Update (1440ET): Digital Currency Group founder and CEO Barry Silbert has responded to market chatter and sent a reassuring note to shareholders.

The Block reports that Silbert told shareholders: “DCG will continue to be a leading builder of the industry and we are committed to our long-term mission of accelerating the development of a better financial system,”

“We have weathered previous crypto winters and while this one may feel more severe, collectively we will come out of it stronger,”

And continued:

“Genesis Global Capital, Genesis’ lending business, temporarily suspended redemptions and new loan originations last Wednesday, November 16 after market turmoil sparked unprecedented withdrawal requests.

This is an issue of liquidity and duration mismatch in the Genesis loan book.  Importantly, these issues have no impact on Genesis’ spot and derivatives trading or custody businesses, which continue to operate as usual.

Genesis leadership and their board decided to hire financial and legal advisors and the firm is exploring all possible options amidst the fallout from the implosion of FTX.

In recent days, there has been chatter about intercompany loans between Genesis Global Capital and DCG.  For those unaware, in the ordinary course of business, DCG has borrowed money from Genesis Global Capital in the same vein as hundreds of crypto investment firms.  These loans were always structured on an arm’s length basis and priced at prevailing market interest rates.  DCG currently has a liability to Genesis Global Capital of ~$575 million, which is due in May 2023.  These loans were used to fund investment opportunities and to repurchase DCG stock from non-employee shareholders in secondary transactions previously highlighted in quarterly shareholder updates.

We appreciate the words of encouragement and support, along with offers to invest in DCG.  We will let you know if we decide to do a financing round.

Despite the difficult industry conditions, I am as excited as ever about the potential for cryptocurrencies and blockchain technology over the coming decades and DCG is determined to remain at the forefront.”

Silbert’s suggestions of ‘intercompany loans’ and ‘same vein as hundreds of other crypto firms’ sounds a lot like he is throwing the whole industry under the bus… or low-key threatening CZ to “do something” or the whole house of cards goes down.

*  *  *

As Jack Inabinet via ‘Bankless’ detailed earlier, crypto conglomerate DCG could be in trouble with Genesis on the verge of bankruptcy…

Dear Bankless Nation,

Not sure if you noticed, but November hasn’t been all that kind to the crypto industry!

The outlook this week doesn’t appear all that rosy either as people wonder if Genesis is on the verge of disaster. We’re kind of curious about that too… so let’s dig into what’s going down with Barry Silbert’s Digital Currency Group.

Et tu, Genesis?

Last week, Genesis froze its lending program.

Crypto Twitter (obviously) then began circulating rumors about impending Genesis disaster.

Not only has the solvency of Genesis, which was crypto’s only full-service prime brokerage, been called into question, but the backing of GBTC, a Bitcoin trust product, has come under similar scrutiny, after its trustee, Grayscale, stated it would not share its proof of reserves audit, citing “security concerns”.

UPDATE WE ARE SO SO SO FUCKED…@grayscale is refusing to show Proof of Reserves…

They hold their #BTC and #ETH on #coinbase…but won’t show blockchain data confirming ANY of their holdings.

“Teserves” are an excel spreadsheet 💀

— Crypto King (@Cryptoking) November 21, 2022

Crypto King @Cryptoking

UPDATE WE ARE SO SO SO FUCKED… @Grayscale is refusing to show Proof of Reserves… They hold their #BTC and #ETH on #coinbase…but won’t show blockchain data confirming ANY of their holdings. “Teserves” are an excel spreadsheet 💀

6:09 AM ∙ Nov 21, 2022

391Likes55Retweets

What do both Genesis and Grayscale have in common?

Well, they are both subsidiaries of crypto conglomerate Digital Currency Group (DCG).

DCG is rumored to have very little remaining liquidity after infusing $140M of fresh capital into Genesis last week, a necessary move after the firm’s lending group lost access to $175M locked in FTX accounts, an event that immediately preceded the freeze in withdrawals from Genesis’s lending platform.

All of this left Crypto Twitter to wonder: how bad can it possibly get?

Aaaand today we got our answer: Genesis is on the verge of bankruptcy…

But they don’t have any immediate plans to file bankruptcy. So… that’s bullish, right?

Unfortunately, probably not.

FTX’s collapse and the ensuing crypto credit crunch created an industry wide credit crisis, which caused a bank run on Genesis. Current bailout plans involve an infusion of an additional $500M, half the size of the firm’s original $1B ask, with Binance being cited as a source of potential funding (though the WSJ isn’t so sure a Binance deal is going to happen).

So, what is Genesis?

Let’s step back, and take a good look at what Genesis is and the firm’s potential sources of financial risk. For a more thorough description of the services Genesis offers, see this amazing tweet thread (that I have summarized below) by Ram Ahluwalia.

Genesis fulfills many of the same functions as a traditional brokerage, while tailoring its offerings towards institutional clientele. Offerings of prime brokerages, like Genesis, include lending and OTC services.

In traditional financial markets, prime brokers, such as Goldman Sachs, offset positions with a counterparty. Suppose a Goldman Sachs client wants to go long on $100M of US Treasuries: if Goldman Sachs fulfilled this order without hedging, they would be short $100M of US Treasuries. If yields begin to fall, Goldman Sachs will be at a loss, but if yields continue to rise, Goldman Sachs nets a profit from the position.

Instead of exposing itself to price fluctuations in the underlying security, Goldman Sachs would simultaneously enter into a long position with JP Morgan, quoting its client a slightly higher price (ask) than it receives (bid) from JPM.

This allows dealers to capture bid/ask spreads, without assuming directional exposure, when executing client orders.

As the pioneer of crypto OTC and prime brokerage markets, Genesis is not afforded the same access to robust inter-dealer markets as traditional financial institutions. Genesis attempted to offer the same services as its trad peers, despite a lack of similar risk management solutions.

Genesis Sources of Risk

We know that Genesis is no longer fulfilling withdrawal requests. But why?

Genesis is facing issues regarding liquidity – and potentially solvency.

Liquidity Issues

Much like a bank, which is primarily financed by demand deposits, Genesis relied on short-term funding sources, including Circle’s Yield program and Gemini Earn. Additionally (much like a bank), Genesis was involved in the maturity transformation of assets, meaning they made long-term loans with these short-term deposits.

Lending out funds for longer maturities enables Genesis to capture a spread between its cost of capital and interest income, providing the basis of a potentially profitable business model. This strategy, however, presents the risk that the bank-like entity does not have enough liquidity to fulfill unexpectedly high volumes of withdrawal requests.

During times of economic uncertainty, lenders typically look to recall outstanding credit from wherever possible and shore up their own cash/liquid asset reserves. Short-term deposit sources, like those used to fund Genesis, allow users to withdraw funds on demand and are among the first places lenders look for liquidity.

Immediately prior to Genesis freezing withdrawals, individuals and institutions (including Genesis) with funds on FTX suddenly lost access to capital they believed was liquid. Additionally, FTX’s mismanagement of user funds drew renewed ire towards crypto lending practices and increased calls from the industry to take a second look at undercollateralized and off-chain lending practices.

The FTX implosion created a need for liquidity to replace funds locked on the exchange and decreased crypto ecosystem participants’ willingness to lend to centralized blackboxes, decreasing available funding sources to Genesis.

Unfortunately, (much like a bank) Genesis extended loans with distant maturities to borrowers and did not have sufficient access to on-demand liquidity to fulfill the unusually high volumes of withdrawal requests that followed in the wake of FTX. 

Liquidity problems for Genesis are probably the best case scenario and likely result in near-term resumption of withdrawals! A potential solution, like the Binance deal contemplated above, is likely to proceed in this case, with withdrawals likely to be enabled soon afterwards.

https://t.co/7GtGZobR83 pic.twitter.com/qjn53NMXVY

— db (@tier10k) November 21, 2022

Solvency Issues

Genesis likely has counterparty exposure related to duration management activities and position hedging.

Duration is a measure of the interest rate sensitivity of the value of assets and liabilities to changes in interest rates. A higher duration implies a greater price sensitivity to fluctuations in interest rates, with higher rates having a negative impact on valuations and lower rates having a positive impact on valuations. Taking shorter-term sources of funding (lower duration) and making longer-term loans (higher duration) exposes financial entities to duration mismatch.

For Genesis, this means that for a given change in interest rates, the magnitude of impact on Genesis’s assets will be greater than that on its liabilities.

The solvency of Genesis, prior to managing its duration gap, is negatively correlated with changes to interest rates. Given the frozen state of crypto credit markets and increases in risk-free rates, driven by contractionary monetary policy, an unhedged Genesis would struggle with its solvency. 

While Genesis likely hedged against rising rates, insolvency of key counterparties to its duration management strategy would leave Genesis with directional exposure, increasing its own risk of insolvency.

Remember all of that Bitcoin that the Luna Foundation Guard purchased with UST?

1/ The LFG has acquired an additional 37,863 Bitcoins totaling ~$1.5 billion in OTC swaps with @GenesisTrading and 3AC. https://t.co/Ezzfwl7VFn

— LFG | Luna Foundation Guard (@LFG_org) May 5, 2022

Genesis received $1 billion of UST from this swap! While it is likely that Genesis would have attempted to hedge their exposure to UST, the insolvency of counterparties to this hedge would create directional exposure to UST. 

Today, that $1B of UST has a market value of only $23M!

Every crypto hedge fund explosion increases the probability that Genesis has directional exposure to crypto assets, including unsold UST.

Counterparty risks represent a much larger threat to Genesis than liquidity issues. While liquidity issues mean that Genesis has enough assets to repay all users in full, just not today, counterparty risk directly impacts Genesis’s solvency.

Failure of risk management strategies, due to counterparty insolvency, will negatively impact the solvency of Genesius and result in diminished payouts to its creditors!

Dubious Connections

Genesis, 3AC, GBTC, and DCG. What do these 4 words/acronyms/tickers have in common?

They were all involved in a complicated, intertwined GBTC trade.

Grayscale (a DCG subsidiary) is the trustee for GBTC. In exchange for its services, Grayscale earns a 2% annual fee, in perpetuity for all assets under management within the trust. SEC regulatory statements filed Q3 2022 indicate that Grayscale has made over $302M in YTD fee revenue from GBTC, compared to $433M over the same period in 2021.

Genesis (also a DCG subsidiary) was a primary lender to 3AC. According to an analysis of publicly available SEC and investor filings by DataFinnovation performed back in July, Genesis was essentially lending at its single counterparty limit to 3AC. 

The analysis speculates that in exchange for collateral, 3AC would borrow BTC from Genesis, return the BTC to Genesis to create GBTC (Genesis is the only Authorized Participant who can create shares of GBTC), and provide the GBTC back to Genesis to restart this circular process.

When GBTC was trading at a premium to BTC, 3AC was essentially creating free money and using the profits to increase exposure to GBTC and other crypto assets. Assuming that the premium held, 3AC could theoretically repeat this arbitrage process forever. 

This trade proved highly profitable for DCG too, by increasing the AUM for Grayscale’s BTC trust and boosting fee revenue.

Unfortunately, this premium turned into a discount as GBTC sell pressure increased and demand for the product diminished. In combination with Luna’s death spiral, a previously sizable investment position in the 3AC portfolio, the end result is an insolvent 3AC.

Genesis is unlikely to fully collect on outstanding loans to 3AC, and given the lack of sophisticated counterparties within crypto, they may have non-negligible counterparty exposure to 3AC.

Known lending relations and potential counterparty exposure with 3AC (or other insolvent crypto funds) has created continued liquidity pressures for Genesis and remained a source of insolvency risk.

Grayscale FUD?

Not only is DCG dealing with issues pertaining to Genesis withdrawals and its solvency, but the conglomerate has also been forced to defend the backing of GBTC. This is a 100% self-inflicted wound for DCG, who refused to release wallet addresses holding Grayscale trust assets or their full proof of reserve audit. 

In the aftermath of the FTX saga and concerns about exchanges falsifying proof of reserve audits, Grayscale’s hesitance to produce its proof of reserve audits is an ABSOLUTELY TERRIBLE IDEA!

Quote from an a16z source on DCG/Genesis raise and lack of Grayscale reserve transparency:

“Complete lack of awareness… FTX changed everything. I’d be shocked if they raise a quarter of what they are looking for.”

— Andrew (@AP_ArchPublic) November 20, 2022

Third-party, on-chain attempts to verify the GBTC holdings were able to trace approximately 50% of BTC held by the trust.

TLDR
– Using public data and chain forensics, we have attributed 432 addresses holding 317,705 BTC to likely GBTC custody activity.
– This total is ~50% of GBTC reported current holdings.
– Additional work is necessary to ID the remaining addresses. pic.twitter.com/MMKzp2HBwQ

— 🏴∴Ergo∴🏴 (@ErgoBTC) November 20, 2022

Coinbase Custody, however, came to Grayscale’s defense, confirming that GBTC and other Grayscale products remain completely backed by assets under control of Coinbase Custody.

4) All digital assets that underlie Grayscale’s digital asset products are stored under the custody of Coinbase Custody Trust Company, LLC. Read more from @Coinbase’s CFO Alesia Haas, and CEO of Coinbase Custody Aaron Schnarch: pic.twitter.com/InBP9zPDkC

— Grayscale (@Grayscale) November 18, 2022

 Related analysis from Nansen’s Alex Svanevik found that Grayscale’s ETH product is likely fully backed by reserves held by Coinbase Custody, providing further confirmation that GBTC is fully backed.

Given that CB has 1/8th the spot volume of Binance, holding 1/3rd the ETH reserves (excl. Grayscale) seems reasonable.

CB probably also has other large custody clients.

So: my guess is that the Grayscale ETH is already sitting in what we’ve tagged as CB in @nansen_ai.

— Alex Svanevik 🐧 (@ASvanevik) November 19, 2022

It remains unlikely that Coinbase Custody would misrepresent the holdings of GBTC, given that such actions would be fraudulent and may expose Coinbase to legal repercussions. But after the FTX collapse and resulting scandalous accusations, Coinbase fraudulently representing the BTC holdings of Grayscale is not utterly inconceivable.

DCG Contagion?

While concerns surrounding Genesis’s solvency and Grayscale’s backings (as well as the general financial health of DCG) remain in question, failure of either of these groups would be disastrous for the crypto industry.

Genesis has a much larger footprint than FTX and provides (provided?) prime brokerage services that empower institutional investment in crypto.

Here are the notes I covered on the show. pic.twitter.com/DYHfvxdisU

— Simon Dixon (Beware Impersonators) (@SimonDixonTwitt) November 20, 2022

 Scenarios ending with Grayscale winding up its trusts result in billions of dollars of sell pressure for BTC, ETH, and other Grayscale assets, an event which would decimate crypto markets. This outcome, however, remains unlikely given the amount of fee revenue generated from the product and the profitability of the group.

5/ Between these two trusts, they own approximately

– 633.8K BTC (~$10.5B)
– 3.05M ETH (~$3.6B)

As well as ~$570M in altcoins held in other trusts.

Forced selling of these at one time would have potentially large negative impacts on the prices of crypto assets.

— Blockworks Research (@blockworksres) November 18, 2022

While it is unclear how the Genesis saga could unwind, the near-term fate of the broader crypto industry, once again, hinges on the solvency of another blackbox CeFi entity. Massive fallout will ensue if Genesis fails, especially considering the firm’s role as a nexus for institutional investment in crypto.

Strap in anon. This could get bumpy!

*  *  *

Subscribe to Bankless

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Brazilian President Jair Bolsonaro has filed a lawsuit asking a court to invalidate 250,000 votes from “malfunctioning ballot boxes,” according to Gazeta Do Povo

According to the petition, an audit carried out at the request of the Liberal Party found that the old ballot boxes “cannot be considered” due to having identical identification numbers.

According to the lawsuit, the 2009, 2010, 2011, 2013 and 2015 models of the voting machines presented “insurmountable operating problems, with emphasis on the very serious failure in the individualization of each URNA LOG file and its repercussions in later stages, such as the Digital Record of the Vote (RDV) and the issuance of the Ballot Box (BU), and, consequently, in the absence of certainty as to the authenticity of the voting result,” (translated).

⚠️ATENÇÃO: O presidente Jair Bolsonaro entrou com uma ação no TSE nesta terça-feira (22) em que pede a anulação dos votos em “urnas com mau funcionamento” (cerca de 250 mil). Representação é baseada na auditoria do PL – o presidente da sigla deve falar à imprensa em instantes. pic.twitter.com/6IRxYSlJR1

— wendal carmo (@euwendal) November 22, 2022

According to Bloomberg, the court has given Bolsonaro 24 hours to decide whether he will only include the 1st round of votes in his complaint.

Three weeks ago Bolsonaro refused to concede the election to challenger Luiz Inácio Lula da Silva, saying at a news conference: “As president and as a citizen I will continue to follow all the commandments of our constitution.”

Shortly after the election, truck drivers loyal to Bolsonaro blocked roads in over a dozen Brazilian states causing disruptions – including the road to São Paulo’s international airport, leading to the cancellation of many flights.

Meanwhile, tens of thousands of Brazilians came out to protest against Bolsonaro’s defeat in the October election, and have asked for the armed forces to intervene.

“I’m fighting for my country, for my daughter and three grandchildren,” 63-year-old Domingues Carvalho told AP after protesting for 15 days straight. “I’m fighting for my country, for my daughter and three grandchildren,” he added.

“I’ll stay here as long as necessary. We are peaceful but we will never, ever leave our country in the hands of communists.”

Bolsonaro called the protests in his favor a “popular movement” resulting from “indignation and a sense of injustice” over the election.

Meanwhile, in response to Bolsonaro’s lawsuit:

A report compiled by 11 RNC lawyers who witnessed widespread issues in Arizona on Election Day 2022 reveals that Maricopa County had far more problems than they are reporting.

Mark Sonnenklar, an attorney for the Republican National Committee Integrity program in Arizona, and 10 other ‘roving’ RNC attorneys reported observing problems ranging from tabulators rejecting ballots to hours-long lines for voting, Just the News reports.

The 11 attorneys visited 115 out of the 223 vote centers in Maricopa County on Election Day and found that 72 of them (or 62.61%) “had material problems with the tabulators not being able to tabulate ballots,” Sonnenklar reported, “causing voters to either deposit their ballots into box 3, spoil their ballots and re-vote, or get frustrated and leave the vote center without voting.”

Box 3 — also called “Door 3” or “Slot 3” — is a separate box on the tabulators into which ballots not counted by the machines were placed for later tabulation. Maricopa County, however, has admitted that “in some voting locations, ‘Door 3’ non-tabulated ballots were commingled with tabulated ballots,” according to a letter from the Arizona attorney general’s office to the county. -Just the News

“In many vote centers, the tabulators rejected the initial insertion of a ballot almost 100% of the time, although the tabulators might still accept that ballot on the second, third, fourth, fifth, or sixth attempt to insert the ballot,” reads the report. “However, many ballots were not able to be tabulated by the tabulators at all, no matter how many times the voter inserted the ballot.”

According to Sonnenklar, the reports “directly contradict the statements of County election officials that (1) printer/tabulator issues were limited to only 70 of the 223 vote centers, (2) the printer/tabulator problems were resolved as of 3:00 p.m., and (3) the printer/tabulator issues were insignificant in the entire scheme of the election.”

Meanwhile, 51% of voting centers had “significant lines,” with many voters waiting multiple hours before receiving a ballot.

“[B]ecause Republican voters significantly outnumbered Democrat voters in the County on election day, such voter suppression would necessarily impact the vote tallies for Republican candidates much more than the vote tallies for Democrat candidates,” Sonnenklar wrote.

A letter from Arizona Assistant AG Jennifer Wright to the Maricopa County Attorney’s Office notes that the department had “received hundreds of complaints,” including “first-hand witness accounts.”

According to the letter, some of the information is “[b]ased on sworn complaints submitted by election workers employed by Maricopa County” and “the plethora of reports from election workers, poll observers, and voters.”

The letter gave the county until Nov. 28, the day counties are required to certify their elections, to respond. -Just the News

Of note, Maricopa, Cochise and Mohave counties have all decided to delay the certification of their elections until the Nov. 28 deadline due to the irregularities in Maricopa.

Authored by Pat Buchanan,

Winter has often proven an indispensable ally of Mother Russia.

The impending winter of 1812-13 forced Napoleon’s withdrawal from Moscow, a retreat from which his Grande Armee never recovered.

The winter of 1941-42 sealed the ultimate fate of the invading armies of Adolf Hitler’s Third Reich.

Vladimir Putin’s new strategy in the war he launched on Ukraine in February is to conscript the coming winter of 2022-23 as an ally of his failing army.

For weeks, there have been reports of Russian air, missile and drone strikes on power plants in every major Ukrainian city.

The false report that a Russian-fired rocket had landed in Poland, killing two civilians, came on a day when 100 Russian bombs, rockets, missiles and drones hit “infrastructure” targets across Ukraine.

It was the heaviest Russian barrage to date in the nine-month war.

Putin’s goal: As the Ukrainian army battles the Russian army in the Donbas and Kherson, the power grid upon which the Ukrainian nation and people depend is to be systematically attacked, shut down, destroyed.

Without electric power, there will be no light or heat in Ukrainian homes, hospitals, offices or schools. Without electricity, food cannot be preserved, stoves do not work, water cannot be pumped.

Without power, light and heat, Putin’s expectation is that the Ukrainian people, who have patriotically supported their army, will, in the tens of thousands this winter, be at risk of freezing to death in the dark.

Winter, from mid-December to mid-March, is the coldest and darkest of the seasons, and it begins in four weeks.

On Friday, CNN reported that, after the latest wave of Russian strikes, 10 million Ukrainians, a fourth of the nation, were without power.

“Russia is turning winter into a weapon, even as its soldiers flail on the battlefield,” wrote The New York Times on Sunday.

“In a relentless and intensifying barrage of missiles fired from ships at sea, batteries on land and planes in the sky, Moscow is destroying Ukraine’s critical infrastructure, depriving millions of heat, light and clean water.”

Ukraine’s state energy company adds:

“Due to a dramatic drop in temperature, electricity consumption is increasing daily in those regions of Ukraine where power supply has already been restored after massive missile strikes on November 15 on the energy infrastructure.”

The U.S. stance in this war is that the fighting stops and peace talks begin only when Kyiv says the fighting stops and the negotiations begin.

But Americans, whose support for Ukraine has been indispensable in this war, also need to have a voice in when the war ends.

For us, the greatest stake in this Russia-Ukraine war is not who ends up in control of Luhansk, Donetsk or Kherson, but that we not be drawn into a military conflict that would put us on the escalator to a war with Russia, a world war and perhaps a nuclear war.

Nothing in Eastern or Central Europe is worth a major U.S. war with Russia that could go nuclear and cost millions of American lives.

The Donbas and Crimea may be of great importance to Kyiv and Moscow, but nothing in these lands would justify a U.S. war with a nuclear-armed Russia, the kind of war we managed to avoid through the Cold War from 1949-1989.

The recent incident of the S-300 surface-to-air missile misfired by Ukrainian forces, which landed several kilometers inside Poland, killing two Polish citizens, is a case in point.

Hawkish cries for NATO retaliation against Russia, under Article 5 of the NATO treaty, revealed that America’s War Party is still very much with us and eager for the next confrontation with Putin’s Russia.

In the final days of this lame-duck Congress, before control of the House passes to Republicans in January, Democrats are expected to approve Joe Biden’s request for another $38 billion for the Kyiv regime, its army and its war. Passage of this legislation would virtually guarantee that the U.S. continues to finance this war and extend the fighting until spring.

Why would we do this?

The U.S. ought not dictate to Kyiv when it should move to the negotiating track to end this war. But we Americans do have, given our indispensable contributions to the Ukrainian war effort, the right to tell Kyiv when we believe that the risks of further fighting exceed any potential gain for us; and, if Kyiv is determined to fight on, to give notice that Ukraine will be doing so without any more U.S. munitions.

Great powers should never cede to lesser powers, unconnected to their vital interests, the capacity to drag them into unwanted wars.

The Polish missile incident, and the noisy clamor that arose for retaliation against Russia for hitting a NATO country, exposed the risks inherent in our many treaty commitments, where we are obliged to go to war for scores of nations, most of which are not remotely related to the security or vital interests of the United States.

With bitcoin tumbling to a two year low and desperate to find a bottom as every day a new – and extremely levered – shoe seems to drop as the fallout of the FTX bankruptcy claims more victims, many have been looking to Binance CEO Changpeng Zhao whose dump of FTT tokens crushed FTX, and who has emerged as the last “White Knight” in the crypto space after revealing last week that he is trying to put together a “rescue fund” for distressed crypto players.

Yet not even CZ is big or rich enough (his wealth is $14.5 billion, down from $81.3 billion in January) to singlehandedly become crypto’s JPMorgan (and after so many media references to his criminal peer SBF as “the new JPMorgan”, we doubt he even wants that designation). So who does CZ go to when he needs some extra cash? Why none other than the new beating heart of the crypto world, the place where so many Russian oligarchs…

More Than 100 Russian Jets Stranded In Dubai After Being Flown There To Escape Sanctions https://t.co/fqCexXw4FR

— zerohedge (@zerohedge) April 10, 2022

… and crypto exiles now live (“Three Arrows Capital Moving Headquarters to Dubai From Singapore“) the United Arab Emirates whose two megacities, Dubai and Abu Dhabi, are emerging as the new centers of the post-crypto financial world after also serving as core anchors of the old, petrodollar-based regime.

According to Bloomberg, Changpeng Zhao and several deputies met with investors in Abu Dhabi last week in an effort to raise cash for a crypto industry recovery fund.  Zhao and his team held meetings with potential backers last week, including with entities affiliated with United Arab Emirates National Security Adviser Sheikh Tahnoon Bin Zayed, who oversees a large financial empire, said the people.

Details on the size of the fund and the projects to support are still not decided and it’s likely several weeks before the vehicle takes off, the people said.

“CZ’s meetings in Abu Dhabi were all focused on general global regulatory matters — specifically how Middle Eastern regulators could lead the globe by exploring more aggressive proof of custody requirements for crypto exchanges,” a Binance spokesperson said.

Of course, there is much more to it than that: CZ has realized that in a world where both Chinese and western governments view crypto with distrust and are willing to crush it over the threat it poses to their doomed fiat systems, the rich gulf states – and here the UAE is the undisputed leader – will be the primary venue for future crypto development; now he just has to convince the local officials to allocate some of their oil wealth to crypto.

Zhao himself moved to Dubai last year and has built close ties with the UAE leadership. After FTX’s bankruptcy, Zhao tweeted that Binance would form a recovery fund “to help projects who are otherwise strong, but in a liquidity crisis.”

“There are still players with very strong financials and we should band together to try to help the projects in need, especially if it’s only financial need,” he said on the sidelines of Abu Dhabi Finance Week last Wednesday.

The Binance CEO, who also spoke at the Milken Institute’s Abu Dhabi conference, had said there was significant investor interest in the industry recovery fund and that he expects to finalize commitments in the coming weeks. His conversations in the region also included proposals to engage with Middle Eastern regulators and boost crypto adoption, the people said.

Bloomberg also reports that it has seen a Google form gauging investor interest is circulating with Binance’s name on it. “Thank you for reaching out to Binance regarding the industry recovery fund,” the form said. “We are committed to helping the crypto industry grow stronger in the current market conditions.”

Echoing our view on dramatic realignment in the crypto world, Bloomberg notes that “with the crypto world facing a crisis of confidence and many Silicon Valley firms burned by FTX’s implosion, the Middle East is becoming the go-to place to seek funds to halt the contagion.”

Bankman-Fried himself spent time in the region in late October, trying to raise capital through meetings with Saudi Arabia’s sovereign wealth fund and Abu Dhabi’s Mubadala Investment Co., people familiar with the matter have said. Luckily, the talks failed to progress after FTX began a downward spiral that threw the exchange and its roughly 130 related entities into bankruptcy.

This time however, with the proper diligence, with sufficient capital, UAE has the potential to emerge as the true incubator of the post-fiat world.

By Simon White, Bloomberg Markets Live reporter and strategist

Tighter Fed policy is raising households’ interest-rate burden, leading to a rapid decline in excess savings and underscoring the likelihood hawkishness has peaked (see “Credit Card Rates Just Hit A Record As The Average Car Loan Rises To Fresh All Time High“).

The pandemic rise in excess savings was probably the most rapid increase in wealth ever seen. A combination of a collapse in demand and huge government transfers led to an estimated peak of $2.3 trillion in excess savings being accumulated by the middle of 2021.

But after the feast comes the famine, and excess savings are being run down swiftly as inflation causes prices and interest rates to rise. These excess savings act as a buffer to a recession as they dampen the feedback loop of a decline in spending, leading to a fall in income, which means less spending, and so on.

The BEA (Bureau of Economic Analysis) defines the flow of savings = disposable personal income – consumption – other outlays. The personal savings rate is the difference between disposable income and consumption as a percentage of disposable income. The savings rate reached as high as 33% in the depths of a the pandemic – a previously unimaginable level – but since then has collapsed to near all-time lows of 3.1%.

The dissaving can be seen in the rapid decline in “excess disposable income,” i.e. disposable income above its pre-pandemic trend. It is back to flat based on a 30-year trend line, signifying that excess savings are no longer being bolstered by excess income because people are spending more and pandemic-related transfer payments from the government have ceased.

Savings are being increasingly stressed by rising debt repayments. Interest rates are rising on consumer and mortgage debt. Debt-service ratios (debt repayments as a percentage of disposable income) remain relatively low, but are rising, and could do so fairly rapidly as debt is re-fixed at higher rates.

In nominal terms, households have to repay an estimated $1.75 trillion each year, or almost 10% of disposable income. Further, this burden will get worse as more income is eaten up by rising prices.

The Fed estimates that excess savings have dwindled to $1.7 trillion (as of mid-2022), a 26% drop in a year (see chart below). The stock of excess savings is likely to fall with an increasing pace as the lagged effects of rising interest rates bite.

The recession buffer is being wiped out, leaving the US economy in a more fragile position and raising the likelihood the Fed has reached its peak in bellicosity on the war on inflation (for now).

Update (1126ET): Meta spokesman, Andy Stone has denied the report, tweeting “This is false” in response.

This is false.

— Andy Stone (@andymstone) November 22, 2022

False like the Hunter Biden laptop story Andy suppressed right before the 2020 US election?

*  *  *

Shares of Meta are spiking after an unconfirmed report that CEO Mark Zuckerberg will step down next year.

According to the Leak, the decision “will not affect metaverse,” the company’s multi-billion dollar project.

Information obtained by The Leak suggests that Zuckerberg has decided to step down himself. The decision, per our insider source, “will not affect metaverse” – Mark’s multi-billion dollar project, which has dragged Meta along with it as the company saw a significant profit decline earlier this year.

Throughout the year, despite shareholder skepticism and concerns, Zuckerberg has been determined to aggressively push forward with his risky plan on the Metaverse – his VR bet, which he claims will pay off in the long run. -the Leak

The report suggests the move is linked to investor frustration with Zuckerberg’s push to double-down on the Metaverse, noting an open letter from Brad Gerstner, whose fund Altimeter Capital owns hundreds of millions of dollars’ worth of Meta shares. The letter, which outlines how investors have lost trust in the company, lays out a three-point plan to right the ship which includes “Limit investment in metaverse / Reality Labs to no more than $5B per year.”

Zuckerberg already has plans to let go of thousands of employees. This is in line with a general trend in the tech industry and with investor worries about headcount costs, which were outlined in the open letter by Altimeter Capital. Yet, it’s unlikely the two parties will see eye to eye when it comes to the metaverse. 

Although he’s withstood similar pressures multiple times over the years, Metaverse’s overestimation of public interest in virtual escapism is might be the endgame of Zuckerberg’s long-standing reign. -the Leak

The outlet has reached out to Meta for comments. Stay tuned for updates.

Authored by Lance Roberts via RealInvestmentAdvice.com,

Following the weaker-than-expected October inflation report, stocks surged on hopes the Fed will “pivot” sooner than later. As we discussed recently, a “policy pivot” is not necessarily bullish but instead suggests more bearish market action will come first. To wit:

“Such leaves only two trajectories for monetary policy. The first option is for central banks to pause rates and allow inflation to run its course. Such would potentially lead to a softer landing in the economy but theoretically anchor inflation at higher levels. The second option, and the one chosen, is to hike rates until the economy slips into a deeper recession. Both trajectories are bad for equities. The latter is substantially riskier as it creates an economic or financial “event” with more severe outcomes.

While the U.S. economy has absorbed tighter financial conditions so far, it doesn’t mean it will continue to do so. History is pretty clear about the outcomes of higher rates, combined with a surging dollar and inflationary pressures.”

The “monetary policy conditions index” measures the 2-year Treasury rate, which impacts short-term loans; the 10-year rate, which affects longer-term loans; inflation which impacts the consumer; and the dollar, which impacts foreign consumption. Historically, when the index has reached higher levels, it has preceded economic downturns, recessions, and bear markets.

Not surprisingly, the tighter monetary policy conditions become, the slower economic growth tends to be.

The bullish expectation is that when the Fed finally makes a “policy pivot,” such will end the bear market. However, while that expectation is not wrong, it may not occur as quickly as the bulls expect.

Notably, the monetary policy conditions index suggests that more bearish action is likely before the next bull market cycle can begin.

Outlook Remains Bearish For Now

Investors are dealing with a bearish market for the first time in over a decade. Such is something that many investors in the stock market today have never witnessed firsthand. Nonetheless, it has been a challenging year on many fronts, given the enormous number of negative days and increases in daily volatility.

However, we warned this could be the case in 2021 when we discussed that “low volatility begets high volatility.”

“Hyman Minsky argued that financial markets have inherent instability. As we saw in 2020-2021, asymmetric risks rise in market speculation during an abnormally long bullish cycle. That speculation eventually results in market instability and collapse.

We can visualize these periods of ‘instability’ by examining the daily price swings of the S&P 500 index. Note that long periods of “stability” with regularity lead to “instability.”

(I have updated the chart to the present.)

While periods of high volatility eventually subside, the bearish period for stocks is ultimately tied to the monetary conditions present in the economy at the time. If we invert our monetary conditions index and compare it to the annual changes in the price of the S&P 500 index, the correlation becomes apparent.

As should be expected, with the Federal Reserve aggressively hiking rates and the US dollar index surging in 2022, monetary conditions are extremely tight. Such suggests that until those monetary conditions reverse, the market will continue to trade within a bearish trend. Such is because, as should be apparent, tighter monetary conditions reduce corporate earnings and profit margins.

The strong dollar alone is problematic for companies with foreign sales, which account for nearly 40% of corporate revenue. However, adding to that risk, higher borrowing costs, wages, input prices, and the ability to maintain margins in a slower economic environment becomes exceedingly difficult.

Therefore, it should be unsurprising that stocks will need to reprice lower in the coming year to adjust for slower earnings growth.

7-Rules To Navigate The Final Leg Of A Bearish Market

While anything is possible in the near term, complacency has quickly returned to the market. Investors are very optimistic that the Fed will pivot and the next bull market will start. However, there are numerous reasons to remain mindful of the risks.

• Earnings and profit growth estimates are too high.

• Deflation will become more prevalent

• The Fed will continue to hike rates.

• Economic data will surprise on the downside.

• Consumer spending will slow.

• Inventory overhang will impact manufacturing.

• Valuations remain high by many measures.

• The risk of a credit-related event is rising.

So what do you do?

We remain optimistic about the markets due to share buybacks, seasonality, and bullish sentiment. As we have repeatedly stated, the market could rise to between 4000 and 4100 by year-end. However, as we enter 2023, we remain concerned about the broader macro risks and the risk the Federal Reserve will “break something” by hiking rates too much. Such keeps us cautious, so we continue reiterating the importance of remaining unemotional and focusing on managing portfolio risks.

1. Move slowly. There is no rush to make dramatic changes. Doing anything in a moment of “panic” tends to be the wrong thing.

2. If you are overweight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. Again, after significant declines, individuals feel like they “must” do something. Think logically about where you want to be and use the rally to adjust to that level.

3. Begin by selling laggards and losers. These positions were dragging on performance as the market rose, and they led on the way down.

4. Add to sectors, or positions, that are performing with or outperforming the broader market if you need risk exposure.

5. Move “stop-loss” levels up to recent lows for each position. Managing a portfolio without “stop-loss” levels is like driving with your eyes closed.

6. Be prepared to sell into the rally and reduce overall portfolio risk. You will sell many positions at a loss simply because you overpaid for them to begin with. Selling at a loss DOES NOT make you a loser. It just means you made a mistake.

7. If none of this makes sense to you, please consider hiring someone to manage your portfolio. It will be worth the additional expense over the long term.

Everyone approaches money management differently. Our process isn’t perfect, but it works more often than not.

The important message is that this bearish cycle will end, and the next bull cycle will begin.

Remember, if you “run out of chips” beforehand, you are out of the game.

Almost exactly 10 years ago, billionaire corporate raider Carl Icahn dueled wih fellow billionaire and hedge fund manager Bill Ackman as the latter unveiled a massive short in Herbalife which the former mocked, loaded up on longs and squeezed Ackman for millions in losses.

Icahn remarked at the time:

“If you’re short, you go short and hey, if it goes down you make money. You don’t go out and get a roomful of people to badmouth the company. If you want to be in that business, why don’t you go out and join the SEC?”

Adding that Ackman could face “the mother of all short squeezes” by announcing his major short position, giving other traders something to shoot against.

10 years later, Bloomberg reports that, according to people familiar with the matter, Icahn began shorting GameStop Corp. during the height of the meme-stock frenzy around January 2021 and still holds a large position in the video-game retailer.

Of course, GameStop is different as it was at the center of the massive short-squeeze in early 2021 that left various major (short) hedge fund managers bleeding heavily…

The last few months have seen GME short interest rising modestly (as GME prices have declined)…

The early response to Icahn’s short on social media was relatively measured. News of the wager was shared on Reddit in at least two threads, including in the popular WallStreetBets forum, garnering more than 250 comments as of 9:54 a.m. in Singapore. That pales in comparison to the thousands of responses to GameStop posts during the height of meme mania.

Nevertheless, GME is trading higher overnight (squeeze beginning) after a bloodbath of a day yesterday…

More than one-fifth of GameStop’s shares available for trading are currently sold short, according to data compiled by S3 Partners, more than double the level seen this time last year. That compares to a peak of more than 140% in January 2021 when the retail trading crowd flooded chatrooms on Stocktwits and used memes and GIFs to pump bets on forums like Reddit’s WallStreetBets.

We wonder if Bill Ackman will take a shot?

After trading in the red for much of the overnight session, US futures inched higher shortly after the European open after a volatile session in Asia marked by rising Covid cases in China, while a Fed president turned dovish and showed openness to slowing the path of rate hikes. Futures on the S&P 500 traded near session highs, up 0.4% to 3,972 by 8:00 a.m. in New York, while Nasdaq 100 futures gained 0.1% after struggling for direction. 

Stocks in Hong Kong and Mainland China slipped as China’s daily virus infections climbed to near the highest on record, although a bounce in Japanese stocks pushed overall Asian markets higher. Europe’s Stoxx 600 Index rose, led by energy shares. The dollar weakened against all major currencies and Treasury yields declined. Crude oil prices rose after Saudi Arabia pushed back against reports of a potential OPEC+ production increase. Bitcoin’s gradual, methodic slide continued interrupted by occasional bouts of ungradual, unmethodic panic liquidations.

In premarket trading, Zoom Video dropped after the firm reported its slowest quarterly sales growth on record and trimmed full-year revenue forecasts. Chinese stocks listed in US fell after a ramp-up in Covid restrictions to curb a spike in virus cases across China. Pinduoduo -2.4%, Trip.com -0.6%, Bilibili -2.8%, Nio -2.5%, Li Auto -3.9%. Here are some other notable premarket movers:

• Blackstone shares fall 2.5% in US premarket trading as Credit Suisse cut its rating to underperform from neutral and said that it is awaiting a better entry point for US alternative asset manager stocks.
• Alibaba shares pare losses in US premarket trading after Reuters reported that Chinese authorities are set to hand down a fine of over $1 billion for Jack Ma’s Ant Group, an event market watchers see as an end to Beijing’s prolonged investigation into the fintech firm and a first step to restarting its IPO.
• GameStop shares swing between slight gains and losses in US premarket trading, following a Bloomberg report that billionaire investor Carl Icahn was said to hold a large short position in the video-game retailer.
• Dell Technologies stock slipped 2% in postmarket trading on Monday as the computer company’s revenue forecasts for the current quarter missed estimates, as economic uncertainty begins to affect information technology customers.
• Keep an eye on Amazon.com after its price target was cut at Piper Sandler as AWS revenue decelerates along with an industry-wide slowdown at major cloud computing firms. The brokerage notes, however, that while “industry growth ticks down, AWS leadership remains.”
• Watch Activision Blizzard as Baird raised the recommendation on the stock to outperform from neutral, while downgrading Airbnb, Carvana and Vroom all to neutral since these companies are exposed to pullbacks in discretionary “high ticket” purchases.
• Keep an eye on software stocks, including Workday and Coupa Software as Morgan Stanley cuts price targets across the sector, with analyst saying that consensus estimates for 2023 are likely too high while customer IT budgets are set to be reduced.

“Market sentiment remains toneless for the second trading day of the week as most investors are still struggling to assess the short- to mid-term outlook for risky assets,” said Pierre Veyret, technical analyst at ActivTrades. “Despite the market starting to price in a potential slowing in rate hikes, some Fed officials have moved to temper these anticipations by reiterating their will to tackle inflation, and that this goal was far from being achieved.”

Fed officials continued to highlight the need to curb inflation but hinted that a slower pace of hikes could be possible. On Monday, San Fran Fed President Mary Daly said officials need to be mindful of the lags with which monetary policy works, while repeating that she sees interest rates rising to at least 5%. Separately, Cleveland Fed President Loretta Mester said she has no problem with slowing down the central bank’s rapid rate increases when officials meet next month.

“Markets get jittery whenever the Federal Reserve is due to speak or issue important information,” said Russ Mould, investment director at AJ Bell. “With the central bank set to publish the minutes from its November meeting tomorrow, equity investors need to brace themselves for the Fed to say it is likely to keep raising rates to tame inflation, even though October’s consumer prices figure was below expectations.”

After this quarter’s 10% rally in the S&P 500, Goldman strategists expressed skepticism about US stocks returns next year, setting a 4000 points target for the benchmark by Dec. 2023 as earnings growth stalls. “Zero earnings growth will match zero appreciation in the S&P 500,” strategists led by David Kostin wrote in a note on Tuesday. Then again, the same David Kostin said excatly one year ago that the S&P would close 2022 at 5,100 so expect him to be dead wrong again.

In Europe,  Stoxx Europe 600 Index climbed 0.2%, with energy stocks the best-performing sector as crude advanced after Saudi Arabia denied report of discussion about OPEC+ oil-output hike. BP rose 5.3% and Repsol was 6% higher after both stocks got analyst upgrades. Hong Kong stocks slid as China’s daily virus infections climbed to near the highest on record. Covid-control restrictions now affect a fifth of China’s economy. Still, the eventual easing by China of its curbs to counter the virus are likely to mean that European profits will hold up relatively well because of the benefits to luxury and mining companies, according to strategists at Goldman Sachs. Here are some of the notable European movers:

• AO World shares jumped as much as 17%, to the highest since early July, after the online appliances retailer raised its FY adjusted Ebitda forecast.
• Verbund rose as much as 8.2% after Stifel upgraded the utility company to buy from hold, saying conditions of Austria’s price cap are “much better” than had been anticipated.
• Allfunds shares fell as much as 11% after a discounted share offering by holders LHC3 and BNP Paribas in the mutual-fund distributor.
• Shares in digital price-tag maker SES- imagotag fell as much as 6%, before paring the drop, after majority shareholder BOE Smart Retail offered 1.5 million shares at a 7.3% discount to the last close.
• ThyssenKrupp declined as much as 5.9% after holder Cevian offered ~23.4m shares via UBS with price guidance of €5.15 apiece, representing a 4.7% discount to last close.
• Vodafone shares fell as much as 3.4% after the telecoms group was double-downgraded to underperform from outperform at Credit Suisse, which cited a growing risk to the dividend and elevated costs weighing on its outlook.

Earlier in the session, Asian stocks advanced as the yen’s recent weakness boosted Japanese exporters, offsetting losses in Chinese tech shares. The MSCI Asia Pacific Index gained as much as 0.7%, with Japanese firms Toyota, Sony and Mitsubishi helping lift the gauge along with Taiwan’s TSMC. Up more than 10% this month, the MSCI Asian stock benchmark has outperformed its US or European peers in November thanks to China’s rally.  Among sectors, energy and industrials advanced the most, while communication services and consumer discretionary shares edged lower. Chinese stocks in Hong Kong fell for another day, as a worsening outbreak on the mainland raised doubts as to whether authorities can hold on to their softer Covid Zero stance. A rally this month fueled by reopening hopes has now come to a halt as investors come to terms with China’s Covid reality.  “As we’ve seen in the Covid issues in China, it’s going to be stop-go sort of news flow in terms of the lockdowns et cetera and that’s going to add volatility to markets,” Lorraine Tan, director of equity research at Morningstar, said in an interview with Bloomberg TV.

Japan equities climbed as the yen’s retreat over the past four days supported exporters’ shares in the face of concerns over China’s Covid Zero policy and the Federal Reserve’s hawkish stance.   The Topix rose 1.1% to 1,994.75 as of the market close in Tokyo, while the Nikkei 225 advanced 0.6% to 28,115.74. Toyota Motor contributed the most to the Topix’s gain, increasing 2.3%. Out of 2,165 stocks in the index, 1,737 rose and 366 fell, while 62 were unchanged. “There is an impression that the market will be quiet with no major selloffs ahead of the Japanese and US holidays,” said Hirokazu Kabeya, chief global strategist at Daiwa Securities. “In some aspects, it is difficult for the stock market to fall as investors find it hard to make a move.” 

Stocks in Malaysia fell for a second day after Saturday’s election produced the country’s first-ever hung parliament. Australia’s equity benchmark rose to a five-month high buoyed by miners.The S&P/ASX 200 index rose 0.6% to close at 7,181.30, its highest since June 6, driven by a rebound in mining and energy shares.  In New Zealand, the S&P/NZX 50 index fell 0.2% to 11,420.42. New Zealand’s central bank is poised to raise interest rates by an unprecedented 75 basis points on Wednesday, accelerating its monetary tightening to get inflation under control. Elsewhere, markets were mixed with moderate gains or losses. 

In FX, the Bloomberg Dollar Spot Index fell as the greenback fell against all of its Group-of-10 peers. Risk-sensitive Antipodean currencies and the Norwegian krone were the top performers. CFTC data showed that speculative and institutional traders turned their back to the dollar yet again last week as the currency stayed under pressure. At the same time, one-month risk reversals in the Bloomberg Dollar Spot Index rallied in favor of the topside.

• The euro rose versus the greenback but underperformed most of its major peers. Bunds slipped and Italian bonds inched lower.
• The pound rose against a broadly weaker dollar and was steady against the euro. Data showed UK government borrowing grew less than forecast in October, ahead of a testimony in Parliament by officials from the Office for Budget Responsibility.
• The yen rose for the first time in five days after remarks from some Federal Reserve officials solidified bets for smaller US rate hikes. Japan’s yield curve steepened a tad ahead of a local holiday. One-week risk reversals in dollar-yen traded earlier at 24 basis points in favor of the Japanese currency, which marked the least bearish sentiment for the greenback in more than a month.

In rates, Treasuries ground higher leaving yields near session lows into the early US session with 10-year at around 3.79%. Bunds and gilts both lag Treasuries, trading slightly cheaper over early London session. US session focus is on Fed speakers and conclusion of this week’s auctions with a 7-year sale at 1pm.  Treasury 10-year yields outperforming bunds and gilts by ~5bp on the day. Long-end of the Treasuries curve underperforms, steepening 10s30s spread by 2.5bp on the day.  This week’s auctions conclude with $35b 7-year note sale at 1pm, follows Monday’s double auction of 2- and 5-year notes.

In commodities, it has been a contained session for the crude complex after yesterday’s WSJ fake news-prompted rollercoaster, with benchmarks higher by around 1% amid further pushback to the production increase report. Kuwait Oil Minister has pushed back against reports of any discussions over OPEC+ raising production at its next meeting, according to the State news agency; Iraq’s SOMO says no discussions have taken place over an increase at the next OPEC meeting. China has reportedly paused the purchase of some Russian oil, awaiting details of the price cap to see if it provides a better price. Spot gold and silver are firmer, with the yellow metal at session highs just below the USD 1750/oz mark as risk sentiment struggles to find firm direction and the USD continues to pullback. For reference, the current spot gold peak of USD 1748/oz is shy of the 10-DMA at USD 1755/oz and still some way from the 200-DMA at USD 1801/oz.

Cryptocurrency prices were mixed, with investors braced for more ructions as further digital-asset sector bankruptcies loom following the demise of Sam Bankman-Fried’s FTX empire.

Looking to the day ahead now, and central bank speakers include the Fed’s Mester, George and Bullard, along with the ECB’s Holzmann, Rehn and Nagel. Data releases include Euro Area consumer confidence for November, as well as the US Richmond Fed manufacturing index for November. Lastly, the OECD will be releasing their Economic Outlook.

Market Snapshot

• S&P 500 futures up 0.2% to 3,964.00
• STOXX Europe 600 up 0.6% to 435.56
• MXAP up 0.4% to 151.12
• MXAPJ down 0.1% to 486.08
• Nikkei up 0.6% to 28,115.74
• Topix up 1.1% to 1,994.75
• Hang Seng Index down 1.3% to 17,424.41
• Shanghai Composite up 0.1% to 3,088.94
• Sensex up 0.4% to 61,380.15
• Australia S&P/ASX 200 up 0.6% to 7,181.30
• Kospi down 0.6% to 2,405.27
• German 10Y yield little changed at 1.99%
• Euro up 0.3% to $1.0272
• Brent Futures up 0.7% to $88.04/bbl
• Gold spot up 0.5% to $1,745.92
• U.S. Dollar Index down 0.35% to 107.46

Top Overnight News from Bloomberg

• More than six years after voting to leave the EU, the UK is facing a prolonged recession, a deep cost-of-living crisis and a shortage of workers. Last week’s Autumn Statement heralded years of higher taxes and cuts to public spending
• The ECB needs to maintain the pace of rate increases at its next meeting on Dec. 15 to demonstrate policy makers are “serious” about taming inflation, Financial Times reports, citing an interview with Robert Holzmann, governor of the National Bank of Austria and member of the ECB’s governing council
• Germany will introduce a cap on gas and electricity prices for companies and households as Europe’s largest economy seeks to contain the fallout from Russia’s moves to slash energy supplies. Large parts of German industry will no longer be able to avoid production cuts if companies need to further reduce natural gas consumption, according to a survey
• Italy has signed off on a €35 billion ($36 billion) budget law for next year which will raise a windfall tax on energy companies in order to expand aid to families and businesses hit by higher prices
• Spain announced a series of steps to shield mortgage-holders on lower incomes from rising costs, stepping up efforts to cushion the economic blow from high inflation and surging interest rates
• The premium investors pay for German two-year bonds over equivalent swaps has dropped to levels last seen in July in recent days, down more than 40 basis points from a record high in September. It comes after the German finance agency and the European Central Bank took steps to increase the supply of debt available to borrow in repo markets
• An FTX Group bankruptcy filing showed that the fallen cryptocurrency exchange and a number of affiliates had a combined cash balance of $1.24 billion
• A new currency trading algorithm developed by a Dutch fund threatens to wrest away millions of euros of fees from investment banks if it gains traction in the pension industry
• China’s overnight repo rate plunged to its lowest level in nearly two years, an indication that a liquidity squeeze seen last week has eased following measures by the central bank

A more detailed look at global markets courtesy of Nesquawk

Asia-Pac stocks were mostly positive as the regional bourses attempted to recover from the recent China COVID woes but with price action contained amid quiet newsflow and a lack of fresh macro drivers. ASX 200 was positive amid strength in the commodity-related sectors in which energy led the advances after oil prices rebounded following Saudi’s denial that it was considering a production increase. Nikkei 225 higher and reclaimed the 28,000 level with early outperformance in Shionogi after its COVID-19 therapeutic drug was presumed effective by Japan’s PMDA. Hang Seng and Shanghai Comp traded mixed with Hong Kong pressured by weakness in the tech sector, while losses in the mainland were reversed after the latest policy support pledges by China including measures to sustain the recovery momentum of the industrial economy and with the PBoC to release CNY 200bln worth of loan support for commercial banks to ensure near-term delivery of homes.

Top Asian News

• US Defence Secretary Austin met with Chinese Defence Minister Wei Fenghe in Cambodia, according to a US official cited by Reuters. US Defence Secretary Austin discussed the need for dialogue on reducing risk and improving communication with his Chinese counterpart, according to a Pentagon spokesperson. Furthermore, Austin raised concern about increasingly dangerous behaviour by Chinese aircraft which increases the risk of an accident and he reiterated that the US remains committed to the longstanding Once China Policy.
• Chinese Defence Ministry spokesman said the main reason for the current situation faced by China and the US is because the US made the wrong strategic judgement. In relevant news, Global Times’ Hu Xijin tweeted that the meeting between the two defence ministers must be supported and that no matter how many frictions, China and the US cannot fight militarily which is the bottom line and the two sides’ due responsibility to the world.
• EU is poised to renew sanctions on Chinese officials accused of human rights violations in Xinjiang for an additional year, according to SCMP.
• RBA’s Lowe say the Bank is not on a pre-set path and could return to 50bps increase or keep rates unchanged for a time. The Board expects to increase interest rates further over the period ahead. Understand that many people are finding the rise in interest rates difficult. It is necessary, though, to ensure that the current period of higher inflation is only temporary.
• Beijing City reports 634 (prev. 274) COVID infections on November 22nd as of 3pm, according to a health official, via Reuters. Subsequently, Beijing will tighten COVID testing requirements as of November 24th, according to an official; COVID tests within 48 hours will be required to enter public venues.

European bourses are modestly firmer, Euro Stoxx 50 +0.2%, though fresh developments have been limited and the upside itself is tentative at best. Sectors are mixed with the likes of Energy outperforming after yesterday’s noted pressure, no overarching bias present in the European morning. Stateside, US futures are near the unchanged mark but have, similar to European peers, been modestly firmer/softer throughout the morning, ES +0.1%. Samsung Electronics (005930 KS) is to jointly develop 3nm chips with five-six fabless clients for large quantity supply as soon as 2023, via Korea Economic Daily citing sources.

Top European News

• ECB’s Centeno sees conditions for rate hikes to be less than 75bps in December and said they “really have to reverse” the trend of rising inflation to have greater visibility on monetary policy, according to Bloomberg.
• ECB’s Holzmann said he supports a 75bps hike in December and noted there are no signs that price pressures are easing, according to FT.
• ECB’s Rehn says they will probably hike rates again, pace depends on how the economy develops.
• ECB’s Nagel says a 50bp rate hike is “strong”, rates are still “relatively far” from restrictive territory, via Reuters; calls for commencing a gradual APP unwind in Q1-2023.
• Italy approved a EUR 35bln budget law for next year which plans to increase an energy windfall tax, according to Bloomberg.

FX

• Dollar loses recovery momentum as risk appetite picks up, DXY drifts between 107.810-300 bounds and retests a Fib retracement level just over 107.500
• Kiwi rebounds to top 0.6150 vs Buck irrespective of worrying NZ trade data, as RBNZ looms amidst expectations of a larger 75bp hike in the OCR
• Aussie recovers alongside Yuan and amidst comments from RBA Governor Lowe reaffirming guidance for further tightening, AUD/USD eyes 0.6650 from around 0.6600 at the low
• Loonie regains poise in tandem with oil and probes 1.3400 against its US rival pre-Canadian data and remarks from BoC’s Rogers
• Yen, Franc, Euro and Pound all take advantage of Greenback fade plus yield convergence to Treasuries as USD/JPY reverses from 142.00+ and USD/CHF from almost 0.9600, while EUR/USD eyes 1.0300 and Cable 1.1900 vs sub-1.0250 and 1.0825.

Fixed Income

• Rangebound trade for core fixed income, though intraday boundaries have extended on both sides throughout the European morning as the complex struggles for firm direction.
• Bund unreactive to a well-received Bobl auction while USTs are a handful of ticks firmer ahead of the week’s last US auction, with volumes currently fairly light.
• Note, final orders for the UK’s 0.125% 2073 Gilt I/L exceed GBP 16.8bln, according to a bookrunner, with pricing set 20bp below the 2068 comparable.

Commodities

• Comparably contained session for the crude complex after yesterday’s pronounced OPEC+ related price action; benchmarks currently firmer by around 0.5% amid further pushback to the production increase report.
• White House Press Secretary said President Biden is committed to further lowering gasoline prices.
• Kuwait Oil Minister has pushed back against reports of any discussions over OPEC+ raising production at its next meeting, according to the State news agency; Iraq’s SOMO says no discussions have taken place over an increase at the next OPEC meeting.
• China has reportedly paused the purchase of some Russian oil, awaiting details of the price cap to see if it provides a better price, via Bloomberg citing sources.
• German gas price break will apply retroactively from January, via der Spiegel; reduction in gas and heat prices is not expected to take effect until March 1st.
• European Commission proposes to introduce a gas price correction mechanism for one-year from January 1st 2023, via Reuters citing draft legislation; proposal leaves the actual price cap blank for now. Diplomats say that EU gov’ts want the gas price cap at EUR 159-180/MWh, vs the much higher cap expected to be proposed by the Commission.
• UK officials visited Brazil in October to assess the regions beef standards, via Politico; a visit which has fuelled hopes in Brazil of a future trade deal.
• Spot gold and silver are firmer, with the yellow metal at session highs just below the USD 1750/oz mark as risk sentiment struggles to find firm direction and the USD continues to pullback
• For reference, the current spot gold peak of USD 1748/oz is shy of the 10-DMA at USD 1755/oz and still some way from the 200-DMA at USD 1801/oz.

Geopolitics

• Moscow considers a search necessary for a peaceful solution to the Kurdish issue after Turkey’s strikes in Syria and believes Turkey should restrain from the use of excessive military force, according to RIA citing Moscow’s Syria envoy.
• N. Korea will take an ultra strong response to anyone that interferes with its sovereign rights, via KCNA; US will face a greater security crisis the more it insists on taking hostile actions.

US Event Calendar

• 10am: U.S. Richmond Fed Index, Nov., est. -8, prior -10

Central bank speakers

• 11am: Fed’s Mester Discusses Wages and Inflation
• 11:45am: Bank of Canada’s Carolyn Rogers Speaks on Financial Stability
• 2:15pm: Fed’s George Takes Part in Policy Panel
• 2:45pm: Fed’s Bullard Discusses Heterogeneity in Macroeconomics

DB’s Jim Reid concludes the overnight wrap

A decent slug of yesterday was spent debating whether England’s 6-2 win at the World Cup was a performance to scare the world of football into submission or whether Iran’s 20th spot in the FIFA World rankings may slightly flatter them. As ever, your opinions are welcome! Good luck to all your teams as the WC introduces a few big hitters today!

I’m not sure if it was the World Cup but markets had a rather slow and lacklustre start to the week yesterday. The S&P 500 (-0.39%) fell back amidst concerns about rising Covid cases in China and ongoing fears about a US recession next year. The effects were evident across multiple asset classes, and WTI oil prices fell below their start of 2022 levels briefly intra-day (-6.24% on the day at the lows) as investors grappled with the prospect of lower Chinese demand alongside speculation about an OPEC+ output increase, which was eventually denied. WTI rallied back hard on a Saudi denial of the story to close just -0.44% lower, while Brent futures were -6.06% lower before closing down only -0.19%. In Asia trading, WTI prices (+0.74%) have climbed back above the start of week levels and are trading just above $80/bbl while Brent futures (+0.49%) are fractionally higher as we go to print.

In terms of what’s coming out of China, there are growing concerns among investors that there’ll be a return to lockdowns following the weekend news that they’d had their first Covid death in six months. The overall rise in case numbers now makes this the third-largest outbreak of the pandemic so far, behind only the Shanghai lockdowns in Q2 and the Wuhan outbreak in early 2020. Beijing has increased its restrictions, and now requires arrivals to take three PCR tests within the first three days and to stay at home until they get a negative result. In the Haidian district of Beijing, schools have now switched to online learning as well. This has all served to dampen the speculation of recent weeks that China might be moving gradually away from its zero-Covid strategy, and the city of Shijiazhuang has even asked residents to stay at home for 5 days. China recorded 27,307 new local Covid cases nationally yesterday, almost close to the record high of 28k seen in March.

The irony is that the China reopening story has been a big positive driver of China-related risk and overall markets over the last couple of weeks, so we are trading between feast and famine on this story. Both could of course be ultimately right. There might be many more restrictions in the near term but stronger more durable reopenings by the spring. Markets are struggling to price this at the moment though.

For now, the effects were apparent among Chinese stocks listed in the US, with companies like Alibaba (-4.41%), JD.com (-6.37%) and Bilibili (-8.15%) underperforming the broader equity moves. The Chinese Yuan (-0.64%) also weakened against the US Dollar, although to be fair this was partly a function of dollar strength.

Overnight in Asia, China risk has bounced a bit. The Shanghai Composite (+0.75%) and the CSI (+0.77%) are both up alongside the Nikkei (+0.72%). The Hang Seng (-0.39%) and KOSPI (-0.35%) are both lower. US equity futures are just above flat as we type.

Staying with equities, the earlier plunge in oil prices was bad news for energy stocks, which were among the biggest sectoral underperformers on both sides of the Atlantic. By the close of trade, the S&P 500 was down -0.39%, with energy down -1.39%, rallying midday from -4.64% to beat out consumer discretionary shares which were -1.41% lower. A number of other cyclical industries underperformed as well, and the NASDAQ fell -1.09% on the day, whilst the small-cap Russell 2000 fell -0.57%. In Europe, the performance was marginally better, but that still wasn’t enough to stop the STOXX 600 posting a very marginal -0.06% decline, with energy (-3.02%) far and away the underperformer as shares closed near the nadir of Brent and WTI futures pricing. There clearly should be a bounce this morning.

The more negative tone out of China yesterday has only added to existing fears about a US recession over the coming months, which the latest moves in the Treasury yield curve did little to dispel. The 2s10s yield curve flattened another -2.2bps to -73bps taking it beneath the 1982 low of -71.65bps to a level unseen since 1981. This came as the 10yr tracked intraday pricing in oil as well, having fallen as much as -7.1bps intraday before finishing the day more or less unchanged. This morning in Asia, 10yr UST yields (-1.12 bps) are slightly lower, trading at 3.82%.

There have been a few Fed speakers over the last 24 hours to impact treasury pricing. SF Fed President Daly warned against the two-sided risks of over-tightening, but hinted that her estimate of terminal may have risen to around 5.1% since the November meeting. Meanwhile, Cleveland Fed President Mester supported downshifting to a 50bps hike in December, but noted the Fed was not “anywhere near to stopping”, echoing Chair Powell’s tone from the November FOMC presser. There’s quite a bit of Fed speak today as you’ll see in the day ahead at the end.

Whilst it’s widely expected that the Fed will slow down the pace of hikes to 50bps in December, there’s somewhat more doubt about the ECB’s next move the following day, who it seems are still weighing up another 75bps hike or slowing down to 50bps. Yesterday, we heard from Austria’s Holzmann (a hawk), who said he’d only favour a 50bps hike if there was a “major reduction” in inflation this month. But Portugal’s Centeno (a dove) said that the conditions were in place for a hike beneath 75bps next month. Separately, Slovenia’s Vasle talked about the need for restrictive policy, saying that the ECB needs to “keep gradually raising rates, even into the territory where monetary policy won’t be just neutral, but will become more restrictive.”

European sovereigns seemed unfazed by this debate, trading in line with the broader global moves. Yields on 10yr bunds (-2.1bps) and OATs (-1.8bps) moved lower, but there was an underperformance among southern European countries, with yields on Italian BTPs up +4.3bps. Interestingly, there was a notable downside surprise in the latest German PPI reading, which came in at +34.5% in October (vs. +42.1% expected). Now it’s worth noting that the decline was driven by energy, but at -4.2% on the month, that was the first monthly decline in the index since mid-2020.

To the day ahead now, and central bank speakers include the Fed’s Mester, George and Bullard, along with the ECB’s Holzmann, Rehn and Nagel. Data releases include Euro Area consumer confidence for November, as well as the US Richmond Fed manufacturing index for November. Lastly, the OECD will be releasing their Economic Outlook.