Month: September 2017

With both the S&P and global stocks once again inching back to all time highs, here are some gloomier observations from Bloomberg’s EM commentatory Garfield Reynolds, who has covered and traded FX, bonds and commodities over two decades.

Down Under Doldrums Challenge Global Growth Hopes: Macro View

The latest burst of chatter that global growth is finally gathering momentum seems overdone in a world beset by geopolitical nightmares of war and debt deadlock, as well as the nagging concern of demographic-driven disinflation. And the recent slump for the key risk proxies among the G-10 currencies — the Aussie and kiwi dollars — shows the need to be careful we don’t get dizzy with thoughts of success. 

The two countries backing these tenders are beholden to raw materials exports, and they straddle a decent cross-section of the key non-oil commodities — iron ore, coal, gold for Australia; milk and wool for New Zealand.

Accelerating world output should be driving up demand for at least some of this stuff, and yet the Aussie and the kiwi languished at the bottom last month among the major G-10 currencies… along with the Brexiting pound.

The Aussie fell for the first time in three months, and risk reversals dropped by the most since September last year.

The kiwi dropped more than 4% for its worst performance since January 2016 and speculators trimmed net longs for three straight weeks.

The fact that all this came as base metals staged a massive rally signals that there’s a disconnect going on under the surface.

Stocks are climbing again and volatility is subsiding now that the Korean missile panic fades and as markets seem to trust that Donald Trump and Congress can pass a key piece of legislation on a very tight timetable.

Meanwhile U.S. GDP and China’s PMIs are being cited by the optimists as proof that this year’s rallies in equities, emerging markets and junk bonds are due to accelerate again.

The recent advances in risk assets have a slightly feverish, twilight-of-the-bull-run feel.

The MSCI All- Country World Index just completed a 10th straight month of gains with a 0.17% climb that was the smallest of the lot. And that’s the longest winning streak since a record 11-month stretch that ended in February 2004.

The S&P 500 index also just barely managed to post what was its fifth straight month of gains and the 2,500 level is looming as a much tougher barrier than 2,000 ever was.

And then there’s central banks and the rates markets that track them, which shows the bullish bias toward tightening that exploded out of Portugal in June has long been scattered by the winds of disinflation. The Fed is seen by OIS traders raising once at most within a year, and the same goes for every major developed economy outside Canada and Sweden.

The Bloomberg Commodity index is still more than 5% below its 2017 peak and Treasuries are looking at 2% as the next stop, not 2.5%.

That light at the end of the tunnel may in fact be an oncoming train.

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All eyes are on the annual retreat of the central bankers at Jackson Hole, and all eyes were on the speeches of Janet Yellen and Mario Draghi (who showed up for the very first time since 2014). Whilst Yellen will very likely receive the usual comments and questions about the end of her official term as the chair of the Federal Reserve Bank, Mario Draghi could be the one who – in the end – claims most of the attention.

After not having attended the symposium in 2015 and 2016, it’s ‘interesting’ to see Draghi confirmed his attendance for this year’s conference and some are arguing this merely is a symbolic move. After all, back in 2014, Jackson Hole was when he announced the ECB’s Quantitative Easing program and it would be pretty symbolic for Draghi to announce the start of tapering at the very same conference, three years later.

Source: Danske Bank

Everything will depend on the ECB’s interpretation of economic growth in the Eurozone. It’s a fact the economy has now been growing for almost four years straight, but this doesn’t necessarily mean all issues have been solved as the recovery remains relatively weak and there’s a very clear ‘two speed’ difference between the countries inside the Eurozone as some members are obviously posting better growth numbers than others.

The ECB minutes in July showed the members of the European Central Bank were divided as to how to move away from the current extraordinary monetary policies. There really are just two possibilities on the table with one being the old school rate hike whilst the second one would be to throttle back the purchase rate of asset backed securities (the real quantitative easing program). You would think a central bank would first reduce the direct market intervention (the purchase of securities) before walking up the interest rates, but we have seen weirder things happen.

Source: Danske Bank

According to an interesting chart, provided by Danske Bank, it’s likely the ECB will reduce its QE purchases to zero by the second half of 2018, by gradually reducing the amount of money spent on those purchases.

This doesn’t mean the ECB will stop investing in asset backed securities. The 80B EUR of monthly purchases (which was subsequently reduced to 60B EUR) was the amount of ‘new’ money flowing into the securities. Just like the Federal Reserve is doing, the ECB will continue to reinvest the proceeds from maturing securities into new purchases.

But as we explained in a previous column, the recent strength of the Euro versus the US Dollar might derail the plans of the ECB. After all, a cheaper Dollar actually reduces the inflation expectations inside the Eurozone (as it becomes cheaper in Euro-terms to import goods sold in US Dollars). So will the ECB dare to make radical changes in its economic and monetary policy?

Whilst the Eurozone might have to wait to hike its interest rates, the exact opposite is happening in the United States where the economy seems to be accelerating again (obviously also helped by higher export numbers due to the weaker US Dollar), and whilst the market doesn’t seem to be expecting any substantial rate hikes, the futures tell us something different:

Source: CME Group

So either Mr. Market is right (and the interest rates won’t increase fast in the near and mid-term future), or the Fed will surprise the market by more and/or faster rate hikes than assumed. The market is pricing in a 47% possibility there will be no additional rate hikes by May 2018, and that’s quite a bold expectation.

Jackson Hole is where the masks fall off.

> Read our Guide to Gold and protect yourself against revised monetary policies

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As tensions between the US, its regional allies and North Korea continue ebb and flow, depending on what and where Kim lobs the next missile and whether Kelly can block Trump from tweeting for the next few hours, Russian President Vladimir Putin has decided to personally weigh in on the conflict for the first time since the UN passed new sanctions against the North earlier this month. In an article published on the Kremlin’s web site, the Russian president warned that the two sides are “balancing on the verge of a large-scale conflict," adding that any efforts to pressure the North to end its nuclear program would prove “futile,” and that the only tenable solution to the standoff would be a "dialogue with preconditions."

"It is essential to resolve the region’s problems through direct dialogue involving all sides without advancing any preconditions (for such talks)," Putin wrote. "Provocations, pressure, and bellicose and offensive rhetoric is the road to nowhere."

His remarks about a diplomatic solution alluded to a “road map” to peace formulated jointly between Russia and China…. without the U.S.

According to the joint Russian-Chinese deescalation plan, North Korea would stop work on its missile program in exchange for the US and South Korea halting large-scale war games, allowing tensions to gradually subside.

Here’s more from AJ:

"Russia believes that the policy of putting pressure on Pyongyang to stop its nuclear missile programme is misguided and futile," he wrote in the article sent to media in Brazil, Russia, India, China and South Africa – the BRICS member states.

 

"The region's problems should only be settled through a direct dialogue of all the parties concerned without any preconditions. Provocations, pressure and militarist and insulting rhetoric are a dead-end road."

As recently as last week, tensions between the two sides appeared to be easing, with US Secretary of State Rex Tillerson praising the country’s restraint after the North went nearly a month without a new missile test, despite restrictive new UN sanctions that took effect on Aug. 5. That quickly changed with the beginning of the US and South Korea’s annual 11-day joint military exercises, which appeared to provoke an especially vitriolic response from the North this year, prompting not one but two rocket launches over the next few days.

Two days ago, Russian Foreign Minister Sergey Lavrov reportedly warned Tillerson that it would be “dangerous” to push for more sanctions against North Korea.

Here’s Newsweek:

“Russian Foreign Minister Sergey Lavrov told Tillerson that the U.S. should avoid taking military actions against Kim Jong Un’s regime and that the Russian government believes additional sanctions could prove “counterproductive and dangerous.”

 

Tillerson’s response to Lavrov is unclear, but the pair did condemn the North’s most recent test on Monday, when a missile sailed over U.S. ally Japan.”

Of course, the North’s missile launch earlier this week which flew over Japan airspace appeared to – at least temporarily – startle investors, triggering a short-lived selloff in global stocks. A day ago, US and South Korea insisted on a provocation of their own, conducting a bombing drill with nuclear-capable US bombers and the new F-35 stealth fighter.

Despite the bellicose rhetoric from both sides, an all-out war is much less likely than the public might believe. Echoing comments made by former White House chief strategist Steve Bannon, a professor warned yesterday that the US is in “no position” to start a war with the North because of the unprecedented devastation the North’s artillery could unleash on Seoul, the densely populated South Korean capital.

As Bannon said during an interview with the American Prospect, the US doesn’t have a tenable military option for toppling Kim Jong Un.

“Until somebody solves the part of the equation that shows me that ten million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you’re talking about, there’s no military solution here, they got us.”

As the war of words stretches into its eighth month, observers will surely keep this in mind. Investors, on the other hand, are just looking for an opportunity to "buy the fucking nuclear war dip."

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With payrolls looming (our full preview is here), carbon-based traders around the globe are leery of putting on any major trades and so the overnight session has been rather dull, dominated by the now traditional overnight algo-mediated levitation, which means the VIX is lower and S&P futures are once again modest higher as European and Asian shares continue their ascent.

“A decent payrolls number today would be the icing on the cake in a week that has seen some positive signs that the U.S. economy may be in better shape than was previously thought prior to Jackson Hole,” analyst Michael Hewson at CMC Markets writes in note. “Annual hourly wage growth is currently 2.5%, a little on the weak side for an economy supposedly at full employment, so a strong number here could increase the odds of another rate rise this year, most likely in December.”

While we have penned a longer preview of today’s jobs report, the only chart that may matter for today’s payrolls print, expected at 180K, is the following from Morgan Stanley, which predicted the July print to the dot, and which anticipates a big miss in the August jobs number, at 136K vs the 180K expected (see full preview here).

The Stocks Europe 600 Index is higher for a third day, the Stoxx 600 up 0.4%, starting off September with solid gains – after three months of strong Euro-driven declines –  with media companies among the winners after Vivendi SA sales beat estimates. the final Eurozone August manufacturing PMI printed as expected, and unchanged from the flash print, at 57.4. In a month traditionally reserved for time at the beach, euro- area factories increased output at one of the fastest rates since 2011. U.K. manufacturing expanded at the strongest pace in four months in August, lifted by both export orders and domestic demand. The Markit manufacturing PMI rose to 56.9 from a revised 55.3 in July, beating the consensus estimate of 55.

The LME Index of six industrial metals soared to the highest in almost three years, with copper leading the charge following another strong Chinese PMI print overnight (see below). The U.K.’s FTSE 100 Index increased 0.9 percent to the highest in more than two weeks.

“European markets and U.S. futures are trading higher ahead of the most-watched economic data on the face of the Earth,” Naeem Aslam, chief market analyst at Think Markets U.K., said by email. “What traders have priced in very much in the market is that the Fed is going to struggle with respect to any further rate hike for this year.”

Hawkish comments from ECB’s Nowotny on Friday morning briefly lifted EUR across the board and weighed on bund futures.

Emerging market stocks were higher after still cheering their eighth straight month of gains as China’s yuan hit a fresh 14-month high and metals markets continued to rally. Industrial bellwether copper was up 0.4 percent at $6,818 a tonne. The LME contract price touched a peak of $6,872 on Thursday, the highest since September 2014.

Japan’s benchmark bond yield fell below zero percent for the first time since November 16, sliding 1.5bps to -0.005%. The decline was unexpected as earlier in the session the Bank of Japan reduced its purchases of 3-to-5-year govt notes by 30b yen, to 300b yen from 330b yen on August 28 while keeping other maturity buckets unchanged. This marked a third open market purchase reduction in the past month, with cuts in the 5-to-10 year zone previously. Banks quickly jumped on the supply-shortage driven tapering bandwagon and, as Mitsubishi UFJ said “unless the BOJ cuts purchases further, the yield decline will deepen” while Makoto Suzuki, strategist at Okasan Securities, said that “even a further decrease in bond purchases is unlikely to cause a spike in yields.”

The drop in 10-year Japanese government bond yield below zero percent paves the way for further cuts in purchases at Bank of Japan’s next relevant market operation, said Akio Kato, general manager of trading at Mitsubishi UFJ Kokusai Asset Management. “Without a cut in purchases, yields will fall too low, given that the yield today fell below zero even as the BOJ reduced amount in 3-5 year zone” Kato added. “If the BOJ continues to cut a couple more times this month, annual buying would fall below 60t yen, calling into question the 80t yen annual monetary expansion target” the strategist said, cited by Bloomberg.

Anyway, back to Asia ex Japan, where with the North Korean crisis forgotten, at least until the next time Kim lobs a handful of missiles over Japan and this time he hits something, South Korea’s won and China’s yuan gained while most other Asia’s emerging currencies were steady ahead of U.S. jobs data and amid holidays in some major Southeast Asian markets. The ASX 200 (+0.1%) and Nikkei 225 (+0.2%) were both supported at the open, but then pared some gains as the financial sector dragged alongside declining yields. Shanghai Comp. (+0.2%) and Hang Seng (flat) initially traded positive (Hang Seng pared gains heading into the close) despite a net weekly liquidity drain by the PBoC, as participants cheered better than expected Chinese Caixin Manufacturing PMI which printed a 6-month high and showed New Orders and Exports components advanced at the fastest pace in multiple years. Government bonds were mixed while the MSCI EM Asia Index of shares advanced, supporting risk sentiment.

“It’s hard to take any significant position before the U.S. jobs data,” Koji Fukaya, CEO at Tokyo-based FPG Securities, told Bloomberg. “The U.S. economy is solid and the Chinese economy has been stabilizing while the stocks are rising. Such a situation supports emerging currencies due to growing exports and portfolio inflows.”

The Bloomberg Dollar Spot Index was little changed following an overnight loss after a weak inflation report and Treasury Secretary Steven Mnuchin’s comments that a weaker dollar is “somewhat better” for U.S. trade. The yen, the Australian and New Zealand dollars weakened even after Caixin China manufacturing PMI for August beat estimates. Speaking of China’s “other” PMI indicator, one day after the official manufacturing survey sent commodities surging, the Caixin Manufacturing PMI printed at 51.6 for August, beating expectations of 51.0, and above July’s. The New orders sub-index rose by fastest pace
in more than 3 years and exports rose at the fastest pace in 7 years.

Speaking of China, the onshore yuan headed for a 1.2% gain this week, the biggest advance since at least 2007. The CNY strengthened 0.5% to 6.5595 per dollar after the PBOC strengthened the yuan reference rate 0.15% to 6.5909 to the USD. The average year end forecast is 6.5896, according to 15 traders and analysts in a Bloomberg survey, so we are already below it.

While Harvey continues to drift inland, its impact remains. Below is a summary courtesy of Bloomberg of what’s shaping the oil market on Friday:

• Explorer Pipeline planning to start lines over the weekend as full impact of storm Harvey on crude, product markets continues to play out.
• Petro-Logistics says OPEC’s August supply fell about 400k b/d. String of U.S. data due later, including nonfarm payrolls.
• Logjam grows to 29 oil tankers as 11 ports remain closed
• Total Port Arthur is said facing extended shutdown on power loss
• Texas storm bucks N.Y. traders with wild gasoline expiry swings
• NHC issues final advisory on Harvey; losing tropical character

More worrying is what is coming after Harvey, which as we described yesterday, is Hurricane Irma, which one Weather Channel meteorologist described as having the “highest windspeed forecasts I’ve ever seen.”

Oil traders in particular will be closely following Irma’s path, which some models see striking the Gulf of Mexico just two weeks after Harvey left historic damage and devastation in its wake.

Speaking of oil, crude gave up much of Thursday’s increase, while gasoline remained at an elevated level after Tropical Storm Harvey knocked out a quarter of refining capacity. West Texas Intermediate crude fell 1.2 percent to $46.65 a barrel. Copper gained 0.3 percent to $6,807.50 per metric ton, the highest in almost three years. Gold fell 0.2 percent to $1,318.20 an ounce, the biggest fall in more than a week.

In rates, the yield on 10-year Treasuries climbed one basis point to 2.12 percent. Germany’s 10-year yield gained one basis point to 0.37 percent. Britain’s 10-year yield increased less than one basis point to 1.034 percent. Japan’s 10-year yield dropped one basis point to -0.001%.

Friday’s econ data include August employment and jobless rate, Markit manufacturing PMI and ISM manufacturing as well as July construction spending and August auto sales. The second round of negotiations for The North American Free Trade Agreement (NAFTA) begins in Mexico City

Bulletin Headline Summary from RanSquawk

• European equities kick-off the month on the front-foot as participants await today’s US jobs report
• FX markets remain tentative ahead of NFP, while energy markets pull-back modestly from yesterday’s gains
• Looking ahead, highlights include US NFP, ISM Manufacturing and Baker Hughes

Market Snapshot:

• S&P 500 futures up 0.07% to 2,471.75
• VIX down 1.8%, or -0.21 to 10.38
• STOXX Europe 600 up 0.4% to 375.52
• MSCI Asia up 0.2% to 161.18
• MSCI Asia ex Japan up 0.2% to 533.64
• Nikkei up 0.2% to 19,691.47
• Topix up 0.1% to 1,619.59
• Hang Seng Index down 0.06% to 27,953.16
• Shanghai Composite up 0.2% to 3,367.12
• Sensex up 0.5% to 31,880.62
• Australia S&P/ASX 200 up 0.2% to 5,724.59
• Kospi down 0.2% to 2,357.69
• German 10Y yield fell 0.2 bps to 0.359%
• Euro down 0.1% to $1.1897
• Italian 10Y yield fell 3.3 bps to 1.753%
• Spanish 10Y yield fell 1.2 bps to 1.55%
• Brent Futures little-changed at $52.42/bbl
• Gold spot down 0.2% to $1,319.51
• U.S. Dollar Index up 0.05% to 92.72

Top Overnight News:

• Trump Is Said to Weigh Tying Debt Limit Increase to Harvey Aid
• CEOs Urge Trump to Keep ‘Dreamers’ Program for Immigrants
• Trump Cuts to Obamacare’s Ads Threaten Law’s Fragile Markets
• World’s Most Important Chemical Made Rare Commodity by Harvey
• Boeing Tanker Fuel Hose Scraping Jets Raises Air Force Alarms
• Billionaire Birla Is Said to Weigh Constellium, Aleris Bids
• Lululemon FY Adj EPS View Beats Highest Est.
• PANW 1Q Rev. View Midpoint Beats Est.; Shares Rise 3.1%
• Russia’s Power Machines Vies With GE for Hungary Contract: RIA
• Macau Aug. Casino Rev. Rises 20.4% Y/y; Est. 18.5% Rise
• Coca-Cola Eyes Number Three Spot for India Globally, TOI Says
• Google Wins Approval of Email Privacy Class Action Settlement
• Former Goldman Compliance Chief to Advise SEC’s Clayton on MiFID
• Amazon Is Said to Plan Canada Prime Now Launch This Year: WSJ
• Southwest Air Rushes to Ensure Fuel Supply Amid Storm Damage

Asia stocks traded mostly positive after the upbeat tone from Wall St where the Nasdaq printed a fresh record close and sentiment was lifted amid tax reform hopes amid comments from US Treasury Secretary Mnuchin. Furthermore, the region also welcomed strong Chinese Caixin PMI data, although gains were mild amid the looming key-risk NFP release. ASX 200 (+0.1%) and Nikkei 225 (+0.2%) were both supported at the open, but then pared some gains as the financial sector dragged alongside declining yields. Shanghai Comp. (+0.2%) and Hang Seng (flat) initially traded positive (Hang Seng pare dgains heading into the close) despite a net weekly liquidity drain by the PBoC, as participants cheered better than expected Chinese Caixin Manufacturing PMI which printed a 6-month high and showed New Orders and Exports components advanced at the fastest pace in multiple years. 10yr JGBs were mildly higher amid a decline in Asia-Pac yields and with the BoJ also present in the market for an amount just shy of JPY 1tln in JGB with maturities ranging up to 10yrs. Chinese Caixin Manufacturing PMI (Aug) 51.6 vs. Exp. 51.0 (Prev. 51.1). (Newswires) New orders sub-index rose by fastest pace in more than 3 years and exports rose at the fastest pace in 7 years. PBoC skipped open markets operations for a net weekly drain of CNY 280bln vs. last week’s CNY 330bln drain. PBoC set CNY mid-point at 6.5909 (Prev. 6.6010).

Top Asian News

• Modi to Revamp Cabinet to Revive Economy Before Key India Polls
• Tencent Music Is Said to Seek Pre-IPO Funds at $10 Billion Value
• Chinese Billionaire Plots Rescue of a Great British Carmaker
• Caixin China Aug. Manufacturing PMI 51.6; Est. 51
• Rupee Resilience After India GDP Miss ‘Surprising’: StanChart
• China Steel Futures Surge to Record as Plant Fire Fuels Gains

European stocks up for September’s first trading day after three consecutive months of losses. CAC 40 boosted by Vivendi shares which confirmed its outlook for the year and stated that its struggling Canal Plus pay TV was showing signs of improvement. Volvo shares also tracking higher after setting new financial targets. ECB’s Constancio says Euro Area recovery becoming increasingly robust. ECB’s Nowotny says that as long as inflation is low, he does not see the need for higher interest rates. Quiet trading overall with Bunds holding a relatively narrow range this morning. Peripherals performing better relative to core debt with the German-Portuguese spread tightening by some 2.7bps, Italy also narrower by circa 1.5bps.

Top European News

• Stalled Brexit Talks Pile Pressure on May to Negotiate Deal
• U.K. Manufacturing Unexpectedly Accelerates to Four-Month High
• Ruble Defies August Curse, Sanctions for Monthly Gain: Chart
• Gemalto Slides; Bryan Garnier Sees Potential for Another Warning
• Europe Miners Gain; Steel Stocks Remain Volatile: Deutsche Bank
• Sophos Gains After Palo Alto Said Demand Environment ‘Solid’
• ECB’s Nowotny Says Japan Shows EU Must Move Fast to Repair Banks

In currencies, the EUR is marginally weaker this morning, largely following from yesterday’s ECB source reports over EUR appreciation, alongside the mild uptick in the greenback. The theme for EUR as we head towards the ECB meeting may well be on speculation that Draghi and Co. may highlight risks to the appreciating currency. As such, EUR could possibly be pressured ahead of the monetary policy decision. Today, there are chunky expiries that may magnetise price action with 2.6bln worth of vanilla options from 1.1870-1.1900. The US Dollar is slightly firmer this morning, ahead of the US job numbers (Exp. 180k), also as tensions between North Korea and the US has seemingly eased off since the beginning of the week. In turn, this has seen USD/JPY break back above 110.00 amid the slight improvement in risk sentiment. Cable received a small uptick from better than expected UK Mfg. PMI which also showed an upward revision. However, sentiment remains bearish for the currency with Brexit talks showing little signs of progress.

In commodities, it is the same story for crude prices, with flooding at US refineries after Hurricane Harvey continuing to weigh on prices.

Looking at the day ahead, the final August PMIs for Germany, Eurozone, UK, France and Italy are due this morning. In the US, the highlight is the employment report for August. The August ISM manufacturing print (56.4 expected) is also worth keeping an eye while the July construction spending and University of Michigan confidence isurvey is also due. Away from the data, ECB governing council member Nowotny joins a panel discussion and ECB VP Constancio will speak. Elsewhere, the second round of NAFTA negotiations begins in Mexico City.

US event calendar

• 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 209,000
  • Unemployment Rate, est. 4.3%, prior 4.3%; Underemployment Rate, prior 8.6%
  • Average Hourly Earnings MoM, est. 0.2%, prior 0.3%; YoY, est. 2.6%, prior 2.5%
  • Average Weekly Hours All Employees, est. 34.5, prior 34.5; Labor Force Participation Rate, prior 62.9%
• 9:45am: Markit US Manufacturing PMI, est. 52.5, prior 52.5
• ISM Manufacturing, est. 56.5, prior 56.3
  • ISM Prices Paid, est. 62, prior 62
  • ISM New Orders, est. 60, prior 60.4
  • ISM Employment, prior 55.2
• 10am: U. of Mich. Sentiment, est. 97.5, prior 97.6; Current Conditions, est. 110.9, prior 111
  • 10am: U. of Mich. 1 Yr Inflation, prior 2.6%; 5-10 Yr Inflation, prior 2.5%
• 10am: Construction Spending MoM, est. 0.5%, prior -1.3%
• Wards Total Vehicle Sales, est. 16.6m, prior 16.7m; Domestic Vehicle Sales, est. 12.9m, prior 13m

DB’s Jim Reid concludes the overnight wrap

Well August has flown by in a hurry. It wasn’t quite the typical quiet final month of summer that we might have expected with the headlines out of Washington – namely the debt ceiling debate but also signs of  further friction in Trump’s inner circle – and North Korea being enough to keep markets on their toes. In the end though markets are heading into September on the front foot helped in part by some upbeat macro data in the last few days. A slight upside surprise in the July CPI data for the Eurozone yesterday continued the positive momentum, while inflation data in the US later in the afternoon, while far from spectacular, at least came in in-line with market expectations. More details on that later.

As you’ll see in the day ahead at the end we’re ending the week today with a bit of a bang too. As always payrolls will likely be front and centre. For what it’s worth the market consensus is running at 180k for August following a 209k print in July. Following the decent ADP print on Wednesday (237k vs. 185k expected) our US economists revised up their payrolls estimate to 200k from 185k. They note that the details in the ADP suggest that the Amazon hiring spree proved an upside risk and as such that was the basis for their change in forecast. All that said we have been arguing that inflation and the debt ceiling have arguably taken over as the bigger issues for the Fed outlook right now so while not completely dampening down the importance of payrolls, it feels like the data is not quite as significant as it once was in the past. With that it’ll be worth keeping an eye on the associated wages data in the employment report (+0.2% mom and +2.6% yoy consensus). Later on we’ll also get the August ISMs while this morning we’ll get the final PMI revisions in Europe. So plenty to get through.

As noted at the top, risk assets generally had a pretty decent final day of August. The S&P 500 closed +0.57% last night and with that took its run of consecutive daily gains to 5 days and the longest streak since the 7-day run in May. That came after the Stoxx 600 had closed +0.77% which means the index has rallied +1.47% in the last two sessions and the most in a month and a half. That move was once again partly helped by an early fall for the Euro which touched the lowest level since Friday, but then reversed and closed +0.22% higher for the day. The early driver appeared to be a Reuters report suggesting that the recent appreciation in the single currency was concerning a growing number of ECB policymakers, which in turn was building the pressure for a more gentle reduction in the pace of QE. Late in the afternoon the reversal came after US Treasury Secretary Steven Mnuchin said “having a weaker USD is somewhat better for us (as it relates to trade)”. Following on, he also said that the additional spending needed to help Texas may reduce the amount of time Congress have to increase the debt ceiling limit by “a couple of days”. This ties in with reports that Trump is considering attaching an increase in the US debt limit to an initial request to  Congress for disaster relief funding of $6bn for Hurricane Harvey.

Sterling was also a notable mover intraday, but like the Euro also ended slightly up (+0.04%) for the day at 1.2930 after the USD weakened. All the talk yesterday was about more signs of Brexit talks failing to progress with the EU saying the UK has not outlined its position clearly, while the UK hit back by saying that the EU is not being flexible. It appears that the key sticking point is agreeing on the UK’s financial settlement. There is no confirmed figure but the European Commission’s Juncker had suggested before it could be 60bn Euros after factoring in budget commitments, pensions and pledge contingencies. A recent poll by ICM showed 65% of British tax payers believed 20bn was already too much.

Jumping over to Asia now where the Caixin manufacturing PMI for China in August was slightly stronger than expected at 51.6 (vs. 51.0 expected) and up from 51.1 in July. This confirms the manufacturing PMI earlier this week. While we’re with China, it’s worth noting a date in your diaries as later in the year on 18th October, 2,300 delegates will meet in Beijing for the 19th Communist Party Congress meeting where the focus will be on potential changes to leadership posts and a party report that will set out the key government policy for the next five years.

This morning markets are for the most part flat to modestly firmer. The Hang Seng (+0.31%), Shanghai Comp (+0.58%) and ASX (+0.15%) are all up while the Kospi and Nikkei are flat.

Moving onto yesterday’s macro data. With regards to that inflation data in the US, while the July core PCE was in line at +0.1% mom and +1.4% yoy, the annual rate is now the lowest since December 2015 and well below the Fed’s target of 2%. Elsewhere, the personal income data was solid. Personal income grew faster than expected at +0.4% mom (vs. +0.3% expected) but personal spending missed slightly at +0.3% mom (vs. +0.4% expected). Elsewhere initial jobless claims remained low at 236k and continuing claims at 1,942k. Meanwhile the Chicago PMI was higher than expected at 58.9 (vs. 58.5 expected) although flat versus last month, while pending home sales disappointed with a -0.8% mom decline (vs. +0.3% expected).

Over in Europe, the Eurozone’s headline inflation was a tad higher, driven by energy costs, but core inflation was in line at +1.2% yoy, which is above the lows of recent years but unlikely to be enough to prompt  the ECB to alter course. Elsewhere, the inflation print for France was in line at +0.6% mom while Italy’s inflation was slightly higher than expected at +0.1% mom (vs. 0.0% expected). Elsewhere the unemployment rate for the Eurozone was in line at 9.1% yoy. Finally, Germany’s July retail sales remained volatile and was slightly lower than expected at -1.2% mom (vs. -0.6% expected).

Looking at the day ahead, the final August PMIs for Germany, Eurozone, UK, France and Italy are due this morning. In the US, needless to say the highlight is the aforementioned employment report for August. The August ISM manufacturing print (56.4 expected) is also worth keeping an eye while the July construction spending and University of Michigan confidence isurvey is also due. Away from the data, ECB governing council member Nowotny joins a panel discussion and ECB VP Constancio will speak. Elsewhere, the second round of NAFTA negotiations begins in Mexico City.

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Authored by Nick Cunningham via OilPrice.com,

The skies are clearing over Houston, but the damage from the remaining elements of Hurricane Harvey has spread east to Port Arthur and Lake Charles along the Texas-Louisiana border. That has knocked more refineries offline, including the largest refinery in the United States.

In the aftermath of the storm, the most serious threat to the energy industry is the extended outage of refineries and pipelines, according to Goldman Sachs. The problem actually looks worse than it did earlier this week as the deluge has shifted towards Port Arthur, another refining hub. Motiva, which runs the U.S.’ largest refinery in Port Arthur, began to completely shut down its 600,000 bpd facility on Wednesday.

Goldman says the refinery shut downs, as of August 30, have spiked to 3.9 million barrels per day (mb/d), although upstream oil production outages have dropped below 1 mb/d. More ports are now closed – in addition to Corpus Christi and Houston, the ports of Lake Charles, Beaumont, and Port Arthur have shut down.

These outages, the investment bank says, will mean that the “ongoing recovery in production will only be partial.” The refinery and pipeline closures are “leaving the oil market long 1.9 mb/d of crude vs. last Thursday, short 1.1 mb/d for gasoline and 0.8 mb/d for distillate.”

More worrying is that the recovery might not be quick. While most refineries had controlled shut downs, there are quite a few, especially in the Port Arthur region, that have been inundated with water, which means that the damage to them is still unknown. Based on the past major hurricanes of Rita and Katrina, Goldman speculates that about 10 percent of the 4 mb/d of refining capacity that has been disrupted will remain offline for several months.

Other analysts agree that the damage could result in lengthier outages than many had hoped. “I'm actually quite concerned about Beaumont-Port Arthur because they just got a huge amount of rain in 24 hours, and we've already seen flooding within the refineries themselves, so we don't know exactly how bad it's going to be,” Andy Lipow, president of Lipow Oil Associates, told CNBC. “If it is bad, you're looking at six to eight weeks of outages over in Beaumont-Port Arthur.”

Ultimately, that could mean that upstream oil producers will be unable to return to full production. Damage to pipelines, storage and processing facilities will also inhibit a full recovery. "It will be a while before operations can return to normal and the U.S. refining industry is bracing itself for an extended shutdown," Stephen Brennock of PVM wrote in a research note.

The prospect of lasting damage to the energy industry is sinking in. “Back to normal is months, not weeks, for exports and for the industry and the region. We have to acknowledge that,” Barclays analyst Michael Cohen wrote.

While much of the focus is (rightly) centered on the effect on gasoline supply, the refinery outages could eat into crude oil demand for quite some time. In fact, on balance, Goldman says that the supply outages could be outweighed by the destruction of demand. Houston alone accounts for around 750,000 bpd of oil demand. Goldman Sachs estimates the region will see demand fall by about 0.7 mb/d in the first month after the storm.

That will make “it harder for OPEC to rebalance the market and maintain bullish sentiment," Barclays' analysts said. OPEC has been struggling to drain inventories for almost a year, but without a substantial portion of U.S. refineries online, inland crude oil storage facilities in the U.S. could fill up once again. And the dip in demand could mean OPEC’s time horizon for balancing gets pushed out a bit more into the future, just as the cartel was hinting that it might have to extend its production cuts anyway.

But the problem is more complex because U.S. data will be much “noisier and less useful as a high frequency indicator at the very time OPEC needs it most,” Barclays says. Storage might increase, refinery runs will bounce around, production figures will edge up slowly – in short, the trend lines that the market has become accustomed to will be all out of whack. And because the U.S. offers the most transparent data, closest to real-time as one can get, it has an outsized impact on market psychology. The data will be really messy for weeks to come, which will complicate OPEC’s strategy.

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Twenty-three years after former Drexel Burnham Lambert executive Michael Milken finished a 22-month minimum-security prison sentence, one fund manager is lobbying President Donald Trump to pardon his past convictions, arguing that Milken’s prosecution was an example of anti-banker hysteria run amok.

Wealth-management executive David Bahnsen told Bloomberg that he sent a plea to Trump asking that he pardon Milken, an innovator who is widely lauded in the financial world for helping to popularize junk bonds among a broader set of investors during the 1980s. Bizarrely, Bahnsen says he’s never met the man. Milken pleaded guilty to securities fraud charges in 1992, and was initially sentenced to 10 years in prison, though he only served 22 months.

Bahnsen said a pardon would send an important message to prosecutors trying to burnish their reputations by going after white-collar criminals.

“Bahnsen, a managing director at Morgan Stanley before he started his own wealth-management group in 2015, told Trump in a letter that Milken’s prosecution was a result of “a period of class envy run amok.” Bahnsen, a Republican donor, said in an email he’s never met Milken.

…

Bahnsen, whose Bahnsen Group oversees more than $1 billion, told Trump the pardon would signal a stop to “headline-seeking, human-damaging corporate prosecutions, devoid of due process.” The banker said he sent an earlier version of the request and revised it after Trump pardoned former Maricopa County Sheriff Joe Arpaio last week.”

Milken, 71, is now a philanthropist and namesake of the Milken conference. While he was investigated by the SEC in 2013 for allegedly violating his lifetime ban from the securities industry, the matter was eventually dropped. Milken has not asked that he be pardoned.

Seeing that Milken himself hasn’t asked for a pardon – and the public is still widely resentful of Wall Street executives for evading prosecution after the financial crisis – it’s unlikely that the request will be seriously considered.

Trump proved his mastery of the f**k you pardon by granting clemency to sheriff Joe Arpaio, a man who – apart from being a longtime friend and campaign-trail ally – is popular with a certain segment of Trump’s base. But we doubt he would do it again to appease a much, much smaller crowd of supports, with whom he has a shaky alliance, at best.

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Authored by Drieu Godefridi via The Gatestone Institute,

• It is through these tax breaks that the Qataris are buying the "jewels" of France. The U.S. is not selling its defense companies to Qatar.
• Thanks to its huge gas and oil reserves, Qatar has the highest per capita income in the world and huge reserves of cash to invest everywhere, whereas France, thanks to 40 years of socialism, is in dire need of cash.

The state of Qatar has been officially labelled as a "state sponsor of terrorism", and an active supporter of Islamic terrorist organizations such as the Muslim Brotherhood, al-Qaeda and the Islamic State — not by Western governments, but by Saudi Arabia, the cradle of Islamic faith, and the other Islamic regimes of the region.

Knowing the facts of Qatar — 11000km², one-third the size of Belgium, population 2.5 million — the question may seem far-fetched: How could France, the great France, possibly be bought by a tiny state such as Qatar?

For the single reason that, thanks to its huge gas and oil reserves, Qatar has the highest per capita income in the world and huge reserves of cash to invest everywhere, whereas France, thanks to 40 years of socialism, is in dire need of cash and has a tradition of corruptible officials, to say nothing of a propensity for "collaboration".

On August 4, the English press — not the French press — revealed that French prosecutors are actively investigating two events: the awarding the 2022 World Cup of football (soccer) to Qatar, and the purchase by "Qatari Diar", a state-owned investment company, of a stake in the French utility firm Veolia.

At the center of the investigation is former French President Nicolas Sarkozy. To be sure, Sarkozy has not been formally indicted (and he may never be), but the evidence is overwhelming.

First, the World Cup. That the State of Qatar, known for decades for its active support of Islamic terror organizations, and with a temperature among the highest in the world — in addition to zero tradition in the world of football — was awarded the 2022 World Cup is, of course, a source of wonder ever since the award was announced by FIFA, the international governing body of football.

French investigators are now looking into a meeting that took place between then-President Sarkozy, Michel Platini — the French former president of the Union of European Football Associations (UEFA), who sat on the FIFA committee that chose Qatar — and Qatari officials on November 23, 2010 (10 days before the vote). It is alleged that Platini was dead-set against Qatar and that Sarkozy urged him to change his mind: "They're good people."

The "deal" is said to have been sealed when Qatar agreed to buy the biggest French soccer team, the Paris-Saint-Germain (PSG). It is alleged that huge bribes were paid by Qatar to high-ranking French officials, to secure these two deals: the World Cup and the Veolia investment. Although no evidence has yet been presented, the case would not have been opened by French prosecutors without it. In addition, no one has ever denied the meeting of November 23, 2010.

In April 2010, the "Qatari Diar" fund bought a 5% stake in Veolia. Investigators are tracking 182 million euros suspected of having been used to bribe French officials. Investigators are also looking into a possible link between these two operations: Qatar investing in Veolia as a favor to France, possibly in exchange for France's support for Qatar to host the 2022 World Cup.

France's then-President Nicolas Sarkozy (left) greets Qatar's then-Prime Minister Sheikh Hamad bin Jassim bin Jabor al-Thani (right) on March 19, 2011 in Paris, France. (Photo by Franck Prevel/Getty Images)

It is doubtful if the French investigators will ever get to the bottom of these two cases. The judiciary in France has a long tradition of submitting to the government. Since 1789, the French judiciary has not even been an independent power — as are the Legislative and the Executive — but a mere authority with a more limited scope.

It is revealing that these two investigations were exposed, not by the French press, but by the English press.

What we already know for sure is the following:

1. A state sponsor of terrorism, Qatar, was allowed to buy France's leading soccer team, Paris-Saint-Germain, with the help of then-president Nicolas Sarkozy. The former owner of the PSG was a private fund controlled in Europe by one of Sarkozy's close friends. There would have been no deal without the direct consent of Sarkozy — that is the way France functions.

2. A state sponsor of terrorism, Qatar, was not only allowed, but actively courted, by French officials to invest in some of France's largest companies, including defense companies, such as Veolia, as well as the Airbus parent company, European Aeronautic Defence and Space Company (EADS); the energy group EDF; the construction firm, Vinci; and the media and defense group Lagardère.

3. A state sponsor of terrorism, Qatar, was actively supported in its 2022 bid for the World Cup by the government of France and Nicolas Sarkozy, who declared after the FIFA vote in 2010: "Sport does not belong to a few countries. It belongs to the world… I don't understand those who say that events should always be held in the same countries and the same continents."

4. There is a significant part of the French political class that seems to consider the Embassy of Qatar in Paris some sort of automatic teller machine (ATM), as has been showed by renowned journalists Christian Chesnot and Georges Malbrunot in their book, Nos très chers émirs (Our Very Dear Emirs) and deplored by the new ambassador of Qatar in France, Meshaal al-Thani.

5. Since 2008, a state sponsor of terrorism, Qatar, has benefited from a huge tax break in France: the exemption of profits on property sales. In France, profits on property sales are not only taxed at 19%, they are subject to a further CSG/CRDS and social tax (15.5%), resulting in a combined total minimum tax rate of 34.5%. The rule is the same for everyone, whether a person or a corporation. Everyone, that is, but the State of Qatar, when the administration of Nicolas Sarkozy decided to exempt it from the tax. As a result, Qatar's royal family and sovereign fund have since built up a huge portfolio of assets in France, one that dwarfs the portfolio of a state such as Saudi Arabia. Qatar's portfolio ranges from a Champs-Élysées mall to the Lido Cabaret. "Our deficit has destroyed our freedom," said Nathalie Goulet, a centrist senator from Lower Normandy, in 2013. "The Qataris are here to buy, while we are selling our family jewels." Which they did.

Qatar and other Gulf states try to benefit from tax exemptions everywhere in the world, but this convergence of facts — the selling of assets, sports clubs, defense companies and governmental representatives — is unique to France. It is through these tax breaks — this is only one of them — that the Qataris are buying the "jewels" of France. Of course, the U.S. is also selling arms to the Qataris — the U.S. has a military base in Al Udeid — but the U.S. is not selling its defense companies to Qatar.

We therefore probably do not even have to wait for the results of the latest investigations to note that France, particularly but not exclusively under the auspices of Nicolas Sarkozy, has literally been bought by a state sponsor of terrorism, Qatar.

At the same time, Islam in France has been spreading. France has been deeply infiltrated by the Muslim Brotherhood terror organization, which is not categorized in France — unlike the UK — as a sponsor of terror. This organization, since it was overthrown by Egypt's current president, Abdel Fattah al-Sisi, is now the darling of Qatar. Without Qatar, the Muslim Brotherhood would be without a home-base. Given its huge financial, corporate and political dependence on Qatar, it is clear that France — in the name of "stability" — would not do anything to displease its darling.

Although France is a member of NATO and a nuclear power, nowhere else in the West is Islamism so deeply embedded in the fabric of the institutions, mind and zeitgeist of a country as it is there. Even in the UK, you still find very powerful counter-powers (see the governmental report on the Muslim Brotherhood). Not in France.

Consider the case of the Palestinian official Jabril Rajoub — sentenced to life in prison in 1970 for throwing a grenade at an Israeli army vehicle, but released, along with others, in exchange for three Israeli soldiers taken hostage by the Popular Front for the Liberation of Palestine (PFLP). Rajoub is now chairman of the Palestinian Football Association — another illustration of the deep infiltration of FIFA by Islamists and Jew-haters sponsored by Gulf States, beginning with Qatar. Would that position even be thinkable without France's sponsorship of Qatar in FIFA? Probably not.

It is true that Qatar is buying assets from around the world, including politicians, not only in France. And it is true that the U.S. is also selling arms to the Qataris, as are many other countries. It is one thing, however, to sell arms, but another to sell your defense companies. It is one thing to be open to foreign investment, but another to give huge tax breaks to a state sponsor of terror so it can acquire the "jewels" of your country.

It is also not an accident that the main face of Islamism in Europe, the Muslim Brother Tariq Ramadan (from his base in Oxford, England) now sees France as the future of Islam in Europe, and not the UK (still number 2 on the list).

The U.S. and other countries may be selling things, but France is selling herself.

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Here’s a piece of news that the remaining human members of Wall Street’s FX sales and trading desks probably don’t want to hear.

According to the Financial Times, six of the world’s largest banks have decided to join a blockchain project called “utility coin” that will allow banks to settle trades in securities denominated in different currencies without a money transfer. What’s worse, the banks expect to begin live-testing the project late next year.

Here’s the FT:

“Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, HSBC, MUFG and State Street have teamed up to work on the “utility settlement coin” which was created by Switzerland’s UBS to make financial markets more efficient.

 

The move comes as the project shifts into a new phase of development, in which its members aim to deepen discussions with central banks and to work on tightening up its data privacy and cyber security protections.”

The project’s managers say they’ve already involved representatives from various central banks…

“Hyder Jaffrey, head of strategic investment and fintech innovation at UBS, said: “We have been in discussions with central banks and regulators and we will continue that over the next 12 months with the aim of a limited ‘go live’ at the back end of 2018.”

Here's a brief explanation of how it's expected to work , courtesy of the FT:

“The utility settlement coin, based on a product developed by Clearmatics Technologies, aims to let financial groups pay each other or to buy securities, such as bonds and equities, without waiting for traditional money transfers to be completed.

 

Instead they would use digital coins that are directly convertible into cash at central banks, cutting the time, cost and capital required in post-trade settlement and clearing.

 

The coins, each convertible into different currencies, would be stored using blockchain, or distributed ledger technology, allowing them to be swapped quickly for the financial securities being traded. Existing members of the project are Deutsche Bank, Banco Santander, BNY Mellon and NEX.”

Initially, utility coin will be used primarily for interbank payments, the banks told the FT. Say two institutions owed one another sums denominated in two different currencies. They could settle those payments in utility coin instead of routing payments through an interbank broker. This will only hasten the declining employment of human currency traders, as fewer trades executed via traditional systems means even less business and even more pressure to automate.

To be sure, even after the “utility coin” system is up and running, a broader use-case could still be years away. As the FT notes near the end of the story, the coins can only be used to settle trades involving securities that are trading on a blockchain. While a few companies (notably Overstock.com) have successfully issued blockchain-based assets, it could be years – or even decades – before blockchain systems supplant the current market infrastructure.

“Before the coins could be used for settling securities trades, he said the securities themselves will need to be transferred to blockchain systems, otherwise the benefits of speed and reduced capital requirements will be lost.”

Assuming it happens at all. Even if the changeover were to be gradual, it would still require the cooperation of banks, exchanges, brokers, clearing houses etc. This remains unfeasible from a technology perspective. And even once blockchains can reliably achieve economies of scale, any kind of transition would probably take years.
 

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