Thursday, 7 July 2016

The most under-reported financial crisis in history

"It Feels Like 2008" Government Bond Yields Signal "Something Very Nasty Is Coming"

Zero Hedge,
6 July, 2016

With global developed market bond yields crashing to record lows and almost $10 trillion of negative-yielding debtworldwide, it is no surprise that money managers are concerned that "it's starting to feel like 2008."

Global developed market bond yields crashed once again to new record lows overnight at just 40.0bps (having plunged from 63bps pre-Brexit)...
As negative yields become the new normal around the world. Japan and France are leading the way as demand for the safest assets boosts the amount of global bonds with negative yields to $9.8 trillion, according to Bloomberg World Sovereign Bond Indexes.


That’s up from $8.35 trillion before Britain voted to leave the European Union last month. 
The latest new entrants include Japan’s 20-year bonds, and French nine-year securities, which both saw yields drop below zero for the first time in the past 24 hours.
As John Anderson, a money manager at Smith & Williamson Investment Management in London concluded:

"Government bond yields are telling you something very nasty is about to happen. These property fund suspensions are a worry. I am risk-off at the moment, erring on the side of believing the govvies,"
Certainly seems like ever since Bernanke went back to the money-printing game after QE2 that he broke the stock market's ability to signal anything...
Because the days of 'fundamentals' are long gone...

"The Dominoes Are Fallling": Three Largest UK Property Funds Freeze$12 Billion In Assets, More To Come


As first reported last night, and following up this morning, in an episode painfully reminiscent of the Bear hedge fund "freezes" that preceded the bank's 2008 collapse and the great financial crisis, first 
the UK's Standard Life halted tradingin its property fund, followed hours later by both Aviva and M&G which likewise announced they are suspending trading in their own portfolio funds. And, as Bloomberg summarizes, three of the U.K.’s largest real estate funds have frozen almost 9.1 billion pounds ($12 billion) of assets after Britain’s shock vote to leave the European Union sparked a flurry of redemptions.

These were the first major dominoes to fall as a result of the confusion resulting from the Brexit vote. M&G Investments, Aviva Investors and Standard Life Investments halted withdrawals 
because they don’t have enough cash to immediately repay investors. About 24.5 billion pounds is allocated to U.K. real estate funds, according to the Investment Association.

The rush by private investors to withdraw money prompted M&G, which held 7.7% in cash before the vote, to suspend its 4.4 billion-pound Property Portfolio fund and Aviva Investors to freeze its 1.8 billion-pound Property Trust on Tuesday. Standard Life halted trading on its 2.9 billion-pound U.K. real estate fund on Monday. The cash position for Aviva and Standard Life’s funds at the end of May was 9.3% and 13.1% respectively.

The market reaction has been swift and brutal, sending stocks of the property-linked asset managers crashing.



Standard Life is among firms, including Aberdeen Asset Management Plc, Henderson Group Plc, Legal & General Group Plc and M&G to adjust the value of assets in their property funds last week. Holdings in the funds range from an office building in Birmingham, to a mall in Newcastle and retail warehouses in Northampton.

Investor redemptions in the fund have risen markedly because of the high levels of uncertainty in the U.K. commercial property market since the outcome of the European Union referendum,” M&G said on its website. Outflows “have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension.”

The dominoes are starting to fall in the U.K. commercial property market,” 
said Laith Khalaf, a senior analyst at Hargreaves Lansdown. “The problem these funds face is that it takes time to sell commercial property to meet withdrawals, and the cash buffers built up by the managers have been eroded by investors heading for the door.”

Cited by Bloomberg, "
the drop-off in inflows and then redemptions forces these funds to eat into their liquidity buffer,” 
much of which is held in real estate investment trust shares, Mike Prew, an analyst at Jefferies LLC, said in a note to clients on Tuesday.

While traders around the globe had been mostly focused on the downstream effects slamming Italian banks in recent weeks, the news of "freezing" UK property funds spooked global markets, and as a result the pound fell to its weakest level in three decades against the dollar Tuesday, surpassing lows reached in the aftermath of the Brexit vote. Bank of England Governor Mark Carney pledged to shore up financial stability on a day when a survey showed a plunge in U.K. business confidence, but has so far failed to achieve that.

The biggest concern prompting the redemptions is that according to industry commentators London office values could fall by as much as 20 percent within three years of the country leaving the EU. During the financial crisis of 2007 and 2008, real estate funds were forced to freeze operations after withdrawals surged, contributing to a property-market slump that saw values drop more than 40% from their peak in the U.K.

As Bloomberg adds, regulators had already planned to meet with the U.K.’s largest asset managers on Tuesday to discuss the effect of Brexit on the industry. The meeting - which could not come fast enough - takes place as the Financial Conduct Authority’s new chief executive officer Andrew Bailey told reporters that while the fund suspensions were not a “panic measure,” 
the regulator “may need to look at the design” of property funds. Just like the SEC looked at the design of open-ended junk bond funds during the late 2015 blow up in that asset space.

Almost 3 billion pounds has been wiped from the market value of the FTSE 350 Real Estate Investment Trust Index since trading started Monday. Land Securities Group Plc, the U.K.’s largest REIT, tumbled 9.1 percent over the period.

Other funds remain hopeful that redemptions will slow enough to prevent further gating:





A spokesman for Aberdeen said the company has no plans to suspend trading in its funds, saying that redemptions have started to slow and its U.K. property fund holds about 20 percent in cash. Henderson declined to comment, while L&G said its U.K. property fund is “well positioned” in terms of liquidity and asset management.

Good luck, because as Emma Bewley, head of funds at Connection Capital in London told Bloomberg, “

the potential impact of a high-profile liquid fund suspending redemptions shouldn’t be underestimated, particularly given the uncertain environment. 

While asset managers will seek to avoid suspending redemptions, they may have to use additional liquidity facilities” such as lines of bank credit."
In other words, half a year after the junk bond mutual fund scare, and just months after most central banks unleashed the strongest salvo in the global race to debase yet, the global financial system finds itself in dire straits yet again.

Naturally, all of this assumes that Italian banks will remain perfectly solvent for the duration of the current crisis, something which as Matteo Renzi's urges to get permission from Europe for a bank bailout suggests will not be the case considering he "
hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits.

" Because once the bank runs do start - precipitated of all things by fears that Europe's brand new bail-in regime will be instituted in one of Europe's largest economies, then it will really be time to panic.

Britain's FTSE 100 one of world's best performing stock markets since Brexit vote


© Russell Boyce


Despite the fear campaign surrounding the UK leaving the European Union, London's premier exchange has been the best performer among the world's major stock markets.

Since the referendum on June 23, Britain's FTSE 100 index has gained two percent as of Wednesday afternoon’s trading. Meanwhile, major European, US and most Asian stock markets are in the red over the same time period.
Germany's DAX and the CAC 40 index in Paris have lost over eight percent since the UK vote. Major US indices, Dow Jones, the S&P 500 and the Nasdaq are down over one percent for the period.

Among major Asian markets, Japan's Nikkei has lost over five percent, the Hong Kong exchange is almost two percent lower and only China's Shanghai Composite saw gains of over four percent since the referendum.

The Brexit vote sent shockwaves through global financial markets wiping off trillions of dollars in value during the two-day selloff following the referendum.
However, after two days of losses, London's FTSE 100 has managed to recover and hit a ten-month high last week.

Some analysts continue to warn the recent market recovery might only be temporary.

Considering there's been no additional clarity on the terms of Brexit or the outlook for the UK economy and the global economy since Britain's decision to leave the European Union, we don't see fundamental support for the recent moves,"Kathy Lien, managing director of foreign exchange strategy at BK Asset Management, told the BBC.

London's FTSE was trading lower on Wednesday, down around 1.5 percent as of 14:00 GMT.








EU Banks Crash To Crisis Lows As Funding Panic Accelerates




The signs are everywhere - if you choose to look - Europe's banking system is collapsing (no matter what Draghi has to offer). From record lows in Deutsche Bank and Credit Suisse to spiking default risk in Monte Paschi, the panic in Europe's funding markets (basis swaps collapsing) is palpable.


Tumbling to a fresh post-Brexit low, Europe's Stoxx 600 Bank Index is testing EU crisis lows...
With Credit Suisse smashing to record lows...


and Deustche Bank crashing towards the inevitable Lehman moment...

As it seems the most systemically dangerous bank in the world is liquidating aggressively (via Reuters)







Deutsche Bank is looking to sell at least $1 billion of shipping loans to lighten its exposure to the sector whose lenders face closer scrutiny from the European Central Bank, sources told Reuters.
While the oil tanker trade has picked up, the container and dry bulk shipping industries are struggling with their worst downturn due to a glut of ships, a faltering global economy and weaker consumer demand.
Banking and finance sources familiar with the matter said Germany's biggest lender was initially looking to offload at least $1 billion.
"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. "They are not looking to exit shipping."
Deutsche Bank, which has around $5 billion to $6 billion worth of total exposure to the shipping sector, declined to comment.
Senior and Sub CDS are widening dramatically today with Italy's short-sale ban on Monte Paschi shares sparking a 10% bounce in the stock but CDS are unchanged implying a 66% chance of default.



Notably BMPS shares are leaking back lower after the opening ramp (desk chatterof takeover rumors have been dismissed) and the rest of the Italian banking sector is catching its cold (as we warned it would when Consob instigated the short-sale ban)
Which helps explain the crisis in Europe's funding markets as USD demand smashes higher (-9bps to -49bps in EUR-USD basis swaps)...
With counterparty risk concerns growing in Sterling banks...
Charts: Bloomberg






Three UK Asset Managers Freeze Withdrawals From Property Funds

In the wake of Brexit, investor fears on the value of property, especially in London have surfaced.
A flurry of redemptions from property funds is so great that three UK fund managers froze redemptions. And the British pound is at 100-year lows.
British Pound
Three Funds Freeze Withdrawals
 Three asset managers froze withdrawals from real-estate funds following a flurry of selling and the pound plunged to a 31-year low less than two weeks since the nation backed quitting the European Union. Rushing to fill the political vacuum, Bank of England Governor Mark Carney signaled easier monetary policy and urged prudence on households.
I am expecting quite a sharp reduction in investment spending, a sharp hit to the commercial property market, probably a check to consumer spending, all of which could push us towards zero or below growth,” John Gieve, a former deputy governor of the Bank of England and veteran of the last crisis, told Bloomberg Television.
Reacting to a rush by investors to redeem their money, M&G Investments and Aviva Investors followed Standard Life Investments in suspending trading in commercial-property funds that together total 9.1 billion pounds ($11.9 billion dollars). Industry analysts have warned that London office values could fall by as much as 20 percent within three years of the U.K. leaving the EU.
20% Correction a Bad Thing?
Property values in London are so ridiculous, one has to ask: Are falling real estate prices a bad thing or a good thing?
Is 20% just a start of what’s to come? Is Brexit to blame or simply a catalyst for an eventuality already baked into the cake?
On a side note, I seldom link to Bloomberg anymore. In fact, I seldom even read Bloomberg anymore thanks to auto-play videos that are hard to kill. I cannot stand autoplay, and nearly every Bloomberg article comes loaded with the damn things.
Mike “Mish” Shedlock

Keiser Report: Oh my God, Brexit
In this episode of the Keiser Report from Washington DC Max and Stacy discuss NIRP absurdity as negative yielding sovereign bonds top $11.7 trillion whilst futures spike on banks buying back their own shares. In the second half Max interviews Ed Harrison about negative interest rates and the Brexit aftermath. 


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