers were maimed stepping on land mines in the Demilitarized Zone. South Korea accused North Korean soldiers of sneaking across the border and planting the land mines.

Last week, China and Russia urged the United States to consider a “freeze for freeze” agreement to reduce tensions. In such a deal, Pyongyang would agree to suspend its tests of missiles and nuclear weapons, and Washington and Seoul would agree to suspend large-scale military exercises. That, however, is not happening: U.S. military experts say such a deal would give a lopsided advantage to North Korea, which could continue its military training even as the U.S.-South Korea exercises were suspended. “It is hard to imagine why the United States would accept that, because of the vulnerability it would create,” said Bruce Bennett, a senior defense researcher at RAND.

In a media briefing on Tuesday, U.S. State Department spokeswoman Heather Nauert said the United States will continue to hold joint exercises with South Korea. And since North Korea will immediate see this "provocation" as a green light for a response, the respite that traders got from the "Armageddon trade" that sent the VIX soaring by one of its biggest and fastest intraday moves in history, may prove very short-lived. Perhaps the only silver lining is that the exercises don't begin until Monday, so traders don't have to do anything too crazy ahead of the weekend.

Fonte: qui

Global Debt Sales Hit A Record $6.6 Trillion In 2016

Earlier in 2016, the US Investment Grade bond market passed an key milestone when some time around August, the total amount of high grade debt outstanding hit $6 trillion, tripling from $2 trillion at the time of the financial crisis. Most, if not all, of the new funding was used to buyback stock. 

And now, as we come to the end of 2016, another $6 trillion number makes a dramatic appearance, this time in a slightly different metric: according to Dealogic, global debt sales hit a record in 2016, led by corporations rushing to load up on cheap borrowing costs, now threatened by Trump’s vague policies to boost the US economy. As the FT reported, courtesy of record low rates throughout most of 2016, overall debt issuance in the year rose to just over $6.6 trillion, breaking the previous annual record set in 2006.Corporates “took advantage of low rates,” said Monica Erickson, portfolio manager with DoubleLine Capital. “The cost of capital is low so it makes sense for them to come to market.” Companies accounted for more than half of the $6.62 trillion of debt issued, underlining the extent to which negative interest-rate policies adopted by the European Central Bank and the Bank of Japan encouraged the corporate world to increase its leverage. The problem: rates are now rising rapidly.

Corporate bond sales - both investment grade and junk - climbed 8% year on year to $3.6tn, led by blockbuster $10bn-plus deals to finance large mergers and acquisitions.

The remaining debt included sovereign bonds sold through bank syndication, US and international agencies, mortgage-backed securities and covered bonds. The figures exclude sovereign debt sold at regular auction.

However, the annual bond issuance record may remain untouched for a while: the recent Trumpflation rally has accelerated the move higher in interest rates that some investors fear will make debt burdens harder to bear in 2017. It will certainly make new issuance more expensive for corporate Treasurers and CFOs.

Cited by the FT, Pimco's Scott Mather said that “the low cost of financing with record-low interest rates simply made building up leverage tempting. This happens every economic cycle, but what makes this one special is the added incentive to issue debt at very low interest rates. It sows the seeds of the next downturn or the next credit event.”

As the following chart shows, eight of the 10 largest bond sales underwritten by banks this year were from companies, including offerings from brewer Anheuser-Busch InBev, PC manufacturer Dell and Microsoft.

To be sure, 2016 was a "special" year with the universe of negative-yielding bonds touching $14tn at one point, forcing asset managers to "stomach lower returns."

It wasn't just corporations, however, rushing to load up on debt: the year’s debt sales were buoyed by China and Japan-based issuers, up 23 and 30 per cent respectively, from a year earlier.

Investors say they expect 2016 is likely to prove a high-water mark for debt issuance in this cycle, with the Fed forecast to raise rates further and question marks growing over the future of bond-buying programs from the BoJ and the ECB.

For a world drowning in debt, where by some estimates total debt/GDP is now around 225% (after clocking in at 199% in Q2 2014 per "that" McKinsey study)...

... any slowdown in debt issuance, or any roadblocks to the rolling over of tens of trillions in short-term debt, could prove calamitous. which is also why many market watchers are convinced that after a spike in yields in the next few months, fears of the next recession will sent yields to even lower, all time lows.

Fonte: qui

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China Dumps Treasuries: Foreign Central Banks Liquidate A Record $403 Billion In US Paper

One month ago, when we last looked at the Fed's update of Treasuries held in custody, we noted something troubling: the number had continued to drop sharply, declining by another $14 billion in one week, and pushing the total amount of custodial paper to $2.788 trillion, the lowest since 2012. One month later, we refresh this chart and find that in last week's update, there is finally some good news: foreign central banks finally bought some US paper held in the Fed's custody account, which following months of liquidation, rose over the past two weeks by $23 billion, the biggest two-week advance since November of 2016, pushing the total amount of custodial paper to $2.816 trillion, the highest since early October.

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That was the good news, and we use the term loosely in as much as the custody account can be used as a proxy of foreign buying, which according to most rates watchers, it can.

The bad news came out with the release of latest monthly Treasury International Capital data for the month of October, which showed that the troubling trend presented one month ago, has accelerated to an unprecedented degree.

Recall that in mid-November, we reported that in the latest 12 months we observed a record $375 billion in Treasury selling by foreign central banks in the period August 2015-September 2016, something unprecedented in size.

Fast forward to today when in the latest monthly update for the month of October, we find that what until a month ago was "merely" a record $375 billion in offshore central bank sales in the LTM period ending  September 30 has, one month later, risen to a new all time high $403 billion in Treasuries sold in the past 12 months.

As the chart below shows, there has never been such an aggressive selling of US Treasuries over a 12 month period in history.

The biggest seller, and keep in mind that TIC data is on a market-price adjusted basis, was once again was China, which in October "sold" a record $41 billion in US paper (the actual underlying number while different, as this particular series is adjusted for Mark to Market variations, will be similar), and a massive $125 billion in the last 4 months, bringing its total Treasury holdings to just $1.116 trillion, the lowest amount of US paper held by Beijing since 2010. In the process, China has now been overtaken by Japan for the top US creditor position in terms of total holdings with $1.132 trillion, for just the second time.

It wasn't just China: Belgium, which has long been rumored to be the venue where China's keeps its "secret" offshore Treasury holdings couretsy of Euroclear, also dumped its TSY holdings, and in October its stated holdings (which again have to be adjusted for MTM), tumbled from $143Bn to $117Bn, the lowest since the summer of 2015.

Furthermore, as we have shown previously, when superimposing China and Belgium's holdings together, these tend to allign almost perfectly with the monthly change in Chinese reserves, which as reported before, have been declining sharply in recent months as a result of China's aggressive attempts to prevent a sharp devaluation of the Yuan. This can be seen on the chart below, and confirms that at least when it comes to China, the reason for the selling of Treasurys has been due to reserve liquidation.

As we pointed out one month ago, what has become increasingly obvious is that both foreign central banks, sovereign wealth funds, reserve managers, and virtually every other official institution in possession of US paper, is liquidating their holdings at a disturbing pace, something which in light of the recent surge in yields to over 2 year highs, appears to have been a prudent move.

In some cases, like China, this is to offset devaluation pressure; in others such as Saudi Arabia and other petroleum exporting nations, it is to provide the funds needed to offset the drop in the petrodollar, and to backstop the country's soaring budget deficit. In all cases, it may suggest concerns about a spike in future debt issuance by the US, especially now under the pro-fiscal stimulus Trump administration.

So who are they selling to? The answer, at least until August, was private demand, in other words just like in the stock market the retail investor is the final bagholder, so when it comes to US Treasuries, "private investors" both foreign and domestic are soaking up hundreds of billions in central bank holdings. As we said two months ago when we observed this great rotation in Treasuries out of official holders into private hands, "we wonder if they would [keep buying] knowing who is selling to them." Well, last month this changed, and after private investors had been happily snapping up bonds for 4 straight months, in September "other foreign investors" sold a whopping $31 billion, bringing the total outflow between public and private foreign holdings to $76.6 billion, the second highest number on record. In October, while foreign official entities sold another $45 billion, at least the pace of selling by private entities moderated somewhat, to "only" $18.3 billion.

Meanwhile, while just four months ago yields had tumbled to near all time lows, suddenly the picture is inverted, and long-yields are surging on concerns that not only will the ECB and the BOJ soon taper their purchases of the long end, but that Donald Trump is about to unleash a $1 trillion debt tsunami at a time when the Fed will not be available to monetize it, now that the Fed is again hiking rates.

While it is unclear under what conditions foreign buyers may come back - after all TSY rates have already jumped high enough to where US paper should be more than attractive to foreign official institutions - one thing is clear: as of this moment the selling strike not only continues but is accelerating, and should the foreign liquidation of Treasuries fail to slow, Yellen will soon have to plan how to not only abort the current rate experiment which continues to pressure yields higher around the globe, but to start thinking how to launch QE4 instead.

Fonte: qui

P.S.: potete usare la funzione TRANSLATE di Google(sulla colonna di destra), selezionando prima un qualsiasi linguaggio e poi successivamente, l'italiano, per avere la traduzione automatica.