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China Sets Yuan Fix At Weakest Since 2008

China Sets Yuan Fix At Weakest Since 2008

Tyler Durden

Sun, 05/24/2020 – 22:32

Just hours after China’s Foreign Minister Wang Yi warned that “some” in America were pushing relations to a “new Cold War”, Beijing made it clear how it intends to retaliate in this new paradigm: by doing the one thing that infuriates Trump more than anything, devaluing its currency.

After the PBOC fixed the yuan at 7.0939 on Friday, the PBOC set the Monday USDCNY midpoint at 7.1209, which was not only weaker than the expected fix of 7.1205 but the weakest fixing since 2008.

Zooming in on the past 10 days shows the sharp bounce in the past three days in both the fixing, the onshore and the offshore yuan, the last of which is now just shy of the lows hit during the March crash, if still below the all time lows hit on Sept 2, 2019 when the USDCNH spiked as high as 7.1940 in response to the escalating trade war.

That said, some – such as Bloomberg – had a different expectation for the fixing, which they saw as 7.1220, which would in turn mean a stronger than expected fixing, and one suggesting that the PBOC has activated its countercyclical buffer to slow the drop of the onshore yuan as the offshore yuan slumps. Their conclusion, which is counter to sellside expectations, is that this marks a shift in the PBOC’s countercyclical adjustments and “could be seen as a warning shot toward speculators betting on a weaker yuan.”

Whether Bloomberg’s fixing model is correct, or consensus expectations for a stronger fix are right, remains to be seen however if indeed it is China’s stance to devalue the yuan in response to the sharp deterioration in Sino-US relations then expect the offshore yuan to take the lead and to keep sliding, giving the PBOC cover for further devaluation and telegraphing how it plans on responding to the “cold war” and any future escalations by the US.

Ironically, the very same Bloomberg, in a different report, notes that “the spread between spot USD/CNH and USD/CNY is likely to become more volatile in coming days, driven by a widening bias. A combination of U.S.-China political tension and unrest in Hong Kong will provide a negative feedback loop into the offshore yuan.”

The PBOC can be expected to maintain a tight grip on the daily yuan fixing and enforce the 2% fluctuation range. But there is no such constraint for the offshore yuan, which is free to roam, only being pulled back into line by FX arbitrageurs or in response to speculation about central bank intervention.

As author Mark Crankfield writes, “the CNH forwards curve can also be expected to see an upward trajectory. The spread spiked to more than 10 big figures several times during previous periods of yuan turbulence. A similar outcome is likely in the near term, as investors consider what the threat of a new cold war will mean for risk assets.

One thing to note: the last time the offshore yuan was here, the S&P was at 2,300.

Finally, here is a reminder from Rabobank’s Michael Every why in the current environment of escalating hostility between the US and China, the only thing that matters is the Yuan, and why in the not too distant future, the Chinese currency may have a 10-handle in front of it.

This time last year, when we were all still going abroad regularly (right now just ‘outside’ is becoming a psychological barrier if I am honest) I was traveling with a presentation titled “Clause is Cause”. This argued that from a geostrategic ‘Von Clausewitz’ perspective, not a neoliberal “Let’s assume world peace” version, the US would at some point realise the USD/Eurodollar was a weapon it could wield vs. China, and when it did we would see three key strings cut: trade; tech; and then capital flows. The first was evident during the trade war – which has not been concluded is likely to get far worse soon; the second is also abundantly clear on a variety of fronts, much to Silicon Valley’s chagrin; and potentially, now we see the start of that third step – because if the US does block this first USD50bn going in, other such steps will follow, just as they did on the previously unthinkable idea of US tariffs on China.

CNH is right to be selling off, albeit in a traditionally limited fashion, because if you don’t buy from China and you don’t help China up the value-chain and you don’t invest in China then China is not going to be getting much USD liquidity at all. The US hawks probably don’t get the Eurodollar iron logic there; they are likely just pressing buttons in anger. The outcome would be the same nonetheless.

I can hear the market bulls and technocrats of the world saying “But China has USD3 trillion in reserves!” Perhaps. Most think it’s far lower than that. And not earning USD means you have to dig into that stockpile. And when you do, the PBOC either has to contract the local money supply (because every USD is backed by 7.xx CNY on the other side of the balance sheet) or it just creates new CNY anyway and supply-demand sees CNY move sharply lower – as we have been seeing in all other EM FX. Looking at the drop in BRL, ARS, ZAR, TRY, etc., or even THB, this would be how we would get to the ‘unthinkable’ 8 (9? 10?) handle in CNY. That would also crush those other EM crosses in tandem – and AUD and NZD, as the former tries to navigate its own geopolitical spat with Beijing.

And so with the Fed having taken over most US capital markets which have now lost most if not all of their discounting and signaling capabilities, keep an eye on that USDCNH: ironically, it may be the last true market stress indicator left.

Dreaming Of Visiting Japan? The Government Might Pay Half Your Expenses To Jumpstart Tourism

Dreaming Of Visiting Japan? The Government Might Pay Half Your Expenses To Jumpstart Tourism

Tyler Durden

Sun, 05/24/2020 – 22:30

Authored by Elias Marat via,

If you’re currently stuck at home and facing government lockdown orders in response to the coronavirus pandemic, we won’t blame you if you’re currently fantasizing about the vacations you want to take once the world returns to relative normalcy.

While books, YouTube travel vlogs, and even open world video games offer great distractions, in many ways they also offer serious fuel to our wanderlust – inspiring us to do nothing more than get out of our current environs and delve deep into other cultures, climes, and cuisines.

And of all the most amazing tourist destinations out there, one country stands tall with its dazzling combination of ancient culture and stunning modernity – and that country is Japan.

Mount Fuji

— 日本 (@VisualsJapan) May 21, 2020

And now, Japanese officials are reportedly considering a plan that would see the government potentially step up to pay half of the travel expenses of foreign travelers to the Land of the Rising Sun.

However, the plan is merely just a proposal – at least for the time being.

Since the coronavirus pandemic became a global concern earlier this year, the brakes have been hit on global travel – as well as the lucrative tourism industries of various countries.

This has been no less true in Japan, where a mere 2,900 tourists visited the country this April – a vast and precipitous drop from the 2,926,685 people who visited the country last April, according to leading Japanese newspaper The Mainichi. On a nationwide level, the country has seen a staggering 99.9 percent year-on-year drop in tourism.

To prevent the continuation of the brutal collapse of tourism, the Japanese government is now considering giving the green light to a 1.35 trillion yen (over $12.5 billion USD) fund to lure back foreign visitors. Japanese Tourism Agency chief Hiroshi Tabata said that the scheme could begin as soon as July if COVID-19 infections continue to subside.

No tourists in #Japan? No problem. 😎 😏

Cherry blossoms 🌸, Japanese style
🇯🇵 🗾 🏯

More than 1,000 deer 🦌 enjoying the flowers and calm at Nara Park, Osaka.

The animals even know how to bow after getting fed crackers by the visitors.

— 𝐏𝐡𝐢𝐥𝐨𝐬𝐨𝐩𝐡𝐞𝐫 𝙋𝙨𝙮𝙘𝙝𝙤𝙡𝙤𝙜𝙞𝙨𝙩 (@PsychologyDoc) May 17, 2020

It remains unclear what exactly would be covered under the plan in terms of airfare or which categories of hotels and lodging.

Japan is currently facing its lowest number of visitors from abroad since 1964. Normally, spring is one of the country’s most popular tourist seasons, especially because it’s cherry blossom season, when the blossoming trees around Tokyo, Kyoto and Mt. Fuji attract thousands of sightseers. This year, however, visitors have largely been restricted to these deer – which, needless to say, doesn’t do much for the tourism industry in terms of generating revenue.

Additionally, Japan has barred entry to nationals and passenger flights from roughly 100 nations. This includes China – one of Japan’s major tourism markets, which had been hitting record highs during the winter amid warming people-to-people relations between the Chinese and Japanese people, who have been plagued by poor bilateral ties in the past.

Flowers fields, Japan 🇯🇵

— World Tourism 🌎 (@WorldTourisms) May 16, 2020

To make matters worse, Japan has also been forced to postpone the upcoming 2020 Summer Olympic Games that were due to take place in Tokyo.

The country’s other landmarks and attractions have also been temporarily closed, including Tokyo Disneyland, Tokyo DisneySea, Universal Studios Japan, and a number of museums, festivals, and other mass events.

However, in a sign that good news may be on the horizon, only three new coronavirus infections were reported in the capital on Friday – the lowest figure since the government declared a state of emergency in April.

So while Japan is not quite out of the woods yet – as is the case in much of the rest of the world – the reported plan to slash travel expenses in half for tourists does seem tantalizing.

After all, where else can we be treated to the priceless scenery of Japan’s villages, the brilliant natural beauty of the country’s mountains and islands, or the irreplaceable flavors of genuine Japanese cuisine?

Well, this might just be the chance you’ve been waiting for.

Gun Battle Unfolds At Residential Complex Near Moscow

Gun Battle Unfolds At Residential Complex Near Moscow

Tyler Durden

Sun, 05/24/2020 – 22:05

A gun battle unfolded at a residential complex called “Yasny” in the south region of Moscow on Sunday, reported TASS News. Residents saw men firing AK-47s and other weapons on the streets below their windows. 

BREAKING #Russia Several armed men involved in shooting in the residential center Yasny, #Moscow. One man arrested. No victims reported@StateDept @MossadNews @Rose45R1237 @rnovoa @MFS001

— Rosanna (@RosannaMrtnz) May 24, 2020

“On the territory of Yasnoy, unidentified people opened fire on each other. At present, the police put on the wanted list cars that are supposedly hiding the incident participants – Mercedes, Ford, Toyota,” a law enforcement agency spokesperson told TASS. 

The spokesperson said at least eight people were involved in the shootout. 

“They shot at each other with traumatic pistols and, presumably, from the Saiga and Vepr hunting rifles.” 

So far, the incident has resulted in “no casualties, and a police search has been launched for at least eight people,” said RT News. Police have yet to release a motive behind the gun battle. 

“Nothing Can Justify This Destruction Of People’s Lives”

“Nothing Can Justify This Destruction Of People’s Lives”

Tyler Durden

Sun, 05/24/2020 – 21:40


Countries across the world have been in lockdown for months in response to the coronavirus pandemic. The costs of the policy are enormous – in terms of life, liberty and the economy. But is it worth it to save lives?

Yoram Lass was once the director-general of Israel’s Ministry of Health. Lass is a staunch critic of the lockdown policy adopted in his native Israel and around the world. He has described our response to Covid-19 as a form of hysteriaspiked caught up with him to find out more…

spiked: You have described the global response to coronavirus as hysteria. Can you explain that?

Yoram Lass: It is the first epidemic in history which is accompanied by another epidemic – the virus of the social networks. These new media have brainwashed entire populations. What you get is fear and anxiety, and an inability to look at real data. And therefore you have all the ingredients for monstrous hysteria.

It is what is known in science as positive feedback or a snowball effect. The government is afraid of its constituents. Therefore, it implements draconian measures. The constituents look at the draconian measures and become even more hysterical. They feed each other and the snowball becomes larger and larger until you reach irrational territory. This is nothing more than a flu epidemic if you care to look at the numbers and the data, but people who are in a state of anxiety are blind. If I were making the decisions, I would try to give people the real numbers. And I would never destroy my country.

spiked: What do the numbers tell us, in your view?

Lass: Mortality due to coronavirus is a fake number. Most people are not dying from coronavirus. Those recording deaths simply change the label. If patients died from leukaemia, from metastatic cancer, from cardiovascular disease or from dementia, they put coronavirus. Also, the number of infected people is fake, because it depends on the number of tests. The more tests you do the more infected people you get.

The only real number is the total number of deaths – all causes of death, not just coronavirus. If you look at those numbers, you will see that every winter we get what is called an excess death rate. That is, during the winter more people die compared to the average, due to regular, seasonal flu epidemics, which nobody cares about. If you look at the coronavirus wave on a graph, you will see that it looks like a spike. Coronavirus comes very fast, but it also goes away very fast. The influenza wave is shallow as it takes three months to pass, but coronavirus takes one month. If you count the number of people who die in terms of excess mortality – which is the area under the curve – you will see that during the coronavirus season, we have had an excess mortality which is about 15 per cent larger than the epidemic of regular flu in 2017.

Compared to that rise, the draconian measures are of biblical proportions. Hundreds of millions of people are suffering. In developing countries many will die from starvation. In developed countries many will die from unemployment. Unemployment is mortality. More people will die from the measures than from the virus. And the people who die from the measures are the breadwinners. They are younger. Among the people who die from coronavirus, the median age is often higher than the life expectancy of the population. What has been done is not proportionate. But people are afraid. People are brainwashed. They do not listen to the data. And that includes governments.

spiked: Do the lockdowns have any positive effect on people’s safety?

Lass: Any reasonable expert – that is, anyone but Professor Ferguson from Imperial College who would have locked down everybody when we had swine flu – will tell you that lockdown cannot change the final number of infected people. It can only change the rate of infection. And people argue that by changing the rate of infection and ‘flattening the curve’, we prevented the collapse of hospitals. I have shown you the costs of lockdown, but this was the argument in favour of it. But look at Sweden. No lockdown and no collapse of hospitals. The argument for the lockdown collapses.

spiked: Why have some countries suffered so much more than others from Covid-19?

Lass: For example, you can compare Italy to Israel. In the Middle East, this virus is not really working. There are two reasons. One is that there is a very young population, and the other is that the climate is different. In the latitude of 50 degrees, which is Europe, and 40, which is the north-eastern United States, the virus is much more viable. Italy has the oldest population in the world apart from Japan. Italians are also are heavy smokers and very social people – they keep hugging and kissing. If you look at the numbers, in 2017, 25,000 Italians died from flu complications. Now you have around 30,000 dying from coronavirus. So it is a comparable number. You should not ruin a country for comparable numbers.

spiked: What has it been like in Israel?

Lass: In Israel, we have two layers of fear. The hysteria is similar to the rest of the world. However, we have a prime minister who has been resuscitated by coronavirus by adding another layer of fear. I do not think there is any other prime minister who has spoken about coronavirus in terms of the medieval Black Death, the Holocaust and the end of humanity in this way. Did Boris Johnson mention the Black Death? I do not think so. That is the special situation in Israel.

spiked: How does coronavirus compare to past pandemics?

Lass: If you look at the 1950s, we had the Asian flu. In the 1960s, there was the Hong Kong flu. These were worse than this pandemic. Also, look at the story of swine flu in 2009, which began exactly the same as coronavirus. A new virus originated in Mexico. There was no vaccine so it was very frightening. It spread all over the world. It infected one billion people. A quarter of a million people died. But there was no lockdown, no Ferguson, nothing – people were far more interested in the economic crisis that hit a year before in 2008. They did not have time to give attention to this nonsense.

spiked: Will the pandemic be over soon?

Lass: The virus, like the influenza virus, is saying farewell to western Europe for sure. The same in the Middle East. In the United States, we do not know yet, so we should talk in a month from now. But nothing can justify this destruction of people’s lives. It is unbelievable.

The Fed Is Now The Proud Owner Of Bankrupt Hertz Bonds

The Fed Is Now The Proud Owner Of Bankrupt Hertz Bonds

Tyler Durden

Sun, 05/24/2020 – 21:27

On March 23 – the day the S&P dropped to its cycle low of 2,237 –  the Fed stunned capital markets when it announced it would purchase investment grade corporate bonds, traversing a Rubicon into secondary market intervention that not even  Ben Bernanke had dared to cross. A few weeks later, on April 9, the Fed doubled down by announcing it would purchase not only junk bonds from “fallen angel” issuers (an announcement which came just days after a quarter in which a record $150BN in investment grade bonds were downgraded to junk, starting the long awaited tsunami of “fallen angels”), but would also buy junk bond ETFs such as HYG and JNK.

This is what the Fed’s Secondary Market Corporate Credit Facilities term sheet said on this topic:

The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds

Naturally, the news cheered beaten down markets, and was enough to send junk bond ETFs such as JNK and HYG soaring.

One month later, following a surge in inquiry including from the bond king Jeff Gundlach as to when the Fed would actually start buying corporate bond ETFs, the Fed realized it would not be able to jawbone markets any more and would have to put its money where its term sheet was, and on May 11 the NY Fed said it would “begin purchases of exchange-traded funds (ETFs) on May 12.”

And while the central bank said the focus of its ETF purchases would be on IG-focused ETFs, the New York Fed also disclosed it would start buying junk bonds ETFs as well:

As specified in the term sheet, the SMCCF may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.

Then, last Thursday, we reported that as part of the Fed’s record balance sheet, which for the first time ever surpassed $7 trillion, the Fed disclosed that it also held $1.8 billion under Corporate Credit Facility holdings, the line item that include purchases of both investment grade (LQD) and junk bonds ETFs (HYG, JNK, etc).

This came two days after Powell defended the Fed’s program to buy junk bonds during his testimony before the Senate Banking Committee, which asked how purchases of junk bonds is “helping folks on Main Street.” Powell flagged that the Fed allowed for buying bonds from so-called “fallen angels” to ensure there is “no cliff” between the two lending markets (even though as we pointed out previously, a clear cliff has formed), saying “we don’t want to have a cliff there to where investment grade markets are working well, but the leveraged markets are not, non-investment grade markets are not.”

He then added that “we made a very limited, narrow set of actions to support market function in these markets, including buying ETFs, and that’s had an effect to improve market function there.”

Powell concluded by saying “we’re not buying junk bonds generally across the board at all,” which of course is correct: he is merely buying ETFs that have junk bond constituents.

And this is where the Fed’s first major test of directly manipulating and intervening in market functioning is about to take place.

While the Fed’s H.4.1 statement does not breakdown how much of the $1.8 billion in ETF holdings is allocated to  investment grade and how much is junk, it is safe to say that at least $1 dollar of that amount has been allocated to purchases of Junk ETFs.

That will be a problem for Powell, because a quick scan of the holdings of both HYG and JNK reveals that these junk bonds ETFs own, among the hudnreds of other securities, several bonds from the just defaulted rental giant, Hertz.

Here are HYG’s holdings of HTZ bonds: they amount to just over $50MM in face value across 4 bonds (out of a total of $23.3BN in holdings across just over 1,000 bonds).

And here is JNK: just under $$30MM in notional across 3 CUSIPs out of a total of $11.55BN in total assets in the ETF.

And yes, for those asking, both ETFs hold that infamous Hertz bond that was issued last November and that will default before paying a single coupon.

To be sure, we can only extrapolate but it is safe to say that the Fed’s holdings of both these ETFs are modest for the time being, and we assume that the bulk of ETF purchases have targeted the investment grade, LQD ETF; still the fact is that as of this moment, the Fed is a holder, via BlackRock and via HYG and JNK, of bonds which are in default, and which make the Fed a part of the Hertz post-petition equity once it emerges from bankruptcy!

This means that unless the Fed somehow manages to divest of Hertz bonds that comprise its HYG and JNK holdings, the US central bank is as of this moment a stakeholder in the Hertz bankruptcy process, and assuming there is no liquidation, will end up owning a pro-rata stake of the post-petition equity once the company emerges from bankruptcy in the not too distant future.

What happens then nobody knows: will the Fed take a vocal position in the company’s future? Can the Fed even own equities via a debt-to-equity swap? What happens when hundreds of other junk bonds default and the Fed ends up owning billions in post-petition equity pro forma for equitization?

We don’t know; we doubt anyone on Wall Street or in Congress knows. And we are certain that the Fed itself doesn’t know, because in its scramble to stabilize the bond market, it forgot that once companies file for bankruptcy (certainly there is no discussion in the Fed’s term sheets of what happens once its corporate bond holdings default) the Fed will – sooner or later – end up being an equityholder.

As a reminder, the ECB was faced with a similar scandal in Dec 2017 when it ended up holding bonds of insolvent Steinhoff, but back then Mario Draghi quickly liquidated the bonds and the market pretended nothing ever happened. The problem for Powell is that one look at the HYG and JNK holdings reveal dozens if not hundreds of companies which will file for bankruptcy within months if not weeks, suggesting the Hertz debacle is just the start of a bankruptcy flood in which the Fed will emerge as a key actor in bankruptcy court and Powell will have to explain away why it is now an equity stakeholder of bankrupt companies.

We eagerly look forward to Powell answering all these questions, hopefully as soon as this Friday when the Fed chair holds yet another video conference.