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BA Deere
Honored Advisor

Evening Nickel: Fed bailout potential "doom loop"?  


Pozsar's "Margin Call Doom Loop" Prediction Comes True As Trafigura Faces Billions In Margin Call

WEDNESDAY, MAR 16, 2022 - 03:40 AM

While there have been occasional stories of hedge fund blow ups (especially those trading Chinese stocks) amid the recent market volatility, so far we have yet to hear of a bank or any other "systematically important" market participant running into a solvency or liquidity crisis or needing a bailout, and yet a look at one of the most tangible funding market indicators - the FRA/OIS - has traded at very elevated levels in recent weeks, suggesting that there is indeed some funding trouble below the surface.

Recall what Zoltan Pozsar warned two weeks ago, when he said that "we could be looking at the early stages Of A Classic Liquidity Crisis" - according to the former NY Fed liquidity guru, none other than the commodity traders themselves, and their associated exchanges and clearinghouses, will be the drain of liquidity during this period of unprecedented commodity volatility, adding that "if you want to express all this in the credit space, look at what CDS spreads on some bigger commodity traders have done in the past few weeks."

Sure enough, last week's unprececented LME margin squeeze, where a 250% surge overnight in nickel prices nearly bankrupted Chinese tycoon Xiang Guangda whose Tsingshan Holding Group, the largest stainless steel maker, held a massive 150,000 tons nickel short and which resulted in $8 billion margin call which however even the collecting counterparties (one of which was JPMorgan) did not want to collect on knowing they would default Tsingshan, collect nothing and potentially push the LME itself into insolvency.

Another, more tangible example, comes from one of the world's top oil and metal traders, which today we learn has been seeking funding from beyond its traditional group of bank private, approaching even equity investors, hoping to obtain $2 to $3 billion in fresh liquidity to meet what Bloomberg described as "margin calls in the billions of dollars" as oil prices surged to $139 a barrel and nickel soared 250% in little more than 24 hours. Precisely as Credit Suisse's Zoltan predicted.

Now, another bank is on the trail of the source of liquidity crunch observed in unsecured funding markets.

In a note published overnight, Barclays strategist Joseph Abate desconstructs Zoltan's key observation, and asks "could margin calls in commodity markets cause unsecured funding rates to rise as banks and investors scramble to meet demands for cash collateral?"

Taking a step back, Abate first notes that in his view, the pressure in unsecured funding pressure is driven principally by two factors: "a precautionary buildup of cash by banks that are uncertain about the geopolitical outlook and the maturity pileup of CP ahead of this week’s FOMC meeting."

That said, and perhaps eyeing the tremendous sway Zoltan weekly views get, Abate writes that "each week brings a new explanation and a new cause for worry in funding markets. First it was the de-SWIFTing of Russian banks. Next it was fears of a “Lehman-like” spiral of secondary defaults tied to unobservable funding and borrowing linkages. The latest iteration ties the sharp increase in commodity prices to funding markets through margin calls."

Reverse engineering Pozsar's main point, Abate notes that the latest concern among markets is that "trading companies that are long the physical  commodity and short derivatives as a hedge are experiencing steep margin calls from their exchanges" and Indeed, two central counterparty clearing houses (CCPs) have already raised their margins on energy contracts in the past week. To meet their requirements, Abate explains, these firms have to borrow large amounts of cash on very short notice, which puts strains on their bank lenders. And in order to raise the cash necessary to lend to the trading companies, their banks are tapping the CP market and pushing unsecured funding rates higher and spreads wider.

Yes, Abate may not want to admit it - after all mundane, boring explanations are far more palatable for institutional sellside strategists who would much rather not make waves (just please explain to your readers why your bank just decided to suspend share creation and make a mockery of its VXX ETN if nothing is wrong with the market), but Zoltan was right again

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Esteemed Advisor

Re: Evening Nickel: Fed bailout potential "doom loop"?

ZH is a major Russian disinformation source, HQed in Bulgaria.