Is An XIV Short-Squeeze Sending The Dow Soaring? Yes

Update 1510ET: Correlation may not be causation but seriously...

* * *

Update 1450ET: Shortly after XIV re-opened and plunged, trigger circuit-breakers, we tweet-wondered if a short-squeeze was imminent...

Of course, XIV will close on Feb 20th at $4.22 - its termination value - but between then and now, who knows!

* * *

After collapsing more than 90% overnight, the culprit - XIV, was halted and suffered a termination event this morning.

It has just re-opened, crashed, trigger volatility circuit-breakers, and is re-halted...

As it collapses back to its termination value at $4.22...

Volmageddon Sparks 6000-Pt Swings In The Dow As Liquidity Evaporates

Full Court Press from the media today to ensure bag-holders to stay in.

So, first things first, the total catastrophe that is the Inverse VIX ETF XIV dropped 90% in after-hours trading, triggering its termination event...

And then when it re-opened, it crashed some more before squeezing higher (remember it will be at $4.22 on Feb 20th, no matter what happens in between)...

And in yet another example of the market's sheer idiocy, this short-squeeze sent The Dow up 600 points...

VIX traded above 50 overnight before going dead, crashing, ramping, and generally being chaotic amid the large vol-of-vol ever...

Notably, S&P 'VIX' was the biggest mover across all the indices...

Asian equities were ugly overnight but played more catch-down than extended the moves..

European stocks extended their losses...

European 'VIX' smashed higher to the same level as US VIX today...

And US equity futures were a bloodbath overnight, before a panic-bid appeared from nowhere at the US equity market cash open... (NOTE that the market ramped at the open of Japanese markets as Abe and Kuroda spoke reassuringly and at the US open)

Quite a day...

The Dow ended up 568 points but went through some enormous point-swings intraday - from the cash close last night, Dow -1400, +1000, -600, +1100, -500, +400, -300, +600...

Some context, however, from Friday's close...

Nasdaq, S&P and Dow managed to get back into the green for 2018...

Nanex's Eric Scott Hunsader showed liquidity has evaporated from US equities - 

Liquidity rising from "Lord of the Flies" to "Banana Republic". Still ridiculous (black=today)

Credit markets have started to awaken...

But for now, FX, rates, and Commodity vol remains 'contained'...

After a massive loss yesterday (the most since the 2013 taper tantrum), aggregate bond and stock gains today were the best since Jan 2016...

Treasury yields were higher from the US equity cash close, after yields crashed notably lower overnight (but remain lower on the week)...

10Y ended back above 2.80% (pre-payrolls)

The yield curve flattened dramatically intraday...

The odds of a 3rd rate-hike in 2018 plunged overnight to just 10%, but rallied back, as stocks bounced, to around 46%...

The Dollar Index ramped back to pre-Mnuchin-Masscare levels, tagged those stops, then dumped back into the red...

Gold and Silver were notably lower on the day after spiking overnight, crude trod water ahead of tonight's inventory data and copper made modest gains...

Cryptos rallied into the hearing this morning...

But this chart made us think a little...

But then again, Bitcoin soared as VIX plunged...

Credit Suisse Tumbles On Fears Of Massive XIV Loss

Update: from Credit Suisse communications department:

Background: Please note there is no impact to Credit Suisse – we are completely hedged.

On the record: "The XIV ETN activity is reflective of today's market volatility. There is no material impact to Credit Suisse."

* * *

In addition to being the creator of the now infamous XIV ETN - which was reportedly the most popular way of shorting volatility for retail investors, all of whom now face almost certainly total losses - Credit Suisse also happened to be its biggest holder. 

Which, now that the ETN appears fated for termination, is suddenly a very big problem for Credit Suisse since according to the latest public filings, the Swiss bank owned 4.79 million units, or over $550 million, worth of XIV at yesterday's close of $115.55, and roughly $480 million less at today's after hours closing tick of $15.43. Of course, if the ETN is redeemed - and with its NAV at $4.22 according to the VelocityShare website - the loss could be total.

And while the question remains who exactly is eating the losses at Credit Suisse - the bank or its clients - the market is not taking chances, and Credit Suisse ADRs have tumbled in Asian trading...

... because if Credit Suisse is on the hook, it would mean two quarters of profits have just been wiped out: recall that CS reported roughly $250MM and $300 million in profits in the last two quarters, which would mean that the XIV loss was roughly equivalent to half a year's worth or profits, an outcome which the regulators will be very interested in, not to mention shareholders, clients, and their lawyers.

Finally, completing the irony, there's this:

This did not age well for Credit Suisse$XIVhttps://t.co/hBpfeUB6e5

CC: @JChatterleyBBG @TheStalwart #WDYM

— The Skeptic (@TheSkeptic21) February 6, 2018

White House Issues Statement On Today's Historic Market Crash

Today, the Dow Jones suffered (including the plunge after hours) its biggest point crash in history, turning negative for the year, which for a president who takes particular delight in every uptick in the market, was terrible news.

So, as many expected, the White House issued a statement after the close, commenting on today's market crash.

Predictably, there was little commentary of the "day to day" moves, and instead Trump deflected by pointing out that he is now focusing on the economy's "long-term fundamentals" instead.

Full statement below:

"The President's focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening U.S. economic growth, historically low unemployment, and increasing wages for American workers. The President's tax cuts and regulatory reforms will further enhance the U.S. economy and continue to increase prosperity for the American people.

Translation: Trump will never again tweet about the market.

S&P Crashes Most Since US Downgrade As VIX Explodes, Bond Yields Flash-Crash

CNBC Pisani: "This has the feel of a textbook pullback"

This was the biggest drop for the S&P since August 2011

The 410-day record streak without a 5% correction is over... Nasdaq is over 7% off highs, DOw and S&P over 8% off their highs...

Only Nasdaq remains green in 2018...

Some headlines...

Vol ETF Terminations Begin: Nomura Announces Early Redemption Of VIX ETN

While we await news on whether Credit Suisse will (or won't) terminate the retail-favorite XIV ETN, following its historic, 90% collapse, some other ETF/ETN providers are starting to terminate their VIX-linked offerings.

Moments ago, Nomura Europe Finance said the Next Notes S&P500 VIX Short-Term Futures Inverse Daily Excess Return Index ETN will be redeemed early, after a condition for early redemption was triggered due to movements in the underlying index. The underlying index on the ETN is the S&P500 VIX Short-Term Futures Inverse Daily Excess Return Index

The ETN in question, 2049.JT has not yet open, and based on this announcement, it looks like it won't.

This is the full announcement concerning the VIX-linked ETF, google translated:

Announcement concerning the determination of early redemption of foreign index-linked securities "2049 NEXT NOTES S & P 500 VIX Inverse ETN" which is the listed ETN listed trust beneficiary certificate (hereinafter referred to as "ET "S & P 500 VIX Short-term Futures Inverse Daily Index Coordinated Bond" (hereinafter referred to as "ETN"), which is a foreign asset-backed securities, which is a trust property of N / JDR, is subject to an early redemption clause. We will inform you that it will be redeemed early.

1) Applicable to early redemption clause (Including the closing price) in the US market of the "S & P 500 VIX Short-Term Futures Inverse Daily Index" (hereinafter referred to as "the index"), which is the subject index of the ETN, is closing the closing price of the relevant index value % Or less, the ETN will be redeemed early on the day after 10 business days of the day ("early termination date") that it realized. On February 5 the relevant index value is closing, the closing price of the relevant index on February 2 It fell to 268,517.46 or less, which is equivalent to 20% of 1,342,587.30, so it will be redeemed at an early date.

2) Early redemption amount Based on the amount equivalent to the value of the ETN as of the early termination date calculated by the calculation agent in its sole discretion in accordance with the following formula for the face value of 10,000 yen of the ETN in a commercially reasonable manner by such redemption (Excluding, but not limited to) the expenses related to the cancellation of related hedge transactions that the Company has borne. 10,000 yen × (redemption price / 100)

Provided, however, that the redemption amount received by the holder as of the ETN JDR trust finish date shall be equal to the payment fee from the early redemption amount to the trustee of said ETN J DR and the equivalent amount of withholding tax, It is deducted from trust fee. We will disclose details of the ETN JDR and details of the handling of said ETN in the future as soon as it is confirmed. We sincerely apologize for the inconvenience caused to our holders.

-1,175 Points! We Just Witnessed The Largest One Day Stock Market Crash Ever

The mainstream media seems so surprised that the stock market is crashing, but the truth is that it isn't a surprise at all. In fact, this crash is way, way overdue. If the Dow Jones industrial average fell another 10,000 points, stock prices would still be overvalued. I have been warning and warning and warning that this would happen, because stock valuations always return to their long-term averages eventually. On Monday, the Dow was down a staggering 1,175 points, which was the largest single day decline that we have ever seen by a very wide margin. In fact, it shattered the old record by nearly 400 points.

Gold & Silver Pressured As Terror Reigns Down On Bitcoin And The Stock Market

VIX is spiking again, Bitcoin and the stock market are dropping, and gold and silver are coming under pressure pre-market. Here's an update on the turmoil…

Gold and silver are coming under pressure here in the pre-market:

Last night gold nearly breached $1350 and silver nearly breached $17.

How much of this is cartel suppression and how much of this is selling (profit taking) to cover losses elsewhere?

We can't be certain, but looking back at the chart from 2008 shows how the metals declined and bottomed first before the broader stock market fell:

The gold to silver ratio is still screaming "buy silver" with the ratio over 80:

Keep in mind that the cartel has brought the heat lately on Tuesdays.

Or are they trying to work gold and silver down as low as they can because they can see currency starting to move into the sector?

All eyes are on the VIX as volatility has stormed back into the markets:

Notice the dollar is in fact putting in the bounce everyone has been looking for.

The last time the VIX was this high was the August 2015 "correction":

The Dow got pummeled yesterday for the largest single day point decline on record (but the percentage decline wasn't even in the top ten):

It should come as no surprise that as the VIX has spiked above 50, the stock market indices are set to open lower again today:

Bitcoin is again falling like a knife and nearly tested $5,000 earlier:

On Friday was laid out an argument that was not very well received, but we are no longer the only person thinking it.

Others are beginning to think the same thing.

Here'e Bill Blain from Mint Partners just today:

Trump who might well think a falling stock market is a Fed Plot to discredit him.

This is more or less what was laid out last Friday, albeit the view was much darker.

For anybody who missed the working theory, here it is in a nutshell:

So think about a few things here:

FISA Memo released (Russian Collusion story dead)

All those people accused of sexual harassment dropping their careers like flies, resparking the accusers of President Trump (but it failed)

President Trump's crazy – invoke the 25th amendment and get him out because he's nuts (that's failed)

Now think about this:

President Trump owns the U.S. economy, he's tweeted a thousand times how America is MAGA and it's all because of him

President Trump says the stock market rally to record high after record high is all because of him

So here's what it means:

What if the Deep State is bringing down the economy – they are going to crash the stock market,they brought down Bitcoin, they are crashing the bond market, and they have hit gold and silver and taken the metals as low as it can possibly go – all to render President Trump ineffective?

This is his economy, and it will be his fault that there is a new financial crisis.

And there's no more Yellen.

And when there is a lot of pain – pain on Main Street, drawn out over this year (mid-term) and next year (2019 presidential candidate hopefuls) going into the 2020 Presidential election, the Deep State will have accomplished two goals:

Trump will not get re-elected because the economy will be in shambles

The Deep State gets in the driver's seat, and they drive us down the dark path towards a totalitarian police state, which was the Deep State's main goal all along.

S&P Warns Removal Of "Easy Money Punch Bowl" May Trigger Next Default Cycle

Stocks aren't the only losers from the recent spike in yields: according to a new note out of Standard & Poors, record corporate leverage and rising interest rates could lead to a potentially explosive cocktail, one in which the removal of the "easy money punch bowl" could trigger a wave of corporate defaults. The combination of easy liquidity coupled with lax underwriting standards, a yield-starved buyside, record number of covenant-lite deals and low interest rates have contributed to a spike in the number of highly leveraged firms, creating a risk "masked" by relatively low default rates, Bloomberg writes. As Goldman first pointed out last summer, even as corporate defaults remain near historically low levels, froth "has been building in the form of corporate leverage. While this may not present a near-term risk, the widespread increase in debt resulting in stretched leverage metrics bears watching, in our opinion."

Fast forward to today when S&P analysts caution that "despite a recent rise in corporate profits and financial metrics, the still high leverage of global corporates poses a significant credit risk."

Using a global sample of 13,000 entities, the rating agency estimated that the proportion of highly leveraged corporates - those whose debt-to-earnings exceed 5x - stood at 37% in 2017, compared to 32% in 2007 before the global financial crisis.

Furthermore, over 2011-2017, global non-financial corporate debt grew by 15 percentage points to 96 percent of GDP.

"On average, corporates are at the top of the credit cycle. Lower asset prices and liquidity reversals are major risks," S&P wrote.

And the punchline: "Removing the easy money punch bowl could trigger the next default cycle since high corporate debt levels have increased the sensitivity of borrowers to elevated financing costs."

S&P then warns that the extraordinary post-crisis monetary stimulus created a gap between default rates, which remain low, and the number of highly leveraged corporates, which has surged as firms took advantage of easy liquidity. This "masked" discrepancy between leverage and defaults is so wide that the recent pick-up in corporate earnings and financial metrics - especially thanks to tax reforms in the U.S. - "won't be enough to offset" the significant credit risks, S&P said.

"When debt is this steep and default rates are low, something's gotta give," wrote the firm's Terry Chan. "A material repricing in bond markets or faster-than-expected normalization in money market rates could impact credit profiles."

Terry is, of course, correct; the question is when does this repricing hit. The answer would be revealed in move of junk bond yields, and potentially market prices of tracking ETFs. Apropos, as Jeff Gundlach pointed out on Friday, the charts of the HY ETFs JNK and HYG - which are most sensitive to liquidity conditions for the most levered corporations - "look like death."

Should the recent selling in JNK and HYG continue, the tipping point which could result in defaults for over a third of the S&P universe of 13,000 companies may not be too far away.

"The Vol Market Finally Broke": A Quant Explains What Happened To The Market

Fade to Black

The "grey swan" we all have spoken about for years—that being the absurd "tail wagging the dog" potential of VIX ETN market structure (inverse and leveraged products) AND the massive growth in "negative convexity" / "vol target" / "vol rebalancing" strategies to either generate extra income or "systematically allocate risk" (looks good in the prospectus, right?!) –finally "broke" the volatility market, and has now bled-through to the "underlying" spot equities market…as the short vol trade went "lights out." 

The ETNs are the "patient zero" of this current market meltdown.  It is estimated that there was anywhere from ~$125mm to $200mm of vega / VIX futs to BUY on the close from the two main "short VIX" ETNs that rebalance daily (XIV and SVXY).  As S&P traded -50 handles AFTER the cash close from 4:00pm to 4:15pm into the market's anticipation of the massive rebalancing of volatility (buy to cover) on the close, XIV then saw a delayed and terrifying ~-87 PERCENT move after the close, as some who owned XIV puts as crash protection sniffed this potential and speculated liquidation from the ETN, which is set per a rules-based system to buy back short vega after an 80% "crash trigger"(which again isn't a certainty because they use a blend of 1st and 2nd month).  The asset pool nonetheless was seemingly / largely wiped-out and the note is guaranteed to "pay out" to their shareholders as set per their prospectus.  It is likely that this thing has indeed been "triggered" and will be forced to liquidate.  SVXY doesn't have the firm 80% "trigger" but too is seeing its NAV "wiped out" and is trading ~-80% post-close as well.

The issue NOW is the pile-on going-forward across assets, as the systematic "short vol" community's models are now completely toast, and they too will be forced to cover remaining "short vol" positions that didn't trade today—i.e. BE PREPARED FOR A MAJOR VIX FOLLOW-THROUGH TOMORROW. 

VaR-based models need to be reset across all asset-class strategies, forcing further de-risking over the coming days and potentially weeks, as heads of funds and heads of risk try to figure out how much their models are forcing them to "gross-down."  Shorter-term vol target / vol allocation strategies (think CTAs) and longer-term models like risk-parity and too will reset and "rebalance" their risk (lower) as realized vols are re-priced.  Structured products, annuities and other vehicles with built-in protection?  Also purging exposure on the vol reset.  Finally, it also shouldn't be lost on the popularity of "short VIX" trades in the retail community, and the "butterfly flapping its wings" relationship to the recent melt-down in the crypto-currency space. 

The "white knight" of corporate buybacks (which by the way were running at 300% of volume today per a competitor as they were pumping the mandates to hold-up their stocks) will be extraordinarily tested with keeping the stock-market "propped up," especially as the traditional active community is likely to back-away until there is a better sense on how this event shakes out… few will willingly be in there tomorrow prepared to catch this falling knife.

Cross-asset, the trickle-down of unwinds is clearly a focal point from here.  As noted two weeks back in the "Nomura Cross-Asset" piece, I've been focusing on the "risk" of positioning asymmetries with consensual "bearish rates" / "flattener" and "short USD" trades primarily, but too, crowded thematic equities position tied to the rates and USD trades (i.e. "long momentum" / "long tech / growth").  

As such, the +7 Z-SCORE (relative to 90d move) today in the UST 2Y/ mongo bull-steepening seen in 5s30s (+7bps today, +17bps since Thursday) raises a "pain trade" red flag.  Single-stock equities clearly took a hit on the back of the index moves, as thematic trades like "long US high beta"--which was +8.1% YTD on Jan 26th—are now -1.5% YTD after trading down -7.1% the past two sessions alone.  The six-day move in US momentum longs has been -4 standard deviations (across all returns dating back to April '13), only previously experienced during the "Flash Crash." 

My model equity L/S portfolio experienced its worst day since the early Feb '16 market-neutral unwind which occurred during the "great deflation scare."  Net / net, it wasn't pretty out there.

Buckle-up, because this move isn't over yet.

XIV, SVXY Halted, News Pending

With every trader suddenly focused on the vol-ETF complex after last night's collapse in the NAV of the most popular inverse VIX ETF - the Credit Suisse-created VelocityShares XIV -which plunged over 80% effectively triggering a "termination event", this morning it appears that the worst is indeed coming, with both the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and the ProShares Short VIX Short-Term Futures ETF (SVXY) suspended by the Nasdaq and NYSE Arca, respectively, on pending news.

As a reminder, the now terminal collapse of both ETFs took place after the VIX surged a record 116%, triggering a waterfall collapse in the NAV of the two synthetic products.

Meanwhile, to ease concerns that it had suffered a ~$500 million rout on its XIV holdings, moments ago Credit Suisse repeated what it told us last night, issuing a statement that the Swiss bank "has experienced no trading losses" from Velocity Shares Daily Inverse VIX Short Term ETNs, or XIV, due December 4, 2030, the bank said in statement.

Ok, but if not Credit Suisse, then someone else must have gotten hit on that $500 million in XIV exposure. One wonders who that someone is.