Iran's Currency Is Surging Against The Dollar Following The Latest Elections

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In One Chart, Here's How Assets That People Thought Were 'Safe' Got Buried

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NOMURA: It Was An Epic Week, The Rules Have Changed, And There Will Be No Reversing The Fed's Big Bang

Here's how you know we had a huge week in the market: Research analysts start using blogger terminology in their notes.

George Goncalves, the top interest rate strategy at Nomura, has a note out titled "The Fed's Big Bang Moment, Reversible?" and it starts like this:

An epic week, to say the least, as markets re-priced to what some are calling the start of a new hawkish Fed world order.

And it gets better:

Unless one believes in time-travel, one cannot reverse the Fed‘s big bang moment. Given the rules changed, we need to respect the shift, take a step back and re-analyze our views for now.

So what exactly happened this week to prompt such talk of "epic" moves?

Well if you were only going to look at one chart, it would have to be the yield on the 10-year US bond.

As you can see on this chart via Bloomberg, the yield has been rising since the beginning of May, but in the last week it went vertical, with interest rates ending at 2.53%.

So what's this new "hawkish" Fed all about.

Essentially what happened was, Bernanke made it clear that the "taper" (the wind down of bond purchases) is on. Assuming the economy stays on forecast, the taper will start later this year, with a goal of having it wrapped up sometime in the middle of next year. It was his certainty that this is indeed the plan (as he even put some hard numbers next to the QE thresholds) that seemed to spook the market the most.

In a note published right after the Bernanke press conference, Goldman's Jan Hatzius identified 5 reasons why you could characterize Bernanke as hawkish. We summarize in bullets:

The Fed is putting hard numbers for the first time on the winddown of QE.The unemployment rate forecast was lowered significantly.The Fed says downside risks were diminished.The Fed was dismissive of current disinflation trends (said they were transitory).And Bernanke was clearly not concerned about the above spike in interest rates (in fact, if you want to check out a chart, you can see right here how interest rates spiked right after Bernanke said he wasn't concerned about spiking rates on Wednesday).

So the view from Wall Street is that we got regime change this week. For the first time since the crisis, we got hints of the Fed actually wanting to turn the corner.

It may be awhile before the Fed actually does turn the corner. But clearly the Fed wants to, and thus the "epic" week Goncalves is referring to above.

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MORGAN STANLEY: Captain Bernanke Piloted The Global Financial Airplane Into A 'Negative-G Pushover'

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LADIES AND GENTLEMEN: We Have A Jon Hilsenrath Headline, And The Market Has Come Storming Back

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Emerging Markets Are Getting Crushed By A Double-Squeeze From China And The US

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Short-term borrowing rates in China have soared to record highs as credit seizes up, prompting fears that the country’s liquidity squeeze may be spinning out of control.

The Shibor overnight lending rate in Shanghai spiked violently to 29pc, with wild moves in seven-day and one-month money. The central bank refused to intervene to calm markets, apparently determined to purge excess from the credit system.

China Securities Journal, a voice of the regulators, said: “We cannot use a fast money supply growth as in the past, or even faster, to promote economic growth.”

“I am extremely concerned about China,” said Lars Christensen from Danske Bank. “They are overdoing it and are on the verge of making the same mistake as the Fed and the European Central Bank before the Lehman crisis in 2008, when they failed to see how much the economy was slowing.”

Mr Christensen said the world now risks a “perfect storm” as the Fed prepares to taper its bond purchases (QE) at the same time as tightening the spigot of worldwide dollar liquidity.

The twin effects are cascading through emerging markets, pummelling commodity exporters such as Brazil, South Africa and Russia that sell to China, but also tripping up Turkey, Ukraine, Hungary and others that rely on external funding. “Everything is being hit indiscriminately,” said Neil Shearing from Capital Economics.

The Turkish lira and the Indian rupee both fell to record lows as investors pencilled in Fed tapering for September. “The party is over,” said Ceros Securities in Istanbul.

Fed chairman Ben Bernanke has brought forward his QE exit by lifting the unemployment target from 6.5pc to 7pc. He dismissed the looming threat of deflation as a “transitory” effect.

Brazil’s real weakened to a four-year low of 2.26 against the dollar, down 15pc since April, while the cost of credit default swaps gauging risk in Indonesia and Vietnam jumped more than 40 points. The Kremlin said Russian companies may have to delay bond issues, but denied immediate credit stress.

The latest country moving onto the radar screen is Poland, where construction crashed 28pc in May, “Poland is suddenly stalling, something we haven’t seen in almost two decades. The central bank has been way too hawkish,” said Bartosz Pawlowski from BNP Paribas.

Benoit Anne from Societe Generale said the “second leg” of the emerging market sell-off is just starting, warning that there is a “long way” to go before investors wake up to the full impact of Fed tightening.

Latin America’s debt crisis of the early Eighties and East Asia’s crisis in the Nineties were both triggered by turns in the US credit cycle, though emerging markets have ample foreign reserves to defend themselves this time.

Mr Shearing said the BRICS quintet will be much weaker than assumed over the next two years for their own structural reasons, but there is now the risk of a “mutually reinforcing” effect as dollar stimulus drains away.

The latest ructions in China came after premier Li Keqiang omitted mention of the liquidity strains in a speech this week, instead dwelling on rampant excess in the shadow banking system and overcapacity in obsolete areas of the economy. Though Deutsche Bank said the unwinding of hot money inflows disguised by over-invoicing may also be to blame.

Mr Li’s comments were a signal that the new leadership intends to prick the credit bubble, even though the hard line has already led to industrial recession. China’s HSBC manufacturing index fell sharply in June, dropping further below the “boom-bust line” to 48.3.

Zhiwei Zhang from Nomura said Beijing aims to crack down on a plethora of trusts, wealth products and offshore vehicles intended to evade loan curbs. These have accounted for half China’s credit growth over the past year.

It is willing to “tolerate short-term pain” to wean China off over-investment, and is less worried about social instability now that its workforce has begun to contract and the rate of migrants from rural areas is slowing.

The strategy is to tighten before the Fed winds down QE in order to “avoid two negative shocks occurring simultaneously”, but this may be hard to manage given the scale of the boom. “We expect a painful deleveraging process in the next few months. Some defaults will likely occur in manufacturing industry and in non-bank financial institutions,” he said.

Fitch Ratings said total credit has jumped from $9 trillion to $23 trillion over the past five years, surging from 125pc to 200pc of GDP. This is a bigger rise than in any of the major bubbles worldwide over the past half century.

China has the firepower to cope with any crisis and will not let the state banking system collapse. Keeping growth on track now that credit has reached saturation point is a tougher challenge.

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