CDS Market Says: “How Crude” 1:3 Chance of Russian Default; Mining For Gold ETFs in Them Thar Hills

Below extract courtesy of global macro trading think tank Rareview Macro LLC ‘s  Jan 13 edition of daily commentary via “Sight Beyond Sight”

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

To Russia Without Much Love: Crude Catalyst and Credit Impact

With another day of lower Crude Oil prices, the vice-grip on the Russian Federation continues to be tightened.

The 5-year credit default swap (CDS) spread has widened out to a new high today and the default probability has increased too slightly above ~34%. In November, there was just a 1 in 5 chance of default. In December, there was just a 1 in 4 chance of default. In January, there is now a 1 in 3 chance of default. The Rubble Basket (symbol: RUBBASK) is above 70.00. It has only traded with a “70 handle” during the height of the December 15-18th currency crisis.

With interest rates above 17% and a continuing effort to defend the Rubble exchange rate, the Russian credit market remains the release valve for stress. This should not be a surprise given that Fitch joined S&P last week in lowering its credit rating to BBB-, the lowest level before junk.

As a reminder, at the end of December, S&P put the country on credit watch negative and has 90-days to act. However, in its press release on December 30th the ratings agency said that it aims to resolve its corporate debt ratings by the end of January, after it makes a decision on the sovereign grade. Given the continued breakdown in the Crude Oil price, speculators are increasingly sensitive to the fact that S&P could very soon be the first rating agency to lower Russia to high yield.

Gold Miners:  Quick Update: GDX & GFI Could Gain

The Gold Miners have seen a fair amount of interest over the last few days, including from fundamental investors for the first time in a long while.

The explanation for why some investors are finally going long of the miners is simple:  A sharp drop in energy prices, positive foreign currency effects, major cost reduction programs and gold prices that have recovered to within 2% of year-ago levels. Against that backdrop, the gold miners should finally recover.

Additionally, this is a classic example of buy-hold-sell research analysts finding themselves behind the curve. The key point here is that despite the positive catalysts listed above, the analyst consensus still expects gold miner earnings to decline this year. Anyone who is now buying the Miners clearly views the events as moving faster than analysts are able to react, and while they wait for clarity before revising their earnings projections the stock prices will go up a lot.

These are just some of the reasons why we added the Market Vectors Gold Miners ETF (symbol: GDX) and Gold Fields (symbol: GFI) to our counter-trend basket (symbols: TAN, EEM/SPY, DBB, BHP & RIO, GDX & GFI, DEDZ7, MXN) in case the US Dollar retraces and Crude Oil bounces.

For the entire edition of today’s Sight Beyond Sight from Rareview Macro LLC, along with access to the daily macro-strategy archives, including the firm’s model portfolio, please visit their website via