Month: July 2019

Yield Curve Ominously Un-Inverts As Dollar Jumps Most In Over 4 Months

For the first time in 41 days, the US Treasury yield has un-inverted…

 

Chinese stocks managed gains overnight (even as STAR IPOs tumbled on their second day)…

 

European Stocks soared on the day with Germany leading the way…

 

US equities spiked on China trade headlines…

 

The buying program that hit when the China trade headlines printed, was the highest since July 10th’s open (after Powell’s prepared remarks prompted a panic-bid)…

 

S&P spiked back above the 3,000 level…

 

While tech stocks are at record highs, tech credit risk is anything but…

 

Bonds and stocks remain in their own worlds…

 

Treasury yields rose modestly on the day with the long-end underperforming…

 

10Y yields plunged on the dismal Richmond Fed data, but sellers re-emerged quickly…

 

The yield curve (3m10Y) spiked almost 5bps today, surging back above 0 for the first time in 41 days…

 

The odds of a 50bps rate cut next week slipped to 17.5%…

 

The debt ceiling ‘kink’ in the Bill curve has been erased…

 

The Dollar rose for the 3rd day in a row – bouncing back from Fed’s Williams lows – this is the biggest 3-day jump in the dollar in over 4 months…

 

Cryptos were mixed today but only Bitcoin Cash is green on the week…

 

But Bitcoin rebounded back above $10,000…

 

Gold and Copper slipped on the day as the dollar rallied but Silver and Oil prices rallied further…

 

Gold is holding up despite the dollar strength…

 

Silver outperformed Gold for the seventh day in a row…

 

Oil prices spiked back up to $57 ahead of tonight’s API inventory data…

 

Finally, soft data collapsed to post-Trump lows (Richmond Fed plunged) as hope disappears…

And trade-deal complacency is running high once again…

And perhaps even more notably, as Bloomberg’s Cameron Crise quantifies, as trade-war risk is priced out of markets (black line) so expectations for the need for a Fed rate cut should be reducing… but aren’t…

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Breaking Bad Meets Bad Braking: Man Transporting $140 Million In Meth Crashes Into Cop Car

An Australian man was found transporting over $140 million in methamphetamines after he crashed his van into a police car outside of a Sydney police station, according to the New South Wales Police. 

26-year-old Simon Tu was pulled over Monday morning around an hour after a Toyota HiAce van he was driving clipped the parked cop car as well as a police van. 

A search of the van revealed 13 boxes packed with 602 lbs of meth, which has a street value of $140 million US ($200 million NZD). The vehicle has been seized for forensic inspection.

“This would be one of the easiest drug busts the New South Wales Police has ever made — incredible, absolutely incredible,” according to Detective Chief Inspector Glyn Baker, adding “Crashing into police vehicles with that amount of drugs on board is somewhat unheard of.” 

Tu was charged with supplying a commercial quantity of drugs, negligent driving, and refusing to provide police with his personal information. 

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E.U. Regulators Can’t Detect the Gene-Edited Crops They Banned

The European Court of Justice ruled last summer that the European Union’s absurd regulatory scheme for genetically modified organisms (GMOs) must be applied to gene-edited crops. Such regulations, however, are scientifically nonsensical. GMO crops (typically modified by adding genes from other organisms)and gene-edited crops (using techniques like CRISPR to modify genes already in the crop variety) are safe for people and for the environment. Such crops need no more regulation than do crops created via conventional techniques such as crossbreeding or random mutation by blasting them with ionizing radiation and harsh chemicals.

Now foods labs are telling would-be E.U. regulators that there are no tests that can reliably distinguish between gene-edited and conventional crop varieties. Why? Because many of the edited genes are indistinguishable from those in naturally occurring organisms. Consequently, E.U. regulators are worried that gene-edited horrors from the U.S., such as Calyxt’s healthy high-oleic-acid oil or Intrexon’s non-browning lettuce, might sneak into European supermarkets undetected.

Before gene-editing, plant breeders would first identify a useful gene in a landrace variety, e.g., mildew resistance, and then onerously crossbreed generation after generation to transfer the gene into a more productive commercial variety. Biotechnologists can now induce mildew resistance by simply editing a few DNA pairs in the corresponding gene in the commercial variety to match the ones found naturally in the landrace.

In contrast to the bioluddites in Europe, regulators in the U.S., Brazil, Argentina, and Australia have sensibly declared that they do not intend to regulate edited crops with mutations that could have occurred in nature.

Hermann Broll, a researcher in the Department of Food Safety at the German Federal Institute for Risk Assessment in Berlin, according to Nature, noted that even if food testing labs could find the edits, regulators would still struggle to prove that the DNA variant they’ve identified is the result of gene editing, rather than a natural mutation. “I do not have a clue as to the solution—and I have not seen anywhere any clue yet,” said Broll.

Here’s a suggestion: Go back to the European Court of Justice and urge the judges to overturn their metaphysical ruling, which found that one of two identical genes must be regulated if it happens as a result of editing, while the other escapes administrative scrutiny if it is a natural or radiation-induced mutation.

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E.U. Regulators Can’t Detect the Gene-Edited Crops They Banned

The European Court of Justice ruled last summer that the European Union’s absurd regulatory scheme for genetically modified organisms (GMOs) must be applied to gene-edited crops. Such regulations, however, are scientifically nonsensical. GMO crops (typically modified by adding genes from other organisms)and gene-edited crops (using techniques like CRISPR to modify genes already in the crop variety) are safe for people and for the environment. Such crops need no more regulation than do crops created via conventional techniques such as crossbreeding or random mutation by blasting them with ionizing radiation and harsh chemicals.

Now foods labs are telling would-be E.U. regulators that there are no tests that can reliably distinguish between gene-edited and conventional crop varieties. Why? Because many of the edited genes are indistinguishable from those in naturally occurring organisms. Consequently, E.U. regulators are worried that gene-edited horrors from the U.S., such as Calyxt’s healthy high-oleic-acid oil or Intrexon’s non-browning lettuce, might sneak into European supermarkets undetected.

Before gene-editing, plant breeders would first identify a useful gene in a landrace variety, e.g., mildew resistance, and then onerously crossbreed generation after generation to transfer the gene into a more productive commercial variety. Biotechnologists can now induce mildew resistance by simply editing a few DNA pairs in the corresponding gene in the commercial variety to match the ones found naturally in the landrace.

In contrast to the bioluddites in Europe, regulators in the U.S., Brazil, Argentina, and Australia have sensibly declared that they do not intend to regulate edited crops with mutations that could have occurred in nature.

Hermann Broll, a researcher in the Department of Food Safety at the German Federal Institute for Risk Assessment in Berlin, according to Nature, noted that even if food testing labs could find the edits, regulators would still struggle to prove that the DNA variant they’ve identified is the result of gene editing, rather than a natural mutation. “I do not have a clue as to the solution—and I have not seen anywhere any clue yet,” said Broll.

Here’s a suggestion: Go back to the European Court of Justice and urge the judges to overturn their metaphysical ruling, which found that one of two identical genes must be regulated if it happens as a result of editing, while the other escapes administrative scrutiny if it is a natural or radiation-induced mutation.

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Horseman Capital: Lessons From Japan 2019

By Russell Clark of Horseman Capital Management

Japan pioneered many of the monetary policies that we now find common in the Western world. Despite the Bank of Japan (“BOJ”) taking monetary policies to ever more extreme levels, including negative interest rates and very large purchases of Japanese government bonds, the Nikkei still languishes well below the all-time highs set in 1989. Despite the BOJ’s best efforts, the Nikkei still has a tendency to move with employment.

Since the bursting of the dot com bubble, US Equities seem to also follow the Japanese tendency of equities and employment. The below table shows the S&P 500 Index vs the Conference Board Employment Trends Index/Conference Board Consumer Confidence Survey which shows the number of unemployed in the US/percentage of survey respondents who say they find “jobs hard to get.”

Both in Japan and in the US, the reaction to slowing employment growth has been a violent reaction in bond yields.

The simple reason for this is that some investors prefer the safety of bonds when employment looks toppy, and prefer equities to bonds when employment is rising. A comparison of MSCI World Index/ JPM Aggregate Bond Index versus Conference Board Jobs Hard to Get Index bears this out.

High yield spreads are also very correlated to employment data with spreads tightening as unemployment falls, and widening as unemployment rises. Intriguingly, even when absolute levels of high yield have fallen as bond yields have fallen, spreads in 2018 and 2019 have continued to remain at higher levels than 2017.

Employment in China is also looking problematic, with Chinese Employment PMI also hitting new post financial crisis lows.

There are several real world (as opposed to financial markets) indicators that would point to unemployment inflecting higher. Trade volumes look to be inflecting lower.

The CRB Raw Industrial index is made up of a number of less traded commodities. This means that it is less subject to correlation with financial markets. This reinforces the trends seen in the trade volume data.

Growth looks to be slowing, high yield spreads are widening. Unemployment could potentially be inflecting higher. If the experience of Japan with quantitative easing is still relevant, it would indicate investors are likely to go into bonds rather than equities.

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State Media Posts Photos Of Kim Jong Un’s New “Powerful Submarine”

South Korea is said to be closely monitoring Kim Jong Un’s new “powerful submarine” currently under construction at a North Korean shipyard.

State media posted photos of the North Korean leader inspecting the massive hull of the vessel which Korean Central News Agency (KCNA) identified as a “newly-built submarine”.

Pyongyang is currently believed to have a fleet of aging, low-tech submarines numbering at about 70, but they are considered loud (and thus can easily be detected) and most importantly incapable of firing nuclear-armed ballistic missiles. 

However, in 2016 the north successfully test-fired a submarine-launched ballistic missile (SLBM) in a bid to establish faster deterrence capabilities.

Based on the new photographs, the current sub under development appears significantly larger than the one deployed during the 2016 test. 

One analyst, Dave Schmerler at the James Martin Center for Nonproliferation Studies, said this means a new missile test is on the horizon as soon as the sub is operational. 

“If this submarine is built for carrying and launching SLBMs it is more than likely that they would test it, to ensure that it works the way they would need it to,” he told CNN.

Kim was quoted as saying the submarine will be deployed off of North Korea’s east coast, adding further that it marks “an important component in national defense of our country surrounded by sea on its east and west.”

KCNA claimed the timetable for the submarine to set sail “is near at hand.” 

Kim further expressed “great satisfaction” during the inspection and photo-op, and further “stressed the need to steadily and reliably increase the national defense capability, by directing big efforts to the development of naval weapons and equipment, such as submarines,” KCNA reported.

While the location was not revealed, and little to no details were given on the submarines specs or planned capabilities, it’s likely the photo-op was designed to maintain leverage with Washington at a moment Kim and President Trump recently agreed to resume denuclearization talks. However, it’s unclear how far the planned resumption of talks have moved, if at all. 

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Small C(r)aps!

Authored by Sven Henrich via NorthmanTrader.com,

Greatest economy ever according to the presidential talking points, new market highs in July, free money just around the corner with every central bank looking to cut rates because greatest economy ever. Welcome to the age of conflicting signals. But the main message sent to investors: You can’t lose, guaranteed gains await you. Don’t you know?

Then why are small caps acting like crap? Where’s the rush to partake in the free money party?

I ask:

While solid up on the year following last year’s disastrous drubbing small caps  haven’t gone anywhere in months.

In fact they haven’t gone anywhere since January 2018 while select tech again is leading advance in 2019.

One may argue that small caps are heavily influenced by the drag in the banking sector as many financials are found in the small cap sector.

This performance divergence is very notable as small caps were leaders in 2018 when rates were rising, but due to the collapse in yields in 2019 the performance dynamic has clearly shifted:

It’s not the first time such a shift in performance has taken place. One notable such event, the lead up to the 2000 market top:

The potential good news for bulls here: That underperformance lasted for 2 years before it mattered and the indices then realigned in performance as the recession unfolded despite the Fed cutting rates. But realign they did.

But by lagging in performance small caps have left a technical trail of craps:

A major broken wedge pattern and now a consolidation pattern that requires a break higher or risks a break lower which would target the December lows again.

Which one will win out?

Perhaps look no further than the quarterly 5 EMA:

$RUT is hanging above it for now. Barely. A sustained break below the quarterly 5 EMA would suggest bears are gaining control and could break the consolidation pattern. Bulls need that line defended. Perhaps the Fed will offer that defense. Watch out if they don’t.

*  *  *

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Microsoft Invests $1 Billion In Musk’s OpenAI, Will Become Exclusive Cloud Provider

Microsoft announced a $1 billion investment in Elon Musk’s OpenAI, which aims to build “friendly AI” that won’t wipe out humanity. 

In exchange, Microsoft will become OpenAI’s exclusive cloud provider, according to CNBC. 

According to the company, artificial general intelligence (AGI) will be able to solve more complex problems than standard AI systems, and seeks to create a ‘long-term positive impact’ on humanity. Of note, Musk has characterized AI as the “biggest existential threat” to humanity. 

“Modern AI systems work well for the specific problem on which they’ve been trained, but getting AI systems to help address some of the hardest problems facing the world today will require generalization and deep mastery of multiple AI technologies,” the companies wrote in a joint press release. “OpenAI and Microsoft’s vision is for artificial general intelligence to work with people to help solve currently intractable multidisciplinary problems, including global challenges such as climate change, more personalized healthcare and education.”

Each year since 2012, the world has seen a new step function advance in AI capabilities. Though these advances are across very different fields like vision (2012), simple video games (2013), machine translation (2014), complex board games (2015), speech synthesis (2016), image generation (2017), robotic control (2018), and writing text (2019), they are all powered by the same approach: innovative applications of deep neural networks coupled with increasing computational power. But still, AI system building today involves a lot of manual engineering for each well-defined task.

In contrast, an AGI will be a system capable of mastering a field of study to the world-expert level, and mastering more fields than any one human — like a tool which combines the skills of Curie, Turing, and Bach. An AGI working on a problem would be able to see connections across disciplines that no human could. We want AGI to work with people to solve currently intractable multi-disciplinary problems, including global challenges such as climate change, affordable and high-quality healthcare, and personalized education. We think its impact should be to give everyone economic freedom to pursue what they find most fulfilling, creating new opportunities for all of our lives that are unimaginable today. –OpenAI

“We believe that the creation of beneficial AGI will be the most important technological development in human history, with the potential to shape the trajectory of humanity,” wrote OpenAI. 

Of course, that’s exactly what the robots want. 

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China’s ‘Nasdaq-Style’ Exchange Sinks On Day 2 As Biggest Traders Lose Billions

On Monday, investors in mainland China finally got a taste of what it would be like to trade in a market that isn’t tightly controlled by Chinese economic authorities. And what a day it was.

Star

During the opening day of trading on China’s new Nasdaq-style STAR Market, volatility was so intense that the average move among the 25 stocks listed on the exchange was a 140%+ increase. Some stocks climbed more than 500%.

But unfortunately for the bulls, the euphoria couldn’t last, and on Tuesday, investors started taking profits, causing STAR’s five biggest individual shareholders to lose a combined $1 billion (that’s after STAR added $44 billion to market cap). All but four companies of the 25 stocks listed on the market fell on Tuesday, erasing about 9% of the total market cap, Reuters reports.

To be sure, the size of the pullback on day two wasn’t nearly as large as the rally on opening day, but many suspect that this is only the beginning.

Star

The biggest loser on Tuesday was China Railway Signal & Communication Corp., which sank 18.4%, the sharpest drop of the day. But even after that, CRSC shares were 71% higher than their initial public offer price.

The market opened on Monday, less than a year after President Xi first announced his plans to build an exchange that would entice China’s top tech firms to list at home, rather than looking to Hong Kong or the US. Investors swapped more than $7 billion of the shares – equivalent to about 13% of turnover in the rest of the market – as the surge minted three new billionaires, according to Bloomberg.

But with all the excitement surrounding the new exchange, one investment management executive said it was hardly surprising to see such wild swings.

“We’ve never been in a market with no trading limits so it’s going to be a bit of a chaos in the early days of trading,” said Sun Jianbo, president of China Vision Capital Management in Beijing. “The high volumes suggest that many investors that won subscription in share offering have dumped shares.”

Unsurprisingly, margin loans helped power trading on Monday, according to data from the Shanghai Stock Exchange. Investors borrowed a total $219.38 million to bolster their buying power.

An index tracking the shares trading on the exchange will launch in the next few weeks, shortly after the exchange gains its 30th listed stock in about two weeks.

Most expect valuations to shrink to more “reasonable” levels in the coming weeks and months. One investor said he expects to see “a tug of war” between speculators and the market as more try to lock in profits.

Investors have three more days to enjoy unrestricted trading on STAR. After that, shares will be subject to daily limits of 20% in either direction. That’s still double the rate from the Shanghai Stock Exchange.

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Trump Sues To Block House From Getting State Tax Returns

President Trump has reportedly filed a personal lawsuit seeking to block the House Ways and Means Committee from obtaining his New York State tax returns.

Bloomberg reports that the lawsuit was filed Tuesday in Washington federal court.

Developing…

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