At least for the next several days, market participants will focus on the proverbial “plumbing,” and any signs that Russia’s expulsion from SWIFT and accompanying sanctions on the central bank are causing problems.
Funding market “oracle” Zoltan Pozsar weighed in twice over the past several days, including a Sunday note in which he conjured Lehman and said “central banks should stand ready to make markets again.”
There were no immediate signs of acute stress beyond what I’d characterize as almost obligatory moves, where that means “nods” to the potential for something to go wrong somewhere. As Nomura’s Charlie McElligott put it Monday, the dollar-funding space is “beginning to reflect increased demand for- and cost of- dollar funding, but I’d say more anticipatory than anything else at this juncture.”
That’s an almost perfect way to describe the initial reaction. However, it seems wishful thinking to believe sanctions of this scope and magnitude levied against a world power won’t eventually manifest in some kind of meaningful stress that can’t be written off to preemptive, preparatory jitters.
McElligott described the situation as “watching and waiting.” “Something, somewhere within the global banking ecosystem will most likely ‘break’ off the back of the Russian SWIFT exclusion and frozen Bank of Russia assets, potentially in the form of transactions related to the sprawling Russian commodities trade,” he said, on the way to tossing out a hypothetical. “Potentially [a] European subsidiary of a Russian bank being unable to pay liabilities as these ‘knock-on’ throughout the system,” he said. Again, that was a hypothetical. Charlie wasn’t predicting anything specific.
He then alluded to Pozsar’s latest missive. I highlighted the key passage from Pozsar on Sunday afternoon (see the linked article above), but here it is for anyone who may have missed it:
And so the Fed’s balance sheet might expand again before it contracts via QT – and not just because of the swap lines. The FIMA repo facility is also there to turn collateral into dollars – anonymously, away from the prying eye of dealers, if a central bank becomes a friendly correspondent for a sanctioned central bank turning gold into cash. That, or an unforeseen call on unwanted reserves in the o/n RRP facility as the correspondents flood the repo market with collateral… …before QT even began.
So, again, that’s from Zoltan. McElligott mentioned the possible resumption (by the Fed) of daily swap lines and noted “a key dynamic to watch for… would be any large decrease in usage of the Fed’s O/N RRP facility, as a sign that the Street is tapping the $1.6 trillion in reserves.” Rest assured, Pozsar will let everyone know if he sees any Russian footprints.
For now, McElligott suggested the “stasis around waiting” to see if any “potential core ‘plumbing’ issues” transform a “geopolitical matter” into a systemic financial event “is why markets and vol are kinda in no-man’s land.”
Meanwhile, Charlie reminded market participants that the same dynamics which have served to perpetuate wild intraday reversals are likely to persist, even as it looks like some of the Greeks are a bit less extreme. “Demand for super short-dated puts will continue to remain a driver of persistent ‘short gamma’ trading dynamics which we struggle under, as it siphons from market depth in futures / ETFs / singles, because dealers turn from (long gamma) ‘liquidity makers’ into (short gamma) ‘liquidity takers’,” he wrote.
That speaks to my repetitive emphasis on the inverse correlation between market depth and volatility. As vol spikes, market depth becomes impaired, which in turn means even more exaggerated price action, more accelerant flows and further deterioration in market depth, in a self-feeding loop.
“The ongoing equities index option dealer ‘short gamma’ environment most obviously created these now daily ‘overshoots’ in both directions, via accelerant hedging flows which ‘press’ into moves both higher and lower with persistent and larger one-day, high-low ranges,” Charlie added.
That’s the backdrop into which Ukraine tape bombs are dropping.
If the Fed is able to exchange our “worthless” fiat currency for actual bullion, well, someone must be doing something right.
I expect financial stress to come from exploding oil and gas costs when Russia realizes it’s pumping oil for free (it gets dollars for oil, but it can’t spend the dollars) and decides to stop exporting. I would give them two months before they realize that living under these sanctions is the same as not exporting oil.
The next shock can be more violent.
Russia is following Venezuela’s path: it’ll shrivel down to the point of being unable to sell oil, but they won’t back down. Their economy, as measured in our dollars, will be in shambles, but as long as they have the human power to continue warring, they will do so; labor will just get cheaper by our metrics.
I predict a Russian dirty bomb will be used in Ukraine before the West comes to the negotiating table to make concessions. Ukranians will experience first hand how war was waged in Syria and the West will again observe aghast not wanting to intervene physically. The recent reports of bombings of civilians are part of the battle-tested escalation tactics.
The conflict is devolving quickly and there is no end in sight. It reminds me of March 2020, when we were predicting a quick resolution to the crisis. This year we might learn to live in a world where atomic weapons are considered just part of the arsenal.
The trouble with a dirty bomb or small tactical nuke is that it will contaminate its target and if Putin wants Ukraine’s resources, exports, etc. radioactive isn’t good. And why they captured Chernobyl I have no idea. It is super hot.
The actions by Russia don’t seem to be focused on acquisition of resources. I do hope you’re right and the Russian elite are rational utilitarians and not a fearful, vengeful bunch who would rather burn a country before the plebe takes it over. They seem to act out of a deep belief that a European Ukraine means a NATO missile is a 3-minute flight away from Moscow.
@MrLucky Chernobyl is an ideal command and dispatch location for the Pigtootin forces because artillery barrages in that location are assumed to be verboten. Meaning Z is not going to send clouds of radioactive dust up into the atmosphere where it might settle on his allies, thereby, making Ukraine the first to use a dirty bomb(ing). The Chernobyl exclusion zone is teaming with life now that the radioactive layer is beneath ever thickening layers of organic detritus. Even wolves have reestablished themselves. I’ve saw a video purporting to show Ukraine forces using the area for training before the Russian invasion. If that meteorological machination is valid it does suggest there may yet be other possibilities created by Russian ‘cleverness.’ Will just have to see how the wind blows on this one, but, we have to remember people in lowercase “l” liberal democracies are not noted for their rational behavior and risk appetite when it comes anything associated with “radiation”. If they were, Germany wouldn’t of been so quick to dismantle their nuclear energy infrastructure options and instead plow hundreds of millions to billions of dollars into the war chest of an authoritarian regime on the border of their NATO alliance by buying Russian hydrocarbons. Let’s hope said lowercase “l” liberal democracies use this “teachable moment” to ponder the consequences of doing business with their other authoritarian trading partner striving to become a new pole in the waning (is Wang(ing)-days a good pun?) days of American unipolar lowercase “l” liberal hegemony. Of course, they can hardly be blamed for following America’s well trod “shining-path” to the mecca of manufacturing. The speed the Chinese factory floor manager can turn over a production line to accommodate specification changes is phenomenal. The West, despite decades to adapt is still dangerously deficient. As for “contaminate”, do you remember the neutron bomb? How much a tactical nuke ‘contaminates’ is dependent on many variables. I’d suppose the most obvious one will be the altitude of detonation. The higher the explosion the less mixing with soils and organics so the less long term contamination. To sicken and reduce the combat capacity of personnel spread across a wide or long mobile advance then the detonation needs to be high enough to ‘cook’ most of the tankers in their pots. Crockpots actually, since they’ll take days to weeks to shit and puke themselves to death. It stretches my limited imagination that the Ukrainian forces would have the ability to muster enough of the appropriate military targets in concentrated arrays to present a target rich enough to rationalize any nuke. My guess at the moment is if the head case Pigtootin does go nuclear it will be for purposes of intimidation. A common tactic for him. He did an extraordinarily (stupid?) thing rattling his nuclear sabers just two days after his slow-mo blitzkrieg sputtered. He essentially removed any doubt the Ruskie conventional land forces are able to fight a ‘long-war.’ That also suggests Russia wouldn’t be able to fight on two significant fronts. The silver lining? It isn’t an army the EU has to worry about driving it’s way to the Atlantic. As for the merits, pro or con, for most of the article, all I can honestly say is, “??? ????????? ????????”, so thanks for talking points Mr Lucky.
“??? ??????? ???????”, was a futile attempt to paste in, “it’s all Greek to me”, in unicode Greek symbols, or maybe it was, “it’s all Greek to me”, in unicode Russian symbols? 🙂