Business

When Portugal “surprised” senior Novo Banco bondholders with a €2 billion bail-in late last month, the market got an unwelcome reminder that euro periphery banks are far from “solid.”

Novo was supposed to house the “good” assets salvaged from the wreckage of failed lender Banco Espirito Santo, but as it turned out, a lot of those “good” assets were actually bad, and Novo ended up needing to plug a €1.4 billion hole. Initially, the plan was to sell assets but seizing €2 billion from bondholders ended up being a whole lot easier and far more efficient.

Earlier today we showed the three key headlines that summarized today's euphoric mood, and explain the general liftathon among massively oversold risk assets:

• Stocks, oil soar as Draghi the dove tames global bears (Reuters)
• Massive snowstorm poised to wallop U.S. East Coast (Reuters)
• Oil Rises in Biggest Rally Since August Amid Volatility Surge (BBG)
• Nikkei spikes more than 900 points after rebounds overseas (Japan Times)
• China's Working-Age Population Sees Biggest-Ever Decline  (WSJ)
• Oil Is `Trade of the Year' for Citigroup After Iran Export Surge (BBG)
• U.S. Payment of $1.7 Billion to Iran Raises Questions of Ransom (WSJ)

In retrospect it appears Tom DeMark was spot on with his Wednesday prediction, made just as the Dow Jones was down some 500 points that that very day was "an interim low" to be followed by a 5-8% rebound (at which point the selling would resume). In fact, those trading Japanese stocks saw virtually the entire predicted rebound take place in just one day as the Nikkei soared by almost 6% overnight, or nearly 1000 points, the biggest jump in 4 months, while risk everywhere else around the globe has likewise exploded higher, as crude has stormed back over $31/barrel.

Below are some excerpts from our latest macro note, "Front Loaded: China, Volatility, and Debt Deflation." The full report with the charts and footnotes is on www.kbra.com.  The key question raised by the comment is this: Do Chair Yellen and the other members of the Federal Open Market Committee actually believe that there is a positive trade-off between the "benefits" of QE and zero rates and the carnage now unfolding in the global capital markets?