One of the main reasons a month ago we started carefully following the commodity trading giants, the Glencores, Mercurias and Trafiguras of the world…
Which will be first: Trafigura, Mercuria or Glencore
— zerohedge (@zerohedge) July 22, 2015
… is because nobody else was.
Perhaps due to their commodity trading operations, these companies were expected to be immune from the mark-to-market vagaries of the commodity collapse on their balance sheet, and as such presented far less interest to market participants than pure-play miners whose stocks have gotten crushed since the commodity collapse and subsequent relapse.
And then, yesterday, Glencore “happened” and everyone was so shocked by the company’s abysmal results, which as we explained may servce as “The Next Leg Of The Commodity Carnage: Attention Shifts To Traders – Glencore Crashes, Noble Default Risk Soars.” This took place a day after we penned “Noble Group’s Kurtosis Awakening Moment For The Commodity Markets” in which we profiled the ongoing slow-motion trainwreck of Asia’s largest commodity trader.
Of course, Glencore’s problems should not have been reason for surprise: after all it was a bet on a surge in Glencore’s default risk that prompted us to write “Is This The Cheapest (And Most Levered) Way To Play The Chinese Credit-Commodity Crunch?” in March of 2014 as a levered and relatively safe way to trade crashing copper prices (since then, Glencore CDS have doubled).
And so others started to notice.
So with Wall Street’s attention suddenly focused, with the usual delay, almost exclusively on the commodity hybrids, it was none other than Bank of America which earlier today reserved a very special place for a possible collapse of these companies. In fact, the “credit event” (read “failure”) of a company like Glencore is precisely what BofA’s Michael Hartnett said “may be necessary to cause policy-makers to panic.“
Bank of America starts with a chart that ZH readers are all too familiar with: a comparison of the CDS of Noble and Glencore which as duly noted many times already, have recently spiked:
And here is why Bank of America decided to suddenly focus on a small subset of the commodity sector, one which we have been fascinated with for over a month: to BofA the collapse of either of these two companies is the necessary and/or sufficient condition for the Fed to exit its recent trance, and reenter and bailout the market.
That’s right: Bank of America is begging for another Fed – assisted market bailout, which gladly hints would be accelerated should Glencore experience a premature “credit event.” To wit:
Short-term, markets seem intent on forcing either the Fed to pass in September, or the Chinese to launch a more comprehensive and credible policy package to boost growth expectations. Alternatively, a credit event in commodities (note CDS is widening sharply for resources companies – front page chart) may be necessary to cause policy-makers to panic. Markets stop panicking when central banks start panicking. We think that is increasingly likely in September, thus arguing that risk-takers should soon look to add risk, particularly on any further weakness.
We thank Bank of America for making it quite clear what the catalyst for QE4 will be (and why we should double down on the Glencore long CDS trade), but we are confused: how is the Fed expected to “panic” in September when that is when BofA’s crack economists predict the Fed will hike rates. If anything, a rate hike is supposed to calm the market and give confidence that the Fed is on top of the situation, even if as has been clearly the case, the US economy, not to mention the global one, are both going into reverse.
And while that is a major loose end to any trading thesis BofA may want to present, it does hedge by saying that all bets on a market bailout are off if the Fed and other central banks have now “lost their potency”, i.e., if the market’s faith in money printing has ended.
Finally, we believe the inexorable rise in volatility as QE programs wane leads to the ultimate risk. In our view, all investment strategies have been tied in recent years to the power of central banks. There are few bond vigilantes willing to punish profligate governments, fewer currency speculators willing to defy central bank intervention, and investors have become adept at front-running policy-makers and/or expecting central banks will “blink” at signs of market volatility. We believe a loss of central bank potency is an unambiguous risk-off.
Indeed, we too believe that if not even central banks can boost this market, then the time to get the hell out of Dodge is at hand. And while exiting, make sure to have a lot of gold, silver and lead. Because if the days of Keynesian voodoo and fiat are almost over, then absolutely nobody has any idea what lies ahead.
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