Month: September 2022

As we detailed over the weekend, many companies are finding it increasingly difficult to manage margin calls, an exchange requirement for extra collateral to guarantee trading positions when prices rise…

Credit Suisse repo guru Zoltan Poszar published what may have been the most insightful snippet of the entire European energy crisis (to date) when he extended the infamous “Minsky Moment” framework to Europe, and specifically Germany, which he said “can’t cover its payments without Russian gas and the government is asking citizens to conserve energy to leave more for industry.” He then elaborated that “Minsky moments are triggered by excessive financial leverage, and in the context of supply chains, leverage means excessive operating leverage: in Germany, $2 trillion of value added depends on $20 billion of gas from Russia… …that’s 100-times leverage – much more than Lehman’s.” 

(Zoltan’s entire note is a must read for everyone with a passing interest in what comes next).

But while Germany is front-and-center in this margin call malaise, many other European nations are suddenly succumbing to what Zoltan dubbed a “supply-chain Minsky moment.”

Over the weekend, we reported that Sweden and Austria had begun to bail out their energy suppliers:

• Austrian Chancellor Karl Nehammer said the loan to Wien Energie was an “extraordinary rescue measure” to ensure its two million customers – mainly Vienna households – continue to receive electricity. It will run until next April.

• Prime minister Magdalena Andersson said the government would offer hundreds of billions of kroner in support to electricity producers, the FT reported. The PM warned that, left unchecked, rising collateral demands for electricity producers could ripple through the main Nasdaq Clearing market in Stockholm and, in the worst case, spark a financial crisis…. just as Zoltan warned almost half a year ago.

And today, Reuters reports that Finland and Switzerland have joined the bailout brigade…

• Finnish utility Fortum said it had signed a bridge financing arrangement with government investment company Solidium worth 2.35 billion euros ($2.34 billion) to cover its collateral needs. A Finnish government official told Reuters the support was in addition to the 10 billion euros of liquidity guarantees Helsinki announced for power companies on Sunday.

• Swiss utility Axpo said it had received a credit line of up to 4 billion Swiss francs ($4.1 billion) from the government to help secure its liquidity needs. The Swiss government has lined up a 10 billion franc safety net for power firms, but decided to allocate the funds to Axpo even though the legislation is still before parliament.

The numbers are adding up fast but pale in comparison to what the final price could be if European governments decide this is their ‘whatever it takes’ moment.

Norwegian energy giant Equinor ASA warned European energy trading risks grinding to a halt unless governments extend liquidity to cover margin calls of at least $1.5 trillion.

While the physical market is functioning, the derivatives market is beginning to show serious signs of systemic stress.

Bloomberg reports that Helge Haugane, Equinor’s senior vice president for gas and power, said in an interview that “liquidity support is going to be needed,” warning that his company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.”

And Haugane confirms what we explained was driving the breakdown in market functioning in the (paper) energy markets:

“This is just capital that is dead and tied up in margin calls,” Haugane said in an interview at the Gastech conference in Milan.

“If the companies need to put up that much money, that means liquidity in the market dries up and this is not good for this part of the gas markets,” he said.

Sadly – but not entirely unexpectedly, Haugane says that EU plans to intervene would be “sensible” for derivatives trading. In other words, we are back to the ‘too big to fail’ arguments from 2008 when fears of the apocalypse (this time in real energy markets ahead of winter) prompted demands that government “do something” to save the over-levered from themselves… with the excuse being ‘if you do not rescue us, there will be hell to pay for the average EU joe’.

Finally, how exactly does this explicitly inflationary ‘bailout’ pair with ECB’s inflation-fighting mandate? We are sure Lagarde and Van der Leyen have all the answers… and if you dare ask, you are a Putin puppet (because remember decades of piss-poor policy decisions signaling as much virtue as possible led to this crisis point among the ‘green’ climate climaxers… Putin’s invasion of Ukraine was merely the final straw that Trump had warned about).

Without the ‘pain’ that Fed Chair Powell has warned about, no one will ever face the consequences of change their actions… but none of that accountability gets you elected, so don’t expect anything but more intervention. As Daniel Lacalle recently concludes, if there is one thing that this crisis shows us, it is that what Europe needs is more market and less intervention. Europe arrived at this crisis due to a combination of arrogance and ignorance on the part of the legislators who control the energy mix. The importance of a balanced mix, with nuclear, hydro, gas and renewables is more evident every day. Interventionist energy policy has failed miserably. More intervention is not going to solve it.

Authored by Michael Snyder via The Economic Collapse blog,

You have heard me say it over and over again.  What we are witnessing right now reminds me so much of 2008, and we all remember what happened in the fall of 2008.  That doesn’t mean that this new crisis will unfold exactly the same way that the last one did.  Ultimately, every economic downturn is unique.  But the fact that we are seeing so many parallels between what is transpiring now and what transpired 14 years ago should deeply alarm all of us.  We appear to be on the precipice of another economic crash, and all of the “solutions” that our leaders give us just seem to make things even worse.

Hopefully someone out there can find a way to pull a miracle out of a hat and a worst case scenario can be averted.

But I wouldn’t count on that happening.  The following are 12 numbers that show that we are getting dangerously close to an economic crash as the fall of 2022 approaches…

#1 The government is telling us that the unemployment rate only went up to 3.7 percent in August.

#2 According to John Williams of shadowstats.com, if honest numbers were being used the real rate of unemployment in the United States would be over 24 percent.

#3 About half of all U.S. companies say that they will be eliminating jobs within the next 12 months.

#4 The government is telling us that the inflation rate in the United States is only 8.5 percent.

#5 According to John Williams of shadowstats.com, if the rate of inflation was still calculated the way that it was back in 1980, the real rate of inflation would be somewhere around 17 percent right now.  That is worse than anything that we experienced during the Jimmy Carter era.

#6 At one company, the number of Americans taking out short-term loans for groceries has nearly doubled this year.

#7 One out of every five home sellers in the United States dropped their asking price last month.  This is more evidence that home prices are starting to rapidly move in a downward direction.

#8 Sales of previously-owned homes were about 20 percent lower this July than they were last July.

#9 One recent survey found that 3.8 million Americans believe that they could be evicted from their homes within the next two months.

#10 According to the National Energy Assistance Directors Association, approximately 20 million U.S. households are currently behind on their utility bills.

#11 The Dow Jones Industrial Average has fallen for three weeks in a row.  We also witnessed this sort of a gradual slide just prior to the big crash of 2008.

#12 In August, a whopping 2,150 corporate executives sold off shares in their companies.  Are they trying to cash in while they still can?

Gustavo Arnal was one of the corporate executives that recently sold off large amounts of stock.

Now he is dead…

The man who jumped to his death from the 18th floor of the famous ‘Jenga’ tower in lower Manhattan’s Tribeca neighborhood Friday has been identified as a Bed Bath & Beyond executive.

Gustavo Arnal, 52, was the Chief Financial Officer of Bed Bath & Beyond, a company that has been going through struggles of late due to high inflation and a sagging economy. The company announced plans to close 150 stores, of its roughly 900, and lay off 20 percent of staff just two days before Arnal’s death.

He reportedly sold over 42,000 shares in the company, oft-identified as a ‘meme stock’, for $1million just over two weeks ago, according to MarketBeat.com.

It appears that Arnal was involved in a “pump and dump” scheme, and he may have decided that he didn’t want to spend much of the rest of his life locked away in prison…

The executive vice president and chief financial officer of Bed Bath & Beyond who plunged to his death from the 18th floor of a New York City skyscraper on Friday was the subject of a class-action lawsuit alleging that he and majority shareholder, GameStop Chairman Ryan Cohen, had artificially inflated the company’s value in a “pump and dump” scheme.

Gustavo Arnal, 52, and Cohen, are listed as defendants in the class-action lawsuit filed last month in the United States District Court for the District of Columbia.

Sadly, I think that we will see quite a few more people jumping off of buildings before this whole thing is over.

Of course most Americans would never do such a thing.

Most Americans will just suffer through whatever comes even as their standard of living is being systematically destroyed.

For example, CNN recently interviewed one young mother that couldn’t even afford to buy a backpack for her preschooler…

As Sarah Longmore finished her back-to-school shopping, the mother of five looked at a $25 backpack for her preschooler. Soaring inflation had crunched the family’s budget, and she decided her daughter could make do with a hand-me-down. She put the backpack back.

Unfortunately, she is not alone.

In fact, one recent poll found that only 36 percent of all parents will “be able to pay for everything their kids need this school year”…

Just 36% of parents said they would be able to pay for everything their kids need this school year, according to Morning Consult’s annual back-to-school shopping report. That’s down sharply from 52% in 2021, when inflation was lower and stimulus checks plus advance child tax credit payments helped some families.

Are things really this bad already?

If so, what will conditions look like six months or a year from now?

2023 is less than four months away, and the stage has been set for an economic implosion of absolutely epic proportions.

Do you remember the extreme pain that our nation went through in 2008 and 2009?

Many believe that what is ahead will be even worse.

The greatest debt bubble in the history of the world is starting to burst, and central banks all over the globe are starting to panic.

If you always wanted to live in “interesting” times, you are going to get your wish.

But for most people, the times that we are moving into will not be fun at all.

*  *  *

It is finally here! Michael’s new book entitled “7 Year Apocalypse” is now available in paperback and for the Kindle on Amazon.

Liz Truss, the Conservative Party’s new leader and incoming prime minister, drafted plans for a massive £130 billion support package over the next 18 months to help struggling households and businesses lower energy bills, according to policy documents seen by Bloomberg.

Truss faces massive economic challenges as energy hyperinflation, and a cost-of-living crisis darkens the outlook, with a recession becoming more likely. She has to act swiftly to avert social unrest. 

On Oct 1, household energy bills were expected to jump 80% to £3,548 a year, forcing people into energy poverty as they must choose between heating their homes or putting food on the table. Under Truss’ new plan, the energy price hike would be canceled. Instead, her team would develop a new unit price that households would pay for electricity and natural gas. 

Liz Truss energy plan:

– freeze will be at around £2,500
– but £400 universal handout remains so that’s why there are suggestions it’s at roughly maintained at the £1,971 current rate
– paid by borrowing. No plan to claw back thru energy bills

1st reported @Steven_Swinford

— Sam Coates Sky (@SamCoatesSky) September 6, 2022

According to documents, energy suppliers would charge households at a lower rate for power, and the government would cover the difference with the utility. 

On Monday, Jacob Rees-Mogg, who is set to become Business Secretary, met with top executives of energy companies to discuss Truss’ new plan. A person at the meeting said the execs were more open-minded about this plan than being hit with a windfall tax. 

The new protections for households and businesses will be announced as early as the second half of this month and implemented in October. As for businesses, officials are in the process of drafting emergency legislation. 

“Limiting households’ bills could cost as much as £130 billion over the next 18 months … cost of the plan to protect businesses will range from £21 billion to £42 billion over six months, depending on how low the cap is set. Over a year, the estimated costs to the government range from £28 billion to £67 billion,” Bloomberg said. 

The size of the UK energy bail-out is off-the charts. According to @alexwickham, on top of the £130 billion to freeze household energy bills, Liz Truss is mulling another £40 billion for small business.

The ~£170 billion equals to the annual NHS budget, and it’s >5% of GDP

— Javier Blas (@JavierBlas) September 6, 2022

Truss will be arriving at Balmoral Castle in Scotland to meet Queen Elizabeth II ahead of taking office later today as the successor to Boris Johnson. 

Gilt yields across the curve retreated from highs on Truss’ proposed power bill support package. The pound responded well as one of the top G-10 performers today, and UK stocks are positive. 

Truss faces a colossal task to turn the UK around. Freezing power bills kicks the can down the road — but will do nothing to solve the worsening energy crisis as Nord Stream 1 NatGas flows to Europe came to a halt over the weekend. 

Authored by Lance Roberts via RealInvestmentAdvice.com,

Last year, I wrote an article discussing that 2022 earnings estimates were too optimisticgiven the impending reversal of the economic “Sugar Rush” of massive liquidity injections. With the Fed hiking rates, high inflation, and slower economic growth pending, a continuation of that earnings decline remains highly probable.

We previously noted that earnings estimates were overly optimistic and would need to come down to align with economic realities. That process has now begun. In the last couple of months, estimates for Q4-2023 have dropped by roughly 12%. Such would be considered normal for an economic slowdown. However, if the economy slips into a recession, a decline of 50% in estimates would be in line.

There should be no surprise, given that economic growth and earnings have a long-term historical correlation. Such would seem logical, given that economic activity generates revenues for companies. Therefore, while it is possible for earnings to grow faster than the economy at times, i.e., post-recession, they can not outgrow the economy indefinitely. The earnings surge in 2021 is something never witnessed previously and must eventually revert to norms.

Estimates Are Extremely Deviated

Despite weakening economic growth as inflation increases, the reduction of liquidity, and profit margins under pressure, analysts continue to keep estimates elevated. Currently, estimates for Q4-2023 are $214.23/share according to S&P. This is revised down from $242.21 in May, suggesting only an 8% increase in earnings over two years. Hardly something supportive of strongly rising asset prices.

More importantly, despite the recent downward revisions, the current estimates still exceed the historical 6% exponential growth trend, which contained earnings growth since 1950, by one of the most significant deviations ever.

The only two previous periods with similar deviations are the “Financial Crisis” and the “Dot.com” bubble.

While many have become increasingly bullish on the market, suggesting the “bottom” for stocks gets made, I would caution otherwise.

The market risk remains fundamentals against a backdrop of the reversal of monetary accommodation. The most significant bottom-line earnings drivers remain accounting gimmicks, share repurchases, and lower tax rates. However, as we advance, there are numerous risks to earnings.

• Changes to tax code or rates (aka the 15% minimum corporate income tax.)

• Increased borrowing costs from higher rates.

• Increased wage costs

• Inflationary pressures

• Decreased demand

• Slower economic growth

• A reversal of share buybacks either through choice or legislation (aka the 1% tax on share buybacks.)

However, regardless of those potential impacts, the annual rate of change in earnings will slow markedly as year-over-year comparisons become more challenging.

While the bulls remain optimistic, the deviation between prices and fundamental realities suggests risks that investors should not quickly dismiss.

The Biggest Risk Remains A Recession

At the beginning of this year,few Wall Street analysts expected substantially weaker economic growth in 2022. As I stated then,

“So, as we head into 2022, here is a short list of the things we are either currently hedging portfolios against or will potentially need to in the future.”

• Economic growth slows as year-over-year comparisons become far more challenging.

• Inflationary pressures remain more persistent than anticipated, which impedes consumption and compresses profit margins.

• Rising wage and input costs reduce corporate earnings, disappointing earnings growth expectations.

• Valuations begin to weigh on investor confidence.

• Corporate profits weaken due to slower economic growth, reduced monetary interventions, and rising costs.

• Consumer confidence continues to weaken as slowing economic growth and rising costs crimp consumption.

“While analysts on Wall Street are confident the bull market will continue uninterrupted into 2022, there are more than enough risks to derail that market outlook. Importantly, none of these independently suggest a significant correction is imminent. However, the risk is that they will undermine the bullish “psychology” of the market.”

My list had a few more items, like a housing correction which is now in progress, but you get the idea. The significant risk to overly optimistic estimates remains an economic recession.

While Q1 and Q2 of this year registered negative economic growth, there was likely enough strength in the employment and consumption measures to avoid recession classification. However, as we head into 2023, the risk of a recession rises markedly as inflation and tighter monetary policy impact consumption.

Already, we are witnessing a broad contraction in manufacturing activity as demand slows. Not surprisingly, there is a high correction between the annual change in earnings, estimates, and the economy.

The chart below is our Economic Output Composite Index (EOCI), which combines several Fed regional surveys, CFNAI, Chicago PMI, Conference Board and OECD Leading Indices, NFIB Small Business, and the ISM composite index. This comprehensive index has a high correlation to the economy, as shown by the 6-month average of the Leading Economic Index.

Economic Weakness & Earnings

As shown, the economy peaked last quarter, and economic data points are softening on several fronts. Not surprisingly, earnings estimates are declining as economic growth rates slow.

With the Fed’s goal to reduce demand to quell inflation, the risk of triggering an economic recession through tighter monetary policy remains elevated.

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” – Jerome Powell

As previously noted, the most considerable risk to the bullish thesis remains the Fed.

The Fed Problem

While many investors hope the Fed will “pivot” on their inflation fight sooner than later, Powell’s recent comments suggest otherwise. However, such should not be surprising given that the whole point of the Fed hiking rates is to slow economic growth, thereby reducing inflation. Unfortunately, with the economy slowing, additional tightening could exacerbate the risk of an economic contraction, given the dependence on low rates to support economic growth through increased debt.

Since earnings remain correlated to economic growth, earnings don’t survive rate hikes, especially in more aggressive campaigns.

The Fed is in a difficult position. Producer prices, as shown below, have risen substantially faster than consumer prices. Such suggests that companies absorb input costs as they can’t pass all the price increases on to consumers. Eventually, the absorption of higher costs will impair profitability. As shown, there is a correlation between corporate earnings and inflation.

When the inflation spread rises enough to impair profitability, corporations take defensive measures to reduce costs (layoffs, cost cuts, automation.) Increased job losses contract consumer spending, slowing the economy toward recession. As Jerome Powell noted, we should expect softness in the labor market as higher Fed rates lead to job losses.

As the Fed continues to hike rates, that tightening almost assures a recession.

While no one currently expects an earnings decline, much less a recession, few tailwinds support economic growth. The most significant risk to investors comes from the lag effect of monetary policy changes. As the Fed focuses on lagging economic data to drive monetary policy decisions, the lag effect of those changes almost guarantees a policy mistake in the future.

In our opinion, the earnings decline has more to go before we are done.

Following a flat Monday futures session when the US was closed for Labor Day and European stocks slumped as Russia confirmed it would halt NS1 pipeline flows indefinitely, on Tuesday European stocks and US equity futures rose as governments attempted to blunt the growing energy crisis, injecting tens of billions in fiscal stimulus to offset soaring energy prices and undoing central bank attempts to crush demand with tighter financial conditions. S&P futures rose 0.6% as Wall Street was set to resume trading after the long weekend, while Nasdaq futures rose 0.7%, ignoring – for now – news of more Chinese lockdowns. Meanwhile, as traders eyes the flood of fiscal “energy support”, Treasuries fell across the board, taking the two-year yield to 3.46%, while oil edged down reversing yesterday’s OPEC+ production cut gains on demand risks from fresh Chinese Covid lockdowns. The pound rebounded as traders assessed the agenda of incoming PM Liz Truss. European natgas prices eased with politicians scrambling to find solutions after Moscow switched off its main pipeline to the continent.

In premarket trading, Bed Bath & Beyond shares tumbled as much as 25% after Chief Financial Officer Gustavo Arnal fell to his death Friday from a Manhattan skyscraper. Other meme stocks were also drifting lower, including GameStop, which declined 5%. US-listed Chinese stocks also slumped premarket, with the drop led by Alibaba which tracked moves in Hong Kong-listed shares in the past two sessions, as lockdowns hit more cities amid an increase in Covid cases. Alibaba (BABA US) falls 2%, Pinduoduo (PDD US) -1.3%, JD.com (JD US) -1.8%, Baidu (BIDU US) -0.6%Here are some other notable premarket movers:

• FedEx (FDX US) shares decline 1.7% in US premarket trading as Citi downgraded the stock to neutral, noting that it’s concerned about the pace of freight activity heading into year-end.
• Ciena (CIEN US) shares drop as much as 1.4% in US premarket trading after JPMorgan downgrades the communications equipment company to neutral from overweight on “limited upside” for the stock.
• Digital World Acquisition (DWAC US) shares slump as much as 33% in US premarket trading, after the blank-check firm that is set to merge with former President Donald Trump’s social media group reportedly failed to get enough shareholder support to extend the deadline to complete the deal.
• Transocean (RIG US) gains 1.4% in premarket trading as the stock was upgraded to buy from neutral by BTIG, which said in a note that improving day rates in the floater market would help the company recharter rigs at higher levels.
• CVS Health (CVS US) stock could be in focus as the company agreed to buy Signify Health for $30.50 per share in cash in a transaction valued at ~$8 billion.
• Watch tanker shares as Jefferies says it remains positive on the outlook for the sector in a note raising PTs across its coverage and upgrading four stocks to buy. Euronav, Frontline (FRO US), Nordic American (NAT US) and Tsakos Energy (TNP US) upgraded to buy from hold, with PTs raised on all.
• Keep an eye on Rollins (ROL US) stock as it was raised to outperform from sector perform at RBC, with the broker saying the pest-control firm offers a “recession- resilient” model against a tough current backdrop.

Soaring energy costs have added to the complexities for monetary policymakers attempting to manage surging price pressures and the risk of recession. The focus turns next to the ECB, with economists at some of Wall Street’s top banks expecting it to announce a hike of 75 basis points on Thursday.

“The global economy, and in particular the European economy is really faced with a number of very difficult challenges, of which energy is sitting at the heart of everything,” Seema Shah, chief global strategist at Principal Global Investors, said on Bloomberg Television. “It does unfortunately mean that Europe despite all the help that governments are trying to provide for families and businesses, it’s simply not going to be enough to stave off a pretty significant downturn.”

And speaking of Europe, the Stoxx 50 rose 0.4%; Germany’s DAX outperformed peers, adding 0.7%, FTSE MIB lags, dropping 0.1% despite a massive a massive energy bailout plan announced by the new PM, Liz Truss, which amount to over €170 billion, and is meant to freeze houshold energy bills as well as rescue small businesses. Retailers, travel and autos are the strongest-performing sectors. Here are some of the biggest European movers today:

• Delivery Hero shares rally as much as 10% after Morgan Stanley raises the stock to overweight, saying the firm is set for the biggest margin improvement in the food delivery sector into 2023 and the most resilient top-line growth.
• Consumer stocks Greggs rises as much as +7.6%, Asos +8.5%, J D Wetherspoon +6.8%
• Volkswagen shares rise as much as 3.2% in Frankfurt after the German company decided to push ahead with its plan to list a minority stake in the Porsche sports-car maker this year.
• Commerzbank shares rise as much as 5% on Warburg upgrade, with the broker seeing good earnings and revenue growth prospects for the German lender.
• The Stoxx 600 Energy index falls, lagging the broader benchmark, as weaker gas prices and a stalled rally for crude weigh.
• Gas-exposed names Equinor drop as much as -6.1% and OMV -3.5%, among the biggest decliners
• Shell decline as much as -2.6% , BP -2.8%, TotalEnergies -2.2% and Eni -4.1% as Brent slipped following the OPEC+ meeting on Monday, with traders weighing the output cut alongside the impact of new lockdowns in China
• Remy Cointreau shares drop as much as 3.4% after Kepler Cheuvreux analyst Richard Withagen cut the recommendation to reduce from hold, citing slowing global spirits-market growth.
• BT shares fall as much as 2.8% to the lowest level since November 2021 after Berenberg downgraded the UK carrier to hold from buy, saying 1Q results raised “a multitude of questions” about the investment case.

Earlier in the session, Asian stocks turned lower as concerns over global monetary tightening and the impact of Europe’s energy crisis kept risk appetite in check. The MSCI Asia Pacific Index slid 0.4%, reversing an earlier gain of as much as 0.5%. Energy shares were the biggest advancers after oil rallied overnight, while most other sectors fell.  Stocks in China rebounded after days of losses, while key measures of Hong Kong equities were the biggest laggards in the region. Australian stocks declined after the central bank raised its key rate by 50 basis points. Indonesia’s benchmark narrowly missed a fresh record high. The threat of a global economic slowdown continues to weigh on market sentiment, along with worry over inflation amid climbing commodities prices. The most recent earnings season has done little to quell concerns around the region, with MSCI’s main Asia gauge on track for its fifth-straight quarterly loss and volatility surging. 

“Monetary tightening and accelerating inflation have weighed on investor sentiment and market returns,” Germaine Share, director of manager research of Morningstar wrote in a report. “We have also seen fund managers turn overweight China in the recent months to buy structural growth opportunities at attractive valuations.”

Japanese stocks closed mixed as uncertainty over the global economy countered optimism over the benefits of the weaker yen for exporters.  The Topix fell 0.1% to close at 1,926.58, while the Nikkei was little changed at 27,626.51. Oriental Land Co. contributed the most to the Topix decline, decreasing 6.3% as the stock failed to be added to the blue-chip Nikkei 225. Out of 2,169 stocks in the index, 1,002 rose and 1,014 fell, while 153 were unchanged. “The markets are assuming that the US and European economies are going to be facing difficult situations,” said Hideyuki Suzuki, a general manager at SBI Securities. “Japanese stocks are in a relatively more favorable situation as the country has been late in restarting its economy, so there is still much room for growth.”

Indian stocks ended marginally lower, after swinging between gains and losses for most of Tuesday’s session, as the US Fed’s tightening bias and concerns about a worsening energy crisis in Europe remained an overarching themes in Asia.   The S&P BSE Sensex fell 0.1% to 59,196.99 in Mumbai, erasing gains of as much as 0.5%. The NSE Nifty 50 Index dropped by a similar magnitude. Of the 30 members on the Sensex, 10 rose, while 20 fell. Twelve of 19 sector indexes compiled by BSE Ltd. advanced, led by a measure of power companies.  “Markets are still in a range and rotational buying across sectors is helping the index to hold strong amid mixed global cues,” Ajit Mishra, vice president for research at Religare Broking Ltd. wrote in a note. “Since all sectors, barring IT, are contributing to the move, the focus should be more on stock selection.” 

In FX, the Bloomberg Dollar Spot Index erased a decline as the greenback traded mixed versus its Group-of-10 peers. GBP and SEK are the strongest performers in G-10 FX, JPY and AUD underperform. Yen trades above 142 as Japan’s failed MMT experiment slowly comes to a close. The euro inched up to trade around 0.9950. Leveraged investors were heavily positioned for a lower euro versus the dollar, but they see scope to partially unwind some of that exposure and bet on further pound weakness. Sterling climbed as much as 0.8% to $1.1609 after sliding to the lowest since March 2020 on Monday. The rebound was fueled by a report that incoming UK Prime Minister Liz Truss has drafted plans to fix annual electricity and gas bills for a typical UK household at or below the current level of £1,971 ($2,300). The gilt curve bear steepened. Australia’s sovereign bonds gave back an advance after the central bank raised interest rates by a half- percentage point for a fourth consecutive meeting and signaled further hikes ahead in its drive to rein in inflation. The Reserve Bank took the cash rate to 2.35%, the highest level since 2015, in a widely expected announcement on Tuesday. The Australian dollar slumped. The yen fell to a new 24-year low against the dollar as rising Treasury yields highlighted the policy divergence between the Federal Reserve and Bank of Japan. Bonds were little changed.

In rates, TSY 10-year yield rose 6bps to 3.25%, while front-end-led losses flatten 2s10s, 5s30s by 1bp and ~3bp on the day; in 10-year sector bunds outperform by nearly 10bp with 10-year German yields richer by ~3bp on the day. The yield on 10-year bunds is up about 1.4bps to 1.54% while German 2-year yields remain 10bp lower on the day following dovish comments from ECB’s Centeno, Kazaks and Stournaras. UK short-end bonds gain, benefiting from new PM’s plan to freeze energy bills, while long-end gilts declined amid concerns about how the proposal will be funded. Treasury cash market was closed Monday for US Labor Day holiday, and few events are slated for Tuesday. Wednesday has several Fed officials slated to speak. 

In commodities, brent fell 3% to near $93, paring its post-OPEC+ meeting gains, effective assuring that more production cuts are coming. Spot gold is little changed at $1,712/oz.

Bitcoin has been oscillating under the USD 20,000 mark throughout the European session.

Looking to the day ahead now, and in the political sphere the main event will be that Liz Truss succeeds Boris Johnson as UK Prime Minister. Otherwise on the data side, we’ll get German factory orders for July, the German and UK construction PMI for August, and from the US there’s the final services and composite PMIs for August, and the ISM services index too.

Market Snapshot

• S&P 500 futures up 0.5% to 3,944.00
• STOXX Europe 600 up 0.2% to 414.17
• MXAP down 0.3% to 153.07
• MXAPJ little changed at 503.42
• Nikkei little changed at 27,626.51
• Topix down 0.1% to 1,926.58
• Hang Seng Index down 0.1% to 19,202.73
• Shanghai Composite up 1.4% to 3,243.45
• Sensex up 0.1% to 59,320.84
• Australia S&P/ASX 200 down 0.4% to 6,826.54
• Kospi up 0.3% to 2,410.02
• Gold spot up 0.2% to $1,714.18
• U.S. Dollar Index up 0.13% to 109.68
• German 10Y yield little changed at 1.57%
• Euro up 0.3% to $0.9956

Top Overnight News from Bloomberg

• German factory orders fell for a sixth month in July. Demand slipped 1.1% from June, driven by a slump in consumer goods, particularly pharmaceutical products. That’s worse than the 0.7% drop economists had predicted
• European households will benefit from at least 376 billion euros ($375 billion) in government aid to stem whopping energy bills this winter, yet there’s a risk the smorgasbord of spending won’t bring enough relief
• Switzerland and Finland joined Germany in offering credit facilities to energy companies as the worsening supply crunch and surging prices threaten to create financial havoc in Europe
• China set a stronger-than-expected exchange-rate fixing for a 10th straight day and said it will allow banks to hold less foreign currencies in reserve, its most substantial moves yet to stabilize a weakening yuan
• China sealed off parts of Guiyang, capital of the mountainous southern Guizhou province, as an increase in virus cases triggered a stringent response
• Egypt’s government now favors a more flexible currency to support an economy that’s come under pressure from Russia’s invasion of Ukraine, a top official said

A more detailed look at global markets courtesy of Newsquawk

Asaia-Pac stocks traded somewhat mixed following the holiday lull stateside and as participants braced for this week’s central bank decisions beginning with an expected 50bps rate increase by the RBA. ASX 200 lacked firm direction with strength in the energy and tech sectors offset by mixed data releases and an unsurprising 50bps rate increase by the RBA. Nikkei 225 was contained following disappointing household spending and softer wage growth data. Hang Seng and Shanghai Comp were mixed with Hong Kong pressured as losses in tech overshadowed the strength in property names, while the mainland was underpinned after further support pledges by Chinese authorities and with the PBoC cutting its FX RRR which is seen as a measure to stem the recent currency depreciation.

Top Asian News

• PBoC set USD/CNY mid-point at 6.9096 vs exp. 6.9304 (prev. 6.8998)
• China’s Shanghai reportedly added one high-risk area and two middle-risk areas Tuesday after report of one local asymptomatic COVID case outside of quarantine.
• Japanese Finance Minister Suzuki confirmed fund requests from ministries for FY23 reached JPY 110tln and said they will decide on a fuel subsidy extension based on prices and other factors.
• Japan is poised to shorted its COVID isolation time to seven days, Nikkei reported.
• Japan Arrests Kadokawa Executives in Olympic Bribery Probe
• MUFG to Sell $600 Million of Marelli Debt to Deutsche Bank
• PBOC Seen Easing Monetary Policy Despite Yuan Slump
• Evergrande to Exit Shengjing Bank in $1.1 Billion Forced Sale
• Nomura India’s Head of Debt Shantanu Sahai Is Said to Leave

European bourses kicked off Tuesday’s trade in the green following a mixed APAC session, which saw no lead from Wall Street amid the US Labor Day holiday. Sentiment this morning was somewhat choppy and bourses trade off highs. Sectors in Europe are mostly firmer and now portraying a mildly anti-defensive/pro-cyclical tilt, with Healthcare, Utilities, Telecoms, and Food & Beverages towards the bottom of the bunch. Stateside, US equity futures remain firmer across the board with the NQ narrowly outpacing the ES, YM, and RTY.

Top European News

• Europe’s Lehman Warning on Energy Prompts Flurry of Cash Help
• Retail Rally on Truss Could Be Short-Lived as ‘Storm Is Brewing’
• UK Utilities Up on Truss Plans to Cap Electricity, Gas Bills
• Handelsbanken Recruits From Citi, Penser, Dagens Industri
• European Gas Drops as Governments Move to Fix Energy Crisis

FX

• The Dollar and index lost upward momentum in low-key US holiday trade on Monday, but found underlying bids to keep the latter propped around 109.50
• EUR sees some respite and consolidation on either side of 0.9950 against the USD, whilst several ECB headlines were released in the blackout period, albeit from a monthly publication.
• JPY declined further on yield differentials, with USD/JPY rising above 141.00 and closer to 142.00.
• Yuan came under renewed pressure irrespective of a firmer than forecast onshore midpoint fix, with China’s COVID situation continuing to be a headwind.
• Russia’s Sberbank said they are beginning to lend the Chinese Yuan, seeing large demand for the currency, according to Reuters.

Fixed Income

• Bunds are off recovery highs, but remain firm within 145.75-144.74 parameters for the Dec contract
• Gilts have pulled back below parity after rebounding in sympathy to 106.79.
• 10yr T-note remains depressed towards the bottom of a 116-00/27+ range awaiting the return of US cash markets from the long Labor Day weekend

Commodities

• WTI and Brent futures have declined below the levels seen at the reopening of electronic trade, but divergence is seen in terms of intraday changes between the contracts as the former saw no settlement on account of the US Labor Day holiday.
• Spot gold hovers around recent levels just above USD 1,700/oz – gold sees key support at 1699.1 and 1678.4, whilst resistance levels include 1,729 and 1,745.
• Base metals are mostly firmer with 3M LME copper posting mild gains above USD 7,500/oz but off best levels.
• France’s Aluminium Dunkerque is to cut production by one-fifth amid power costs, according to sources cited by Reuters

Central Banks

• ECB’s Centeno said monetary policy must be patient, ECB may achieve inflation goal with slow normalisation via Eurofi Magazine.
• ECB’s Kazaks said broad of protracted recession could slow rate hikes’ ECB will have above the neutral rate if needed via Eurofi Magazine
• ECB’s Scicluna said determining when to use Transmission Protection Instrument (TPI) is a major challenge, via Eurofi Magazine.
• ECB’s Stournaras sees energy costs moderating and bottle easing; EZ inflation is close to its peak, inflation will start steady deceleration via Eurofi Magazine.
• BoE’s Mann said a fast and forceful approach to tightening, potentially followed by a hold or reversal is better than a gradualist approach, while she added that a 75bps rate hike by the BoE is an important question and that they must ensure inflation expectations do not drift further from the target.
• RBA hiked rates by 50bps to 2.35%, as expected. RBA reiterated that the board is committed to doing what is necessary to ensure inflation returns to the target and it expects to increase rates further in the months ahead but is not on a preset path. Furthermore, it stated that the size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market, while it noted that the Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade.

US Event Calendar

• 09:45: Aug. S&P Global US Services PMI, est. 44.2, prior 44.1
• 09:45: Aug. S&P Global US Composite PMI, est. 45.0, prior 45.0
• 10:00: Aug. ISM Services Index, est. 55.4, prior 56.7

DB’s Jim Reid concludes the overnight wrap

US markets might have been closed for the Labor Day holiday, but there was plenty of action in Europe as markets finally reacted to the closure of the Nord Stream gas pipeline on Friday evening. Unsurprisingly it wasn’t a happy one and European assets slumped across the board, with the Euro itself falling beneath $0.99 for the first time since 2002 as we went to press yesterday, whilst the STOXX 600 managed to claw back its initial losses to “only” close -0.62% lower. Those countries most exposed to Russia’s gas were particularly affected, with the DAX falling -2.22% on the day. In the meantime, the prospect that the latest shock would force the ECB into even more aggressive rate hikes saw sovereign bonds yields move higher across the continent.

Of course, the one asset class these losses didn’t apply to were energy itself, and European natural gas futures surged by +14.56% on the day, albeit down from +35% up just after 9am London time. That still leaves them at €246 per megawatt-hour, which is still someway beneath their closing peak at €339 a week and a half ago, but is nevertheless almost five times the level they were trading at a year ago. German power prices for next year also rebounded +12.10% (after falling -48.35% last week), which came as Bloomberg reported people familiar with the matter saying that Germany was now unlikely to meet their target to hit 95% gas storage by November following the recent news on Nord Stream.

In terms of the next policy steps, EU energy ministers are set to meet on Friday, and EU Commission President von der Leyen tweeted that the Commission was “preparing proposals to help vulnerable households and businesses to cope with high energy prices”. She said the aim was to reduce electricity demand, as well as “Enable support to electricity producers facing liquidity challenges linked to volatility”. Let’s see what they come up with, but we also heard from French President Macron, who said he was in favour of an EU-wide windfall tax on energy profits.

Against this backdrop, Brent crude oil prices (+2.92%) moved higher for a second day after the OPEC+ group announced that they would cut production by 100k barrels per day next month. That reverses the increase from September that was one factor helping to lower oil prices, and won’t be welcome news for policymakers as Europe grapples with its own energy issues. In particular, it’ll be interesting to see how this week’s ECB forecasts are affected by the latest energy shock, and how long they expect it to take before inflation returns back to target. In early Asian trade, Brent futures (-0.74%) have reversed a bit of yesterday’s gains.

Speaking of the ECB, the latest shock from the Nord Stream headlines led markets to price in a further +6bps of rate hikes over the rest of 2022, which brings the total amount expected to +174.9bps. That takes the expected rate implied by year-end to its highest level yet, and means that markets are pricing the equivalent of a 75bps move this week, and then two further 50bps moves in October and December, so a pace unlike anything we’ve been used to seeing over recent years. And in turn, with investors expecting more aggressive rate hikes and faster inflation, sovereign bonds also sold off significantly, with yields on 10yr bunds (+4.0bps), OATs (+4.6bps) and BTPs (+10.8bps) all moving higher on the day.

Here in the UK, we got confirmation that Foreign Secretary Liz Truss would become the next Prime Minister today, after she defeated former Chancellor Rishi Sunak in the Conservative leadership election. Truss’ victory was somewhat narrower than recent polls had implied, with a 57%-43% win among party members, and it was also the smallest margin of victory for a new leader with Conservative members since the current system was brought in over 20 years ago. UK assets were unaffected by the news, since it had been widely expected in advance, but they’ve significantly underperformed over the last month as the contest has proceeded, with gilts down -8.2% over August (vs. -5.1% for Euro Sovereigns and -2.6% for Treasuries). Furthermore, since Prime Minister Johnson announced his resignation on July 7, sterling has been the worst performer among the G10 currencies, having fallen -4.21% against the US Dollar. Our FX strategist Shreyas Gopal even put out a report yesterday assessing the risks of a UK balance of payments crisis (link here).

In terms of what happens now, Truss will be invited to become PM by the Queen after Johnson resigns today. After that, she’s expected to deliver a speech from 10 Downing Street, and start putting together her new cabinet. The key post of Chancellor of the Exchequer (the UK’s finance minister) is widely expected to go to current Business Secretary Kwasi Kwarteng, who wrote in an FT op-ed on Sunday evening that the Truss government would “take immediate action” on the cost of living, and that there would “need to be some fiscal loosening to help people through the winter”. There were also some lines to reassure markets, saying that they would “work to reduce the debt-to-GDP ratio over time”, and they “remain fully committed to the independence of the Bank of England”. Overnight all the newspapers are reporting that Truss is close to sanctioning the freezing of energy bills for the next 18 months which could cost an eye watering £130bn. For context the entire covid spending has been estimated at somewhere between £300-400bn.

Asian equity markets are trading higher this morning following yesterday’s announcement by Chinese officials that they will speed up stimulus efforts in the third quarter to boost the economy as evidence points to a further loss of momentum for an economy marred by pandemic related losses and a property slump. The RRR cut yesterday is also helping. As I type, Chinese stocks are leading gains across the region with the Shanghai Composite (+0.96%) and CSI (+0.54%) both moving higher while the Kospi (+0.10%) is also up. Elsewhere, the Nikkei (+0.02%) is recovering from its earlier losses whilst the Hang Seng (-0.33%) is sliding after its opening gains this morning.

S&P 500 (+0.50%) and NASDAQ 100 (+0.63%) futures are edging higher after the holiday. Meanwhile, 2 and 10yr US Treasuries are +6.8bps and +4bps higher respectively, following the global move yesterday.

In monetary policy news, the Reserve Bank of Australia (RBA) raised its official cash rate (OCR) to the highest level since 2015, increasing it by 50 bps to 2.35%, its fifth hike in a row to curb soaring inflation that is pushing up prices in the nation. In a statement, the RBA Governor Philip Lowe indicated that the central bank would continue to adjust rates as inflation continues to run above its 2%-3% target range. He added that prices are expected to increase further over the months ahead before peaking later this year. Our economists think the move and comments leans slightly more hawkish which is reflected by Aussie yields rising as I type.

In terms of data releases yesterday, we got the final services and composite PMIs for August from Europe, where there were generally downward revisions relative to the flash readings. In the Euro Area, the composite PMI was revised down to 48.9 (vs. flash 49.2), and in the UK, it was revised down to a contractionary 49.6 (vs. flash 50.9), which is the first time in 18 months that the UK composite PMI has been in contractionary territory. Otherwise, Euro Area retail sales grew by +0.3% in July (vs. +0.4% expected).

To the day ahead now, and in the political sphere the main event will be that Liz Truss succeeds Boris Johnson as UK Prime Minister. Otherwise on the data side, we’ll get German factory orders for July, the German and UK construction PMI for August, and from the US there’s the final services and composite PMIs for August, and the ISM services index too.

Shares of Bed, Bath & Beyond are plunging in pre-market trading this morning after the week’s report that the company’s Chief Financial Officer was identified as a man who lept to his death from a Tribeca building last Friday. 

Shares are down about $1.30, or roughly 15%, to $7.35 as of 0730 EST.

52 year old CFO Gustavo Arnal’s death was officially ruled a suicide on Monday, according to Reuters. He officially died from “multiple” blunt force trauma, according to the New York City Medical Examiner’s Office. 

The Reuters report noted that Arnal was sued on August 23 “over accusations of artificially inflating the firm’s stock price in a ‘pump and dump’ scheme, with the lawsuit alleging Arnal sold off his shares at a higher price after the scheme.”

Recall, we wrote this weekend that Arnal fell from the 18th floor of 56 Leonard Street on Friday and was identified on Sunday morning by the New York Post. The Post noted he had just sold 42,513 shares of stock on August 16, netting a little over $1 million. 

In 2021, Arnal’s total compensation was more than $2.9 million, which included $775,000 in salary. He joined the company in 2020 after stints working as chief financial officer for Avon and as an executive for Procter & Gamble, the report notes.

Bed, Bath & Beyond had been on a roller coaster ride over the last month, which shares running up to as high as $28 per share just days ago on a “meme stock” rally. It then saw investor Ryan Cohen exit his position in the company, sending shares plunging.

In the days following, the company announced plans to try and reduce costs and stave off bankruptcy, including a $500 million financing agreement in order to help pay its vendors. It released a statement about its strategic and business updates that will result in store closures and a reduction of its workforce. Its plan includes closing approximately 150 lower-producing banner stores and a reduction of 20% of its workforce.  

But the measures didn’t convince the street. As we wrote on August 31, we spoke with at least one institutional trading desk specializing in consumer discretionary who said they’ve all but given up on Bed Bath & Beyond and left the ‘meme stock’ for the ‘apes.’ 

Subsequently, both the company’s debt and equity were downgraded.