Month: July 2019

A brazen daylight assassination raid by unknown attackers on a restaurant in the northern Iraqi city of Erbil has left at least one Turkish diplomat dead and two others injured. “They were shot at point blank range by unknown assailants,” one eyewitness described of the afternoon attack which local security sources described as a “serious” and developing situation. 

Despite global headlines initially identifying three diplomats killed, Turkey’s Foreign Ministry confirmed “One personnel of the Erbil embassy was killed in an armed attack today afternoon as he was outside the embassy building.” However, it appears multiple diplomatic personnel were shot, with one Iraqi bystander possibly killed. The shooting comes during an uptick in Turkey’s highly controversial cross-border operations against the PKK in northern Iraq.

Iraq’s Irbil is the seat of the Kurdistan Regional Government (KRG), which Turkey has historically had very tense relations with as it’s long attempted to root out the outlawed Kurdistan Workers’ Party (PKK). Ankara has in the past accused Iraq and Syria of harboring Kurdish “terrorists” at war with the Turkish state across its border. 

Since 2018 and multiple times before, notably in 2008, Turkey’s armed forces have been embroiled in military offensives in northern Iraq, which both the KRG and the federal government in Baghdad have condemned as illegal incursions and a violation of Iraqi sovereignty. 

Conflicting reports suggest more may have died, given at least three were shot by “unknown assailants” per Al Jazeera:

Security sources earlier told Al Jazeera that at least three Turkish security personnel were killed in Wednesday’s attack. Among those reported killed on Wednesday was the Turkish deputy council-general.

Al Jazeera’s Osama Bin Javaid, citing security sources, said the incident took place in the upscale neighbourhood of Ankawa.

“They were shot at point blank range by unknown assailants,” he told, reporting from Iraq’s capital, Baghdad.

The area of the shooting is being described as among “the safest in the city” according to reports.

And further, one well-known US war correspondent has pointed out the restaurant is located directly across from the US consulate in the city. 

#BREAKING

A restaurant with #Turkish embassy personnel inside in #Iraq‘s #Erbil was attacked, leaving one personnel dead.

It was reported that #Turkey‘s Ambassador Hakan Karaçay was not at the scene during the attack. pic.twitter.com/ytBhP9oBaU

— EHA News (@eha_news) July 17, 2019

The group of Turkish diplomats had been dining at the restaurant when the attack to place, however, top Turkish diplomat in Erbil Hakan Karaçay was not present. The AFP reported the Turkish vice consul as being among the dead.

Local media reports the area is in lock down as KRG police attempt to track and root out the suspected assassins. 

Recent weeks have witnessed an uptick in Turkey’s highly controversial cross-border operations against the PKK in the Hakurk region of northern Iraq. Likely the gunmen belonged to the PKK or another Kurdish militant movement angered by recent Turkish aggression in the region. 

via ZeroHedge News https://ift.tt/2XRGSGw Tyler Durden

Authored by Bryce Coward via Knowledge Leaders Capital blog,

We have been surprised over recent weeks to read a slue of commentary proclaiming that the economy is in great shape and Fed Chairman Powell is just pandering to markets by signaling rate cut(s) in July and beyond. Specifically, “strong” readings from the employment report, inflation and now retail sales have received much attention even as much more leading data continues to point to weakness among these very indicators in the second half of 2019. In this post we’ll try to show why Chairman Powell is right to cut rates here and now and why incoming data has done little to alter the intermediate-term outlook of a slower economy ahead.

Employment

The recent employment report is probably the most misunderstood of all the recent economic data. Yes, non-farm payrolls came in at 224K vs an estimate of 160K. However, the report paints a much different picture when you lift up the hood. For example, the important hours worked component sank to a 1% YoY growth rate, a level only breached on the downside two other times during this recovery (in 2016 and 2014). More striking, though, is the fact that multiple job holders increased by 301K, outpacing total payroll growth by 77K. That means that people picking up a second job (think college-age kids picking up two summer jobs) explains the entire growth in payrolls for the month of June. Single job holders actually decreased by 77K.

What’s more, employment is a lagging indicator. It tells us practically nothing about the state of the economy now, but rather its state three months ago. The ISM manufacturing PMI, which is a leading indicator and leads payroll employment by a quarter, points to slower payroll growth in the immediate future. The ISM manufacturing PMI also points to a rise in initial unemployment claims compared to year-ago levels for at least the next quarter. Therefore, not only was the employment report not “strong”, the next few employment reports could get markedly weaker as the summer progresses.

Inflation

Core CPI reported last week increased by 2.1% YoY compared to estimates of 2% YoY. Core producer prices increased by 2.3% YoY compared to estimates of 2.2% YoY. Never mind the fact that intermediate goods prices are now growing at just 1% and the earliest stage goods prices are declining at 5% YoY – that is, there is price disinflation baked into the pipeline. The price numbers coming in higher than expected have been read to mean there is little slack in the economy. However, these stats too are lagging indicators. For example, unit labor costs lead core consumer prices by 1 year, and unit labor cost growth just slipped into negative territory for the first time since 2014 and 2010 before that. This suggests pricing pressure will abate through the middle of 2020.

Retail Sales

Retail sales were released today and showed growth of .4% MoM compared to expectations for .1% growth MoM. This large “beat” looks good on the surface, but we also must consider how those retail sales are being funded. If consumers were saving a lot less in order to fund current consumption, then a strong retail sales number wouldn’t be very indicative of future retail sales since depleting one’s savings rate cannot go on indefinitely. In fact, US consumers have reduced their savings rate from 7.4% to 6.1% while YoY retail sales growth has improved from a little over 1% to 3.4%. Given that the 6% mark is pretty much the lowest savings rate that has prevailed this entire expansion, our dry ammo to fund faster consumption growth is about shot.

Moreover, ISM new orders actually lead the retail sales figures by 1 quarter and ISM new orders just hit a multi-year low of 50. Readings above 50 indicate expansion while readings below 50 indicate contraction. The ISM is telling us retail sales growth could slow markedly by the end of the summer.

Outlook for the ISM

It’s one thing to look at the current level of the ISM report and its components to forecast the direction of other economic variables. After all, the ISM is about the most leading economic indicator out there. But, based on how changes in interest rates affect the growth rate of the economy with a lag, we can also forecast the intermediate direction of even this leading indicator. Currently, the rise in long-term US rates we saw from 2016-2018 is still being felt in the economy and will continue to be felt through the rest of this year.

This suggests that the ISM manufacturing index faces a difficult path ahead. When the most leading economic indicator has more downside, it may be prudent to look through “strong” lagging economic data. That may be just what Powell is doing now. If he wasn’t doing so, we’d be a lot more scared a slowdown turning into a recession.

via ZeroHedge News https://ift.tt/2GjuxVE Tyler Durden

A major case involving three Iranian citizens who for years allegedly smuggled nuclear related materials into Iran from a US broker has been revealed this week in a New York federal court. 

The scheme involved illegally exporting “many tons” of carbon fiber out of the United States between 2008 and 2013, which federal prosecutors say violated existing US sanctions and a UN embargo, given the direct military and nuclear use capability of the substance. 

One of the three accused, Behzad Pourghannad, was successfully extradited from Germany but the other two, Ali Reza Shokri and Farzin Faridmanesh, remain at large. The conspiracy involved an unidentified broker shipping the banned substance out of the US to Iran via third parties in Europe and the UAE, while paperwork was fabricated to circumvent US export laws. 

In a statement, US attorney for the Southern District of New York, Geoffrey S. Berman described that, “Carbon fiber has many aerospace and defense applications, and is strictly controlled to ensure that it doesn’t fall into the wrong hands. Pourghannad and his co-defendants allegedly went to great lengths to circumvent these controls and the United States’ export laws. Together with our law enforcement partners, we will continue to protect our nation’s assets and protect our national security.”

And a statement published to the Department of Justice website noted, “Pourghannad is alleged to have sought to procure for Iran large amounts of carbon fiber — a commodity that can be used in the enrichment of uranium.” The DOJ and FBI further described the conspiracy as seeking to assist “Iran’s destabilizing efforts and make Americans less safe.”

An FBI counterintelligence division chief added, “Iran remains determined to acquire U.S. technology with military applications, and the FBI is just as determined to stop such illegal activity,” according to NBC.

The indictment doesn’t reveal precisely how much carbon fiber is believed to have made it to Iran, and the American-based source of the UN embargoed material is not named, and it’s further unclear if the source was consciously involved in trying to evade sanctions on Iran. The men each face multiple 20-year sentences, but it’s unknown if law enforcement are close to apprehending two of the men who remain on the run. 

Iran actually successfully established its own carbon fiber production facility starting in 2011, according to reports, likely now making it less urgent to procure it abroad in places like the United States or Europe. 

via ZeroHedge News https://ift.tt/2JR2wFE Tyler Durden

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

In a previous article, The Fed’s Body Count, we stated:

“Markets and economies, like nature itself, are beholden to a cycle, and part of the cycle involves a cleansing that allows for healthy growth in the future. Does it really make sense to prop up dead “trees” in the economy rather than allow them to fall and be used as a resource making way for new growth?”

We come back to that thought in this article inspired by the notion that investors find themselves in a forest increasingly littered with dead trees. In today’s market parlance, the dead trees (corporations) are called zombies.  This article details the corporate zombie concept in-depth and provides a few examples to illustrate the topic.

The Walking Dead

It is no small irony that one year after the end of the great recession, a television show about the zombie apocalypse quickly became one of the most successful shows on TV. The Walking Dead features a large cast of “survivor” characters under near-constant threat of attack from mindless zombies, or “walkers” as they are called.

In the investment world, the term zombie has a special connotation generally referring to a company that might otherwise not be around had the Federal Reserve not suppressed interest rates for so long. The zombie label is fitting as these companies do not die as they should and at the same time, they devour capital and resources that could otherwise be used by healthy companies. They are a drain on the economy.

Although not a matter of life and death, investing in zombie companies or failing to understand the implications of their existence poses a unique risk to one’s economic well-being.

Zombies Defined

The generic description used for zombified companies is too obtuse to use to precisely identify such companies. If the suppression of interest rates served a key role in maintaining these firms, what would be the circumstances fundamental to that condition?

Corporate zombies are generally described as companies that cannot function without bailouts and/or those firms that can only afford to service the interest on their debt while deferring repayment of principal indefinitely. In our view, those definitions do not go far enough.

In a recent interview, James Grant of Grant’s Interest Rate Observer offered what seems to be the most precise definition – zombie companies fail to generate enough operating income to cover the interest on their outstanding debt. Furthermore, that condition would have to persist for more than one year to eliminate any anomalous results.

In other words, a corporation that fails to cover its interest expense can, for a time, keep borrowing to make up the shortfall, especially if money is cheap. On the other hand, true zombie status is revealed, and the “headshot” of demise ultimately comes, when the company runs out of borrowing runway. That circumstance can unfold rather quickly in an economic downturn or a period of rising interest rates when the negative differential between operating income and interest expense widens further.

Operating Income is defined as gross revenue minus wages, cost of goods sold, and selling, general and administrative expenses (SG&A). Operating income does not include items such as investments in other companies, taxes, or interest expense. Isolating the difference between operating income and interest expense is a way of comparing the revenue that a company expects to become profit versus the cost incurred for borrowed funds. It is a variation of a leverage ratio.

Zombie Hunt

We analyzed the broad S&P 1500 to identify companies having zombie characteristics under Grant’s definition. Namely, does their interest expense exceed their operating income and has it done so when averaged over the last three years?

The list of stocks that qualify as zombies under this definition using Bloomberg data through Q1 2019 reveals 204 companies or 13.5% of the S&P 1500. Some of these companies do not show any interest expense but have operating income losses, so we removed those companies. That leaves 128 companies or 9% of the members of the index. Using a stricter methodology of requiring three consecutive years of interest expense exceeding operating income returns 43 companies that meet the criteria or roughly 3% of the index. These 43 companies are the worst in class of the zombie population.

While defining and identifying the zombies is a good start, what we care about is a divergence between fundamentals and valuations. In other words, we want to truly protect ourselves from the zombies who appear alive due solely to a well-performing share price. In doing this, we find that 34% of the 128 companies have positive 3-year annualized total returns. Of these firms, the average 3-year annualized return of that population through June 30, 2019, is 13.6%. There are also another 11 companies that have been relatively stable as defined by annualized total returns of zero to -5%.

Such returns do not reflect the underlying fundamentals of companies that cannot service their debt and are a recession away from going bankrupt. The graph below charts operating income less interest expense with the three-year total returns for the 128 zombie companies.

Data Courtesy Bloomberg

For the 128 companies represented in the graph, they either have weak revenue generation and/or onerous debt levels. That, however, raises another issue for consideration – just how bad is the situation if the company cannot cover the interest expense on their debt due to weak demand for their products and/or services? Equally concerning, what if there is so much debt that even solid demand for their products and accompanying revenues do not cover that expense?

Deeper Dive

Awareness of this issue and quantifying it is useful and important to help us understand the kinds of imbalances that exist in the economy. At the same time, while most zombie companies would not exist were it not for years of suppressed interest rates, those that do should be priced for the uncertainty of an economic downturn and the higher probability of their demise in that event. As mentioned, many are not. Out of the 128 companies whose operating income cannot cover interest expense, many are priced at valuations that imply they are a normal going concern.

To gain a better perspective of zombies, we selected three individual candidates to explore in-depth. As discussed, the market is crawling with these companies that bear very similar characteristics. A table of the relevant fundamental statistics for each company is shown below each summary.

Rent-A-Center, Inc. (RCII)

RCII, a BB-rated company with a stable outlook, operates and franchises rent-to-own merchandise stores offering electronics, appliances, and furniture under “flexible rental purchase agreements” (lucrative financing plans). Based in Plano, Texas, they have 14,000 employees and a market capitalization of $1.3 billion. RCII stock has a three-year annualized return of 30.7% and three-year average EBITDA (earnings before interest taxes depreciation and amortization) through the end of 2018 of $51.2 million. Meanwhile, three-year average net income and free cash flow are negative $30.0 million and negative $106.2 million respectively.

Their zombie metric of operating income less interest expense was positive $18.3 million in 2018, but the three-year average is negative $69.9 million. Additionally, revenue for 2018 was the lowest since 2006 at $2.66 billion and total debt for the company increased by 52% (from $540 million to $825 million) in the first quarter of this year alone. It is hard to imagine the consumer showing enough strength to bail out the circumstances facing RCII. However, apart from us, most analysts are constructive in their outlook.

Scientific Games Corp. (SGMS)

Based in Las Vegas, Nevada, SGMS is a single-B-rated company with a stable outlook that provides gambling products and services under four operating divisions of gaming, lottery, digital, and social. The company has 9,700 employees and a market cap of $1.7 billion. Despite a significant correction since June 2018, SGMS stock has a stellar three-year annualized return of 29.2%. Given their negative earnings per share, the current price-to-earnings (PE) multiple cannot be calculated, but the expected PE for the end of the year based on earnings projections is 1,693. The company generated over $3.3 billion in revenue in 2018 but had net income of negative $352 million. The company sports a net debt obligation (net of cash) of $8.8 billion at the end of 2018.

Their zombie metric is -$332 million and has been negative every year since 2008. Despite their fundamentals, through June 30, 2018, SGMS produced a 47% 3-year annualized return showing the power and irrationality of momentum investing. The enthusiasm for SGMS revolves around the legalization and commercialization of nation-wide sports betting. Over the last ten years, insider selling dominated executive transaction flows. Our guess is they will wish they had sold even more.

The Williams Companies (WMB)

WMB, based in Tulsa, Oklahoma, is an energy infrastructure company focused on connecting North America’s hydrocarbon resources to markets for natural gas. The company owns and operates midstream gathering and processing assets, and interstate natural gas pipelines. It has 5,300 employees and a market cap of $33 billion. WMB is rated BBB by Standard & Poors with a negative outlook. Through the end of June 2019, WMB shares have a 3-year annualized total return of 14.0%. Net income for 2018 was -$155 million on revenue of $8.7 billion. Revenue grew at a three-year average of 5.7%, but net income was negative in three of the past four years. The company has net debt outstanding of over $22 billion, which is up 200% from $7.4 billion in 2011. Interest expense on that debt has exceeded operating income (zombie metric) in each of the past four years. Since 2017, insider selling of company shares was 4.4 times larger than insider purchases.

The following table compares our three zombies:

Data Courtesy Bloomberg

Summary

Loose monetary policy contributed to the financial crisis as the Fed held interest rates at 1.0% in 2003-2004 despite an economy that was rebounding and a housing bubble that was inflating well beyond its natural means. The Fed also imprudently used forward guidance to keep rates low for “a considerable period” which further prompted investors to speculate. In a troubling parallel, and proving lessons learned in finance are cyclical, not cumulative, the Fed has maintained and extended emergency policies following the crisis for nearly a decade. New bubbles have since replaced those that popped in 2008.

Upon receiving the Alexander Hamilton award in 2018, Stan Druckenmiller said, “If I were trying to create a deflationary bust, I would do exactly what the world’s central banks have been doing for the past six years.” The important point of his comment is that the deflationary episodes most feared by central bankers are caused by imploding asset bubbles. Those asset bubbles are invariably caused, in large part, by imprudent monetary policies that encourage market participants – households, corporations, and governments – to misallocate resources.

Corporate zombies are but one example. Their existence is evident, but the true extent to which they populate the market landscape cannot be known. Our analysis here reveals only the easiest to identify but rest assured, when economic twilight comes, many more zombies will be fully exposed.

via ZeroHedge News https://ift.tt/2xPXNhQ Tyler Durden

After weak home sales data and re-weakening in mortgage applications (but a modest recovery in homebuilder sentiment), expectations were for a slowdown in starts and permits but the June prints were shockingly bad.

Housing Starts dropped 0.9% MoM (worse than the 0.7% expected) but Building Permits plunged 6.1% MoM – the worst drop since March 2016.

This occurred despite a collapse in mortgage rates during the reporting period.

Under the surface, multi-family starts tumbled 9.4% MoM as single-family jumped 3.5% from 818K to 847K

And multi-family permits collapsed 20.7%, from 454K to 360K, the lowest since Feb 2017.

Two of four regions posted an increase in housing starts last month, led by a 31.3% rise in the Northeast and a 27.1% advance in the Midwest. New construction declined 9.2% in the South and 4.9% in the West.

via ZeroHedge News https://ift.tt/32vlavt Tyler Durden

Authored by Sven Henrich via NorthmanTrader.com,

Everybody is trampling all over themselves to raise bullish targets. $SPX 3,300, $SPX 3,350, $SPX 3500, do I hear Dow 31,500? Yes I am. The big driver of course the Fed and central banks cutting rates again to save the global economy.

And amid all the hype and excitement you see headlines like this:

Bullish U.S. Stock Buyers Are Positioning for a Giant Windfall

• Equity options strategy could deliver a 13-fold return…

• …If the S&P 500 gains another 11% by the end of this year

The free money excitement is great.

But I have a question:

Why does the global economy need rescuing after 10 years of non stop monetary stimulus?

— Sven Henrich (@NorthmanTrader) July 16, 2019

I also have an answer and it’s an unpleasant one. Because by bailing out markets and economies at every sign of trouble over the past 10 years central banks have given politicians license to do nothing. And nothing is what you get as political discourse fragments and majority solutions are impossible to come by.

But not only are majority solution impossible to get nobody even wants to even talk about them. Why? Because they involve pain. Voters don’t want to hear pain. Hence all you hear is free money. Tax cuts in 2016. Now we hear free college, health care and debt forgiveness for 2020 and who knows maybe more tax cuts.

Nobody wants to campaign on pain. I get it. But does anyone really think solving the structural problems that are behind slowing growth after 10 years of monetary stimulus are easily solvable?

Heck, they may not be solvable at all, hence it’s easier to create a political climate of hate, division, distraction and outrage.

Everybody talks about the outrage of the day, it’s a hyped up atmosphere by design. Because the architects of the conversation know the truth, and that is: As long as people are distracted by outrage, fear, anger and emotion they will not think about how the system is actually utterly screwed.

Debt ceiling? Nobody takes it seriously and the supposed enemies labeling each other currently as racists and socialists will suddenly find a solution and compromise to raise the debt ceiling. They always do. It’s always drama, and talk and hand wringing, but it never means anything.

Remember fiscal conservatives? They only exist when they are not in power. Nobody really wants to do anything but offer free money in one form or another. On either side.

In debt we trust:

But apparently central bankers are getting a sense that they can’t do it alone, that they need help from the politicians:

Central Bankers Are Sick of Rescuing the World Economy Alone

“Global central bankers are again in the driving seat when it comes to propping up the world economy, but many are demanding governments join them in the rescue effort.

Amid slowing global growth, the Federal Reserve, European Central Bank and perhaps even the Bank of Japan are all set to ease monetary policy in coming months. But with less room to act than in the past, their leaders are telling politicians they will need to act if a downturn takes hold”.

Be clear their solution is to add more debt. That’s it. Stimulus. Because without stimulus nothing works.

Cause we really need stimulus as trillion dollar market companies such as $MSFT are going parabolic:

Nobody is talking about structural solutions. Not the politicians, not the voters, not the central banks.

You know when structural solutions will be discussed? When it’s too late. When the next crisis, crash, depression, whatever you want to call it, will force people to wake up and force them to come together and actually look at the problems. This will not happen now, not with this lot, and not with markets high, unemployment low, and central banks ready to throw free money around again.

No, central banks are now the impediment to progress, they are not only bailing out markets, but they are extending a license to politicians, a license to do nothing, but add more debt.

And that is the rise of insanity.

*  *  *

For the latest public analysis please visit NorthmanTrader. To subscribe to our market products please visit Services.

via ZeroHedge News https://ift.tt/2Gg7Dym Tyler Durden

S&P futures pared gains, and traded unchanged as mixed Q2 earnings and disappointing hints by banks on future revenue gave traders concerns about the sustainability of the rally, while European stocks struggled for traction amid fresh trade tensions.

US equity futures gave up some of their earlier (low-volume) gains after Bank of America’s net interest income fell short of analysts’ expectations, though CEO Brian Moynihan said the economy appeared to be improving. The Stoxx Europe 600 index nudged higher amid a mixed bag of reports from companies including Swatch, Ericsson and ASML. In the US, earnings from the big banks JPMorgan, Citigroup and Wells Fargo this week have raised concerns that lower interest rates will pressure profits at a time when revenue growth is already slow.

Adding some nervousness to markets was a threat from U.S. President Donald Trump to tax another $325 billion worth of Chinese goods. And in the latest evidence that trade tensions were hurting businesses, railroad CSX reported a quarterly profit that missed estimates and lowered its full-year revenue forecast, sending its shares 7.2% lower. Also worth noting, on Tuesday more dovish comments from Federal Reserve Chairman Jerome Powell did little to stir markets, suggesting easing may be fully priced in as Bloomberg points out.

Meanwhile, in Europe, strong quarterly profit from Dutch chip equipment maker ASML helped semiconductor makers  including Advanced Micro Devices, Micron Technology, Intel and Applied Materials rise between 0.4% and 1.6%. Qualcomm jumped 5.6% after the U.S. Justice Department asked a federal appeals court to pause the enforcement of a sweeping antitrust ruling against the mobile chip supplier. 

Earlier in the session, Asian stocks slipped for a second day, with South Korean shares leading declines amid regional and global trade tensions. Technology and energy were among the weakest sectors after U.S. President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants. Most markets in the region dropped, while Australia bucked the trend with the S&P/ASX 200 gauge up 0.5%, supported by BHP Group after the miner forecast iron ore production will rise as much as 6% this fiscal year. China’s Shanghai Composite Index fell as large financial companies led losses. The Kospi retreated 0.9%, dragged by Samsung Electronics and SK Hynix, while the Topix closed 0.1% lower. India’s Sensex added 0.2%, with Kotak Mahindra Bank and Infosys among the biggest boosts, as investors awaited more corporate earnings.

In FX, the dollar halted a two-day rally, held down by gains in commodity currencies, with the Canadian dollar rallying ahead of inflation data. Even so, it held near its strongest level in a week as traders awaited economic data and speeches by Federal Reserve officials in coming days for clues about the size of expected interest-rate cuts this year. The pound traded near the lowest levels since April 2017 as the risk of a no-deal Brexit continued to preoccupy investors.

Elsewhere, Bitcoin extended a slide below $10,000.

 

In commodities, WTI and Brent futures are nursing some of yesterday’s losses after prices slid around 3% on comments from the US which suggested a tempering of US-Iran tensions, albeit this was later rebutted by Iran. Upside for the complex has been limited by a number of supply-side factors including the narrower-than-expected drawdown in API crude stocks (-1.4mln vs. Exp. -2.7mln).  Furthermore, refineries in the Gulf are restarting operations post-storm Barry, with only 59% of production still offline (vs. 69% on Monday).

Elsewhere, gold prices are gravitating closer to the key 1400/oz mark as the Dollar index gains more ground above 97.00. Meanwhile, Dalian iron ore futures have retreated from recent record highs as investors digested news about higher transaction fees in all iron ore futures contracts on the DCE alongside a rise in iron ore shipments to China from Australia.

Expected data include housing starts and building permits. Abbott, Bank of America, IBM, and Netflix are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.1% to 3,011.00
• STOXX Europe 600 down 0.01% to 389.06
• MXAP down 0.2% to 160.30
• MXAPJ down 0.3% to 527.76
• Nikkei down 0.3% to 21,469.18
• Topix down 0.08% to 1,567.41
• Hang Seng Index down 0.09% to 28,593.17
• Shanghai Composite down 0.2% to 2,931.69
• Sensex up 0.2% to 39,201.86
• Australia S&P/ASX 200 up 0.5% to 6,673.26
• Kospi down 0.9% to 2,072.92
• German 10Y yield fell 2.7 bps to -0.271%
• Euro up 0.02% to $1.1213
• Italian 10Y yield fell 3.5 bps to 1.259%
• Spanish 10Y yield fell 3.2 bps to 0.459%
• Brent futures up 0.7% to $64.81/bbl
• Gold spot down 0.3% to $1,402.29
• U.S. Dollar Index little changed at 97.35

Top Overnight News from Bloomberg

• President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants, after promising to hold off on more duties in a trade-war truce he reached with China’s Xi Jinping last month
• European car registrations fell sharply in June, resuming a downward spiral this year that has seen profit warnings at German manufacturer Daimler AG and a quarterly automotive division loss at rival BMW AG.
• Hong Kong is beginning to reckon with the economic cost of ongoing protests against the government’s extradition bill, as the disruption risks driving away local shoppers and deterring tourists from mainland China.
• President Donald Trump reiterated that he could impose additional tariffs on Chinese imports if he wants, after promising to hold off on more duties in a trade-war truce he reached with China’s Xi Jinping last month.
• Fed Chairman Jerome Powell said the central bank is “carefully monitoring” downside risks to U.S. growth and “will act as appropriate to sustain the expansion,” reiterating concerns last week that cemented expectations for an interest-rate cut later this month
• The next leader of the European Commission, Ursula von der Leyen, said she hopes to dissuade President Trump from imposing tariffs on EU cars by reminding him of all the areas where European and American interests coincide
• A lawyer who won a landmark ruling that allows the U.K. to reverse Brexit is considering what could be one of several lawsuits seeking to block any attempt to suspend Parliament to force through a no-deal departure from the bloc
• The U.S. and Japan are working on a small trade deal that would involve agriculture and autos, Reuters reported citing three unidentified industry sources familiar with the talks
• China’s holdings of U.S. Treasuries dipped in May to the lowest in two years amid an escalation of the trade war between the world’s two largest economies. The Asian nation’s pile of notes, bills and bonds fell by $2.8b to $1.11t, according to Treasury Department data released Tuesday in Washington
• House Speaker Nancy Pelosi said she sees “forward motion” after yet more talks with Treasury Secretary Steven Mnuchin to negotiate higher spending levels in a budget deal that congressional leaders want to attach to a bill raising the debt limit before Congress’s August recess
• Japan’s long-term foreign currency debt rating was affirmed by Fitch at A because of the nation’s advanced and wealthy economy, high governance standards and strong public institutions
• Oil held its biggest loss in two weeks as President Trump’s threat of new tariffs on Chinese imports rekindled fears about global demand, while the U.S. signaled a possible easing of tensions with Iran

Asian equity markets traded mostly lower as the region followed suit from the lacklustre performance on Wall St where all major indices pulled back from record levels as participants digested the first bout of blue-chip earnings and with risk sentiment also pressured after comments from US President Trump added to the doubts for a near-term breakthrough with China. This weighed on the regional indices from the open although the ASX 200 (+0.5%) quickly bucked the trend with upside in defensive sectors and miners leading the turnaround including BHP which gained after it topped production estimates despite output declining Y/Y, although the energy sector underperformed after crude prices slipped around 3%. Nikkei 225 (-0.3%) and KOSPI (-0.9%) weakened as the soured Japan-South Korea relations and ongoing trade dispute continued to take its toll, while Hang Seng (-0.1%) and Shanghai Comp. (-0.2%) conformed to the glum after US President Trump suggested there is a long way to go regarding trade with China and that the US can put tariffs on another USD 325bln of goods if it wants. Furthermore, China made a hawkish addition to its trade team indicating that it is in no hurry to wrap up trade discussions, although pressure in the mainland was limited after the PBoC conducted a consecutive substantial liquidity injection. Finally, 10yr JGBs were subdued as prices initially ignored the upside in T-notes and weakness in stocks ahead of a 20yr JGB auction, which proved to be mixed but still showed a higher b/c to provide marginal support in late trade.

Top Asian News

• Hong Kong Protests Have City’s Residents Plotting Their Exit
• Morgan Stanley Revises Call on Turkey Rate, Sees Bigger July Cut
• Shining Star of Mideast Stock Markets Seen Losing Sparkle
• India Shadow Bank Said to Discuss Rescue Plan With Bondholder

A muted session thus far for European equities [Eurostoxx 50 Unch] as the region has derived little inspiration from a mixed Asia-Pac handover. Sectors are mixed with clear underperformance seen in the Energy sector following yesterday’s decline in oil prices, whilst defensive sectors are kept afloat by the somewhat cautious tone. Individual movers this morning have largely been driven by earnings. Swatch (+5.0%) rose to the top if the SMI as operating profits topped estimates and amid expectations of positive overall growth in FY 19. Likewise, ASML (+4.2%) rests near the top of the Stoxx 600 as the Co. beat on revenue forecasts and expects Q4 “to be very strong”. On the flip side, Ericsson (-4.9%) shares are pressured as the Co. expects negative impacts to increase in H2 this year. Finally, Swedbank (-5.8%) declined to the foot of the pan-European index as its firm earnings were overshadowed by shortcomings in regard to its money laundering investigation.

Top European News

• Deutsche Bank’s Prime-Broker Deal Could Elevate BNP in Asia
• Ericsson Ends Run of Earnings Beats With Asia Warning
• Chip Gear Maker ASML Gets Boost From 5G Push Amid Memory Slump
• Swedbank Slashes Dividend as Baltic Dirty-Money Probes Drag On
• Swatch Climbs as Watchmaker Takes Aim Against Gray Market

In FX, Nzd/Usd has rebounded relatively firmly back above 0.6700 and is retesting the 200 DMA circa 0.6718 mainly due to the Greenback losing a bit of its retail sales momentum and the DXY fading just shy of 97.500, though the Kiwi may have gleaned some belated traction from yesterday’s rebound in GDT auction prices after the in line and firmer NZ CPI data for Q2 overnight. Similarly, Usd/Cad has retreated towards 1.3050 from close to 1.3100 as the Loonie eyes Canadian inflation data for independent impetus and draws some underlying support from firm crude prices in the run up.

• CHF – Somewhat surprisingly perhaps, or at least unexpectedly, Usd/Chf and Eur/Chf are both firmer and nudging big figures at 0.9900 and 1.1100 respectively without any apparent rationale for Franc underperformance. However, following recent strength it would not be out of the realms of reality to point the finger at official intervention/rate checking or front-running the SNB.
• EUR/JPY/AUD/GBP – All narrowly mixed vs the Usd, as the single currency clings on to the 1.1200 handle after a more concerted attempt to fill evidently substantial bids at the round number, albeit in no small part due to contagion from another bout of Sterling weakness as Cable tumbled further below 1.2400 and Eur/Gbp touched 0.9050. Note, however, Eur/Usd appears capped ahead of decent option expiries between 1.1250-55 (1.1 bn), just like Usd/Jpy within 108.12-32 given similar size expiry interest running off at 108.00 (1.5 bn) and 108.30 (1.1 bn) at the NY cut. Elsewhere, Aud/Usd has drifted back towards 0.7000 after topping out a few pips short of 0.7050 on Tuesday amidst less positive vibes on US-China trade prospects following President Trump’s latest tweets and tariff threats plus the appointment of a so called hawk to Beijing’s negotiating team. Back to the beleaguered Pound, no real reaction to largely in line UK inflation data, with the exception of PPI input prices that were considerably weaker than forecast.
• EM – The Rand is a notable regional laggard, with Usd/Zar hovering near the top of a 14.0000-13.9500 range ahead of SA retail sales data at midday and the SARB meeting on Thursday when a rate cut is widely anticipated (-25 bp), while ongoing doubts about Eskom are also weighing on sentiment.

WTI and Brent futures are nursing some of yesterday’s losses after prices slid around 3% on comments from the US which suggested a tempering of US-Iran tensions, albeit this was later rebutted by Iran. Upside for the complex has been limited by a number of supply-side factors including the narrower-than-expected drawdown in API crude stocks (-1.4mln vs. Exp. -2.7mln).  Furthermore, refineries in the Gulf are restarting operations post-storm Barry, with only 59% of production still offline (vs. 69% on Monday). Elsewhere, gold prices are gravitating closer to the key 1400/oz mark as the Dollar index gains more ground above 97.00. Meanwhile, Dalian iron ore futures have retreated from recent record highs as investors digested news about higher transaction fees in all iron ore futures contracts on the DCE alongside a rise in iron ore shipments to China from Australia.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -2.4%
• 8:30am: Housing Starts, est. 1.26m, prior 1.27m; MoM, est. -0.71%, prior -0.9%
• 8:30am: Building Permits, est. 1.3m, prior 1.29m; MoM, est. 0.08%, prior 0.3%
• 2pm: U.S. Federal Reserve Releases Beige Book

DB’s Jim Reid concludes the overnight wrap

It might have been the 50th anniversary of Apollo 11 lifting off yesterday in what five days later followed with the first man landing on the Moon, however US equities failed to shoot for the moon as they retreated off their record highs. Indeed yesterday’s closing moves of -0.34% for the S&P 500, -0.09% for the DOW and -0.43% for the NASDAQ coincided with another fairly benign intraday range and also with summer-like trading volumes. There was actually a large volume of newsflow to digest, but it seemed like ultimately comments from President Trump outweighed everything else, with the market declining after he said that there’s “a long way to go as far as tariffs where China is concerned, if we want. We have another $325 billion we can put a tariff on.” Away from that, there was a bumper US retail sales report, a soft German ZEW survey, a selloff in oil prices, a mixed bag of US bank earnings reports, and a slew of Fedspeak.

Bond markets were a bit more exciting. Indeed, 10y Treasuries sold off as much as +5.2bps, boosted by the bumper US retail sales numbers with the 2s10s curve flattish following a similar move at the front end. However they ended only +1.4bps higher, off their highs, at 2.103% following dovish comments from Fed officials and a swoon in oil prices. WTI crude fell -3.29% in New York after US Secretary of State Pompeo suggested that Iran was willing to negotiate on its missile program. Positive progress could open the door to higher exports, and although Iranian sources subsequently denied the story, oil held its losses. The selloff in Treasuries also helped Bunds to finish flat on the day after rallying post the soft German ZEW survey number while the STOXX 600 ended +0.35% higher.

This morning Asia has followed Wall Street’s lead with little new newsflow to report, with the Nikkei (-0.40%), Hang Seng (-0.32%), Shanghai Comp (-0.05%) and the KOSPI (-0.92%) all trading lower. S&P futures have made a marginal gain however, up +0.06%.

Coming back to the US bank earnings yesterday, the highlights were strong results from Goldman Sachs (+1.86%) and JPMorgan (+1.04%). Both banks beat consensus profit estimates, with Goldman performing especially well in equity trading and investment banking. Wells Fargo (-3.02%) underperformed sharply though after reporting disappointing progress on costs. Somewhat worryingly for the sector as a whole, the three banks saw pressure on their net interest margins, which follows naturally from the recent fall in rates. The S&P 500 banks index retreated -0.52%.

As for the Fedspeak yesterday, the highlight on the calendar was undoubtedly a speech by Chair Powell in the early evening. However, his remarks were largely unchanged from his recent rhetoric, saying the Fed will “act as appropriate.” His only truly interesting comment was regarding the Fed’s ongoing policy review, providing the first calendar guidance for the results and saying the FOMC will devote time at regular FOMC meetings soon to discuss it, with a final result due in H1 next year.

Instead, remarks from Dallas President Kaplan and Chicago President Evans proved more impactful. The former said that he could support an “adjustment in the policy rate in light of market-determined rates,” which was a big shift from his recent stance against any cuts. That caused rates to ease off their highs, and the move was further supported by dovish comments from Evans who said that “we are little bit more restrictive than we need to be, and we need to be more accommodative.” He also weighed the arguments for and against an immediate 50bps cut, saying “if I think it takes 50bps before the end of the year to get inflation up then something right away would make that happen sooner.” So at least for him, a voting member this year, the door remains open for a 50bps cut. Right now the market prices around a one-in-four chance of a 50bps cut happening this month, with a 25bps cut fully priced.

Meanwhile in Europe, the European Parliament supported Ursula von der Leyen as the next President of the European Commission, with a majority of 383 MEPs voting in favour, narrowly above the absolute majority of 374 required. The appointment process isn’t yet finished however, as the other members of the Commission will need to be chosen, and the full college of Commissioners including the Commission President needs to win a parliamentary vote of approval, which will take place after the summer. Notable comments in von der Leyen’s remarks yesterday included her goal that she was seeking “the first climate-neutral continent in the world by 2050”, and on Brexit, she said that “I stand ready for a further extension of the withdrawal date should more time be required for a good reason.”

Elsewhere, just on the details of the June retail sales report in the US which as mentioned at the top revealed that ex-auto and gas sales rose +0.7% mom and therefore far exceeded expectations for a +0.3% mom rise. The control group component also rose +0.7% mom which helped push some of the oft-watched GDP trackers higher, including a 0.3pp uptick for the Atlanta Fed’s tracker to 1.6%. That includes an estimated 4.2% expansion in consumer spending, with the headline GDP figure predicted to be softer as a result of headwinds from inventories and trade. In fact, the annualized retail control reading for Q2 was 7.52% which was the highest quarterly print since Q4 2005, and the 6-month annualized rate was the highest-ever at 11.05%. The May control group reading was also revised up by one-tenth so a much rosier picture for the consumer compared to investment and supply data of late.

Indeed, in contrast the June industrial production reading was flat in June which compared to expectations for a +0.1% mom reading. However, in what is likely to please the Fed following comments by Powell about weakness in manufacturing output being a concern, the June manufacturing production print bettered expectations at +0.4% mom (vs. +0.3% expected).

As for the rest of the US data which was a bit more mixed, the import price index ex-petrol in June slid more than expected (-0.4% mom vs. -0.2% expected) while the NAHB housing market index rose 1pt in July to 65. Finally the May business inventories reading of +0.3% mom was in line.

Prior to this in Germany that July ZEW expectations survey reading of -24.5 was a 3.4pt decline from June and was also weaker than expected. It’s also back to testing the -24.7 low mark made in July and October last year. The good news is that the monthly drop was a lot more modest in comparison to the 19pt decline in June. What was interesting was the reference to the Iran conflict in the text as an additional concern alongside the now-standard mentions of Brexit and trade war risks.

There was better news for the data here in the UK where unemployment held steady in May and earnings crept higher. Indeed the unemployment rate held at 3.8% although employment growth did slow slightly, however the bigger takeaway was the 3.6% print for regular wage growth (vs. +3.5% expected). This somewhat affirms a robust underlying trend following sizeable rises in private sector regular pay in April too.

Despite that Sterling fell -0.87% and even broke below $1.240 at one stage intraday. Clearly the market isn’t putting much emphasis on the UK data at the moment and instead throwing more weight behind the incremental pricing of a hard Brexit. On that, Sky News ran a story yesterday suggesting that Boris Johnson, should he win the PM job, could send lawmakers home in October to stop them hindering a possible no deal Brexit. However, the report also said that a decision hasn’t been made yet. It was also reported by the Times last night that Johnson wanted to have an early election while the current Labour Party leader Jeremy Corbyn is “still around”.

Finally, looking at the day ahead this morning we’ve got more data out of the UK with the June CPI/RPI/PPI data docket before the final June CPI revisions for the Euro Area are released. In the US we’re due to get June housing starts and building permits data. This evening we’ll also get the Fed’s Beige Book while the Fed’s George is due to speak at 6.30pm BST on the economic outlook. As for earnings, Bank of America is the latest US bank to report while the tech sector will also be in focus with eBay, Netflix and IBM also releasing earnings.

via ZeroHedge News https://ift.tt/30BYQhO Tyler Durden