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Submitted by Peter Garnry of SaxoBank

Summary: Tesla shares have exploded this year burning short sellers and the last two trading sessions have been an outright short squeeze detaching Tesla from meaningful fundamentals. It is quite likely that the stock will normalize. How it plays out and when we don’t know, but if investors want to play any normalization we go through the various options and the risks associated with them.

Tesla shares are up 36% in the last two trading sessions and up 111% year-to-date. We are observing a classic short squeeze where many short sellers are forced to reduce their position. The interesting math of short selling is that a short position increases in exposure (weight in the portfolio) as the position goes against you which is opposite of what is happening on long positions. So if a stock declines that you have short then you short even more to maintain the same risk exposure in the portfolio.

The price action in Tesla is compounded by other market participants smelling fatigue and weakness among the entrenched short sellers in Tesla. So they are forcing short sellers to buy back some of the shares they have borrowed. But several short sellers have openly said that they are continuing to short and new short sellers are taking the risk at current levels.

Depending on the will of the buyers trying to shake the short sellers and the short sellers’ stubbornness this short squeeze might not be over just yet. But everyone agrees that the move is not based on fundamentals and Tesla’s shares cannot support this market valuation of $160bn. That means that the market will most likely normalize Tesla’s shares at one point, but we want to stress that we don’t know when and how much the normalization will go.

But if investors believe Tesla shares will be down in the near term future how should investors do it?

If investors are shorting a delta one instrument (shares or CFDs) on Tesla then timing is everything and the potential losses are unbounded so this approach has extremely high risk. Another approach is to buy put options on Tesla. The current market price (premium) on a put option at-the-money with expiry on Friday next week is around 10% of the underlying. The put option provides the investors will pre-defined maximum loss (premium + commission paid) that cannot be exceeded. In such a volatile environment this maximum loss characteristic is attractive. But the risk with the option is naturally that the investor pays a high premium for a short period and thus could end up losing 10% of the underlying in a short period.

Authored by Michael Lebowitz and Jack Scott via RealInvestmentAdvice.com,

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

John Maynard Keynes – The Economic Consequences of Peace 1920

“And when we see that we’ve reached that level we’ll begin to gradually reduce our asset purchases to the level of the underlying trend growth of demand for our liabilities.”

–Jerome Powell January 29, 2020.

With that one seemingly innocuous statement, Chairman Powell revealed an alarming admission about the supply of money and your wealth. The current state of monetary policy explains why so many people are falling behind and why wealth inequality is at levels last seen almost 100 years ago.

REALity

 “Real” is a very important concept in the field of economics. Real generally refers to an amount of something adjusted for the effects of inflation. This allows economists to measure true organic growth or decline.

Real is equally important for the rest of us. The size of our paycheck or bank account balance is meaningless without an understanding of what money can buy. For instance, an annual income of $25,000 in 1920 was about eight times the national average. Today that puts a family of four below the Federal Poverty Guideline. As your grandfather used to say, a dollar doesn’t go as far as it used to.

Real wealth and real wage growth are important for assessing your economic standing and that of the nation.

Here are two facts:

• Wealth is largely a function of the wages we earn

• The wages we earn are predominately a function of the growth rate of the economy

These facts establish that the prosperity and wealth of all citizens in aggregate is meaningfully tied to economic growth or the output of a nation. It makes perfect sense.

Now, let us consider inflation and the role it plays in determining our real wages and real wealth.

If the rate of inflation is less than the rate of wage growth over time, then our real wages are rising and our wealth is increasing. Conversely, if inflation rises at a pace faster than wages, wealth declines despite a larger paycheck and more money in the bank.

With that understanding of “real,” let’s discuss inflation.

What is Inflation?

Borrowing from an upcoming article, we describe inflation in the following way:

“One of the most pernicious of these issues in our “modern and sophisticated” intellectual age is that of inflation. Most people, when asked to define inflation, would say “rising prices” with no appreciation for the fact that price movements are an effect, not a cause. They are a symptom of monetary circumstances. Inflation defined is, in fact, a disequilibrium between the amount of currency entering an economic system relative to the productive output of that same system.”

The price of cars, cheeseburgers, movie tickets, and all the other goods and services we consume are chiefly based on supply and demand. Demand is a function of both our need and desire to own a good and, equally importantly, how much money we have. The amount of money we have in aggregate, known as money supply, is governed by the Federal Reserve. Therefore, the supply of money is a key component of demand and therefore a significant factor affecting prices.

With the linkage between the supply of money and inflation defined, let us revisit Powell’s recent revelation.

“And when we see that we’ve reached that level we’ll begin to gradually reduce our asset purchases to the level of the underlying trend growth of demand for our liabilities.”

In plain English, Powell states that the supply of money is based on the demand for money and not the economic growth rate.  To clarify, one of the Fed’s largest liabilities currently are bank reserves. Banks are required to hold reserves for every loan they make. Therefore, they need reserves to create money to lend. Ergo, “demand for our liabilities,” as Powell states, actually means bank demand for the seed funding to create money and make loans.

The relationship between money supply and the demand for money may, in fact, be aligned with economic growth. If so, then the supply of money should rise with the economy. This occurs when debt is predominately employed to facilitate productive investments.

The problem occurs when money is demanded for consumption or speculation. For example:

• When hedge funds demand billions to leverage their trading activity
• When Apple, which has over $200 billion in cash, borrows money to buy back their stock  
• When you borrow money to buy a car, the size of the economy increases but not permanently as you are not likely to buy another car tomorrow and the next day

Now ask, should the supply of money increase because of those instances?

The relationship between the demand for money and economic activity boils down to what percentage of the debt taken on is productive and helps the economy and the populace grow versus what percentage is for speculation and consumption.

While there is no way to quantify how debt is used, we do know that speculative and consumptive debt has risen sharply and takes up a much larger percentage of all debt than in prior eras.  The glaring evidence is the sharp rise of debt to GDP.

Data Courtesy St. Louis Federal Reserve

If most of the debt were used productively, then the level of debt would drop relative to GDP. In other words, the debt would not only produce more economic growth but would also pay for itself.  The exact opposite is occurring as growth languishes despite record levels of debt accumulation.

The speculative markets provide further evidence. Without presenting the long list of asset valuations that stand at or near record levels, consider that since the last time the S&P 500 was fairly valued in 2009, it has grown 375%. Meanwhile, total U.S. Treasury debt outstanding is up by 105% from $11 trillion to $22.5 trillion and corporate debt is up 55% from $6.5 trillion to $10.1 trillion. Over that same period, nominal GDP has only grown 46% and Average Hourly Earnings by 29%.

When the money supply is increased for consumptive and speculative purposes, the Fed creates dissonance between our wages, wealth, and the rate of inflation. In other words, they generate excessive inflation and reduce our real wealth.  

If this is the case, why is the stated rate of inflation less than economic growth and wage growth?

The Wealth Scheme

This scheme works like all schemes by keeping the majority of people blind to what is truly occurring. To perpetuate such a scheme, the public must be convinced that inflation is low and their wealth is increasing.

In 2000, a brand new Ford Taurus SE sedan had an original MSRP of $18,935. The 2019 Ford Taurus SE has a starting price of $27,800.  Over the last 19 years, the base price of the Ford Taurus has risen by 2.05% a year or a total of 47%. According to the Bureau of Labor Statics (BLS), since the year 2000, the consumer price index for new vehicles has only risen by 0.08% a year and a total of 1.68% over the same period.

For another instance of how inflation is grossly underreported, we highlighted flaws in the reporting of housing prices in MMT Sounds Great in Theory But…  To wit: 

“Since then, inflation measures have been tortured, mangled, and abused to the point where it scarcely equates to the inflation that consumers deal with in reality. For example, home prices were substituted for “homeowners equivalent rent,” which was falling at the time, and lowered inflationary pressures, despite rising house prices.

Since 1998, homeowners equivalent rent has risen 72% while house prices, as measured by the Shiller U.S. National Home Price Index has almost doubled the rate at 136%. Needless to say, house prices, which currently comprise almost 25% of CPI, have been grossly under-accounted for. In fact, since 1998 CPI has been under-reported by .40% a year on average. Considering that official CPI has run at a 2.20% annual rate since 1998, .40% is a big misrepresentation, especially for just one line item.”

Those two obscene examples highlight that the government reported inflation is not the same inflation experienced by consumers. It is important to note that we are not breaking new ground with the assertion that the government reporting of inflation is low. As we have previously discussed, numerous private assessments quantify that the real inflation rate could easily be well above the average reported 2% rate. For example, Shadow Stats quantifies that inflation is running at 10% when one uses the official BLS formula from 1980.

Despite what we may sense and a multitude of private studies confirming that inflation is running greater than 2%, there are a multitude of other government-sponsored studies that argue inflation is actually over-stated. So, the battle is in the trenches, and the devil is in the details.

As defined earlier, inflation is “a disequilibrium between the amount of currency entering an economic system relative to the productive output of that same system.”

The following graph shows that the supply of money, measured by M2, has grown far more than the rate of economic growth (GDP) over the last 20 years.

Data St. Louis Federal Reserve

Since 2000, M2 has grown 234% while GDP has grown at half of that rate, 117%. Over the same period, the CPI price index has only grown by 53%. M2 implies an annualized inflation rate over the last 20 years of 6.22% which is three times that of CPI. 

Dampening perceived inflation is only part of the cover-up. The scheme is also perpetuated with other help from the government. The government borrows to boost temporary economic growth and help citizens on the margin. This further limits people’s ability to detect a significant decline in their standard of living.

As shown below, when one strips out the change in government debt (the actual increase in U.S. Treasury debt outstanding) from the change in GDP growth, the organic economy has shrunk for the better part of the last 20 years. 

Data St. Louis Federal Reserve

It doesn’t take an economist to know that a 6.22% inflation rate (based on M2) and decade long recession would force changes to our monetary policy and send those responsible to the guillotines. If someone suffering severe headaches is diagnosed with a brain tumor, the problem does not go away because the doctor uses white-out to cover up the tumor on the x-ray film.

Despite crystal clear evidence, the mirages of economic growth and low inflation prevent us from seeing reality.

Summary

Those engaging in speculative ventures with the benefit of cheap borrowing costs are thriving. Those whose livelihood and wealth are dependent on a paycheck are falling behind. For this large percentage of the population, their paychecks may be growing in line with the stated government inflation rate but not the true inflation rate they pay at the counter. They fall further behind day by day as shown below.

While this may be hard to prove using government inflation data, it is the reality. If you think otherwise, you may want to ask why a political outsider like Donald Trump won the election four years ago and why socialism and populism are surging in popularity. We doubt that it is because everyone thinks their wealth is increasing. To quote Bill Clinton’s 1992 campaign manager James Carville, “It’s the economy, stupid.”

That brings us back to Jerome Powell and the Fed. The U.S. economy is driven by millions of individuals making decisions in their own best interests. Prices are best determined by those millions of people based on supply and demand – that includes the price of money or interest rates. Any governmental interference with that natural mechanism is a recipe for inefficiency and quite often failure.

If monetary policy is to be set by a small number of people in a conference room in the Eccles Building in Washington, D.C. who think they know what is best for us based on flawed data, then they should prepare themselves for even more radical social and political movements than we have already seen.

Ten days ago, shortly after China first started reporting the cases and deaths associated with the coronavirus epidemic, a UK researcher predicted that over 250,000 Chinese would be infected with the virus by February 4. And while according to official Chinese data, the number of infections has indeed soared in the past two weeks, at just under 25,000 (and roughly 500 deaths), it is a far cry from this dismal prediction, about ten times below that predicted by the epidemiologists.

Is this discrepancy possible? Is the epidemic truly far less serious than conventional epidemiological models predicted? Or is China merely hiding the full extent of the problem?

After all, it the WSJ itself reported in late January , China was explicitly manipulating the casualty number by listing pneumonia as the cause of death instead of coronavirus. Subsequent reports that Wuhan officials were rushing to cremate coronavirus casualties before they could be counted did not add to the credibility of the official data.

But the biggest hit to the narrative and China’s officially reported epidemic numbers came overnight, when a slip up in China’s TenCent may have revealed the true extent of the coronavirus epidemic on the mainland. And it is nothing short than terrifying.

As the Taiwan Times reports in a report first spotted by user @IN_174, over the weekend, Tencent “seems to have inadvertently released what is potentially the actual number of infections and deaths, which were astronomically higher than official figures“, and were far closer to the catastrophic epidemic projections made by Jonathan Read.

According to the report, late on Saturday evening, Tencent, on its webpage titled “Epidemic Situation Tracker”, showed confirmed cases of novel coronavirus (2019nCoV) in China as standing at 154,023, 10 times the official figure at the time. It listed the number of suspected cases as 79,808, four times the official figure.

And while the number of cured cases was only 269, well below the official number that day of 300, most ominously, the death toll listed was 24,589, vastly higher than the 300 officially listed that day.

Moments later, Tencent updated the numbers to reflect the government’s “official” numbers that day.

This was not the first time Tencent has done this: as Taiwan Times notes, Chinese netizens have noticed that Tencent has on at least three occasions posted extremely high numbers, only to quickly lower them to government-approved statistics.

This is where it gets even more bizarre: contrary to claiming that this was just a “fat finger” mistyping of data, observant Chinese netizens also noticed that each time the screen with the large numbers appears, it shows a comparison with the previous day’s data which demonstrates a “reasonable” incremental increase, much like comparisons of official numbers.

This led many in the mainland to speculate that Tencent has two sets of data, the real data and “processed” data.

In short, two camps have emerged: one, the more optimistic, speculates that a coding problem could be causing the real “internal” data to accidentally appear. The other, far more pessimistically inclined, believes that someone behind the scenes is trying to leak the real numbers, as “the “internal” data held by Beijing may not reflect the true extent of the epidemic.”

Indeed, as repeatedly pointed out here and according to multiple sources in Wuhan, many coronavirus patients are unable to receive treatment and die outside of hospitals. Furthermore, a severe shortage of test kits also leads to a lower number of diagnosed cases of infection and death. In addition, there have been many reports of doctors being ordered to list other forms of death instead of coronavirus to keep the death toll artificially low.

What is the truth?

We leave it up to readers, but keep this in mind: on Jan 29, Zeng Guang, the chief scientist of epidemiology at China’s CDC, made a rare candid admission about why Chinese officials cannot tell people the truth in an interview with the state-run tabloid Global Times: “The officials need to think about the political angle and social stability in order to keep their positions.“

And then, on Monday, none other than China Xi’s called on all officials to quickly work together to contain the Coronavirus at a rare meeting of top leaders, saying the outcome would “directly impact social stability in the country.”

Well, if China is mostly concerned about social stability – as it should be for a nation of 1.4 billion – it is easy to comprehend why the entire political apparatus in China would be geared to presenting numbers which seem somewhat credible – in light of the barrage of videos of people dying on the street – but not so terrifying as to cause a countrywide panic.

Then again, if China indeed had over 154,000 cases and almost 25,000 deaths as of 5 days ago, then no attempts to mask the full extent and true severity of the pandemic have any hope of “containing” the truth.

The US trade deficit increased in December after shrinking to its smallest since trump was elected in November…

Source: Bloomberg

• Imports rose 2.7% in Dec. to $258.52b from $251.75b in Nov.

• Exports rose 0.8% in Dec. to $209.64b from $208.06b in Nov.

This left the annual trade deficit at $616.755 billion – the first shrinkage of the trade deficit since 2013…

Source: Bloomberg

The annual merchandise-trade deficit with China — the principal target of Trump’s trade war — narrowed 17.6% to $345.6 billion after hitting a record in 2018. Imports from the country slumped 16.2%, exceeding the drop in 2009 during the global financial crisis, while shipments to China declined 11.3%, the biggest drop since at least 2003.

That pushed China down to third place among America’s top trading partners for goods in 2019, as Mexico vaulted to the top spot, slightly ahead of Canada.

However, it is crude exports that have enabled this ‘miracle’ as the non-petroleum goods deficit was $839.2 billion, a record high.

For the full year, exports fell 0.1% to $2.5 trillion as shipments of civilian aircraft declined amid the grounding of Boeing Co.’s 737 Max plane, while sales of autos, consumer goods and petroleum gained. Imports fell 0.4% to $3.12 trillion on lower purchases of crude oil, computer accessories and telecommunications equipment.

After resurging last month back above a 200k gain (thanks to a rebound in goods-producing jobs), ADP was expected to show a more modest 157k gain in January but instead it exploded higher by 291k – the most since May 2015…

Source: Bloomberg

No wonder President Trump tweeted yesterday that: “Market up big today on very good economic news. JOBS, JOBS, JOBS!”

Goods-Producing jobs soared (as did services)…

Source: Bloomberg

Mark Zandi, chief economist of Moody’s Analytics, said:

“Mild winter weather provided a significant boost to the January employment gain. The leisure and hospitality and construction industries in  particular experienced an outsized increase in jobs. Abstracting from the vagaries of the data underlying job growth is close to 125,000 per month, which is consistent with low and stable unemployment.”

Under the hood, everything was solid aside from natural resources/mining…

Finally we note that December’s ADP print was the first ‘beat’ of BLS official data in 8 months…

Source: Bloomberg

Twitter has locked the account of conservative journalist James O’Keefe for publishing publicly available evidence that a pair of radical leftists with violent fantasies work for the Bernie Sanders campaign. While O’Keefe’s tweets are still visible, he can’t publish anything new on the platform until he deletes a post which violates Twitter’s rules against “posting private information.”

O’Keefe was responding to a tweet by Washington Post reporter Dave Weigel claiming that the men, Kyle Jurek and Martin Weissgerber, are Sanders volunteers. When O’Keefe demanded a retraction, posting publicly available Federal Election Commission (FEC) records revealing their employment, Weigel deleted his tweet.

And now, O’Keefe must delete his evidence or he won’t be able to tweet again.

BREAKING: @JamesOKeefeIII Twitter account has been locked for reporting on Sanders campaign staff

He recieved this message: pic.twitter.com/civAjzngMc

— Jack Posobiec 🇺🇸 (@JackPosobiec) February 5, 2020

Jurek and Weissgerber were filmed going on disturbing rants about armed revolution and re-educating conservatives in modern gulags by undercover journalists for O’Keefe’s Project Veritas. They also said there are many people involved in the Sanders campaign who feel the same way.

It’s in the public interest to know that paid presidential campaign staffers are arming themselves for the “fucking revolution” – and ready to “tear bricks up and start fighting” before sending ‘all ‘Republicans to re-education camps.’

Moreover, it’s in the public interest to identify and distinguish these individuals as paid staffers who have gone through a hiring process, as opposed to volunteers – who would by definition have a far weaker association with a campaign. And while publishing private information would be a clear violation of Twitter’s rules, O’Keefe was using publicly available information to correct Weigel on a pertinent fact. Now, O’Keefe is currently unable to reach his 710,000 followers unless he retracts his evidence from their platform.

What rules are Twitter actually following when they police accounts?

Was it ok for CNN to confront, harass, and disclose the name of an elderly woman who promoted a pro-Trump social media account allegedly set up by Russians? That tweet is still up, along with CNN’s account.

Did @CNN get this woman’s permission to record and harass her on her front lawn and post the video to Twitter?

Can’t wait until Twitter locks their account!https://t.co/mPCYejZ4Ej https://t.co/IHFZqb3xag

— ALX 🇺🇸 (@alx) February 5, 2020

Is it fine that BuzzFeed journalist Ryan Broderick ‘doxed’ Amy’s Baking Company over Twitter, tweeting a link to the private contact information of the husband and wife owners? Broderick’s tweet remains as of this writing, along with his account.

Meanwhile, if one directs people to ask a Chinese scientist researching bat coronaviruses about an outbreak of bat coronavirus in the same city as his laboratory, using publicly available contact information – and if you think it’s strange that he would be looking to hire post-doc fellows to use “bats to research the molecular mechanism that allows Ebola and SARS-associated coronaviruses to lie dormant for a long time without causing diseases,” you might lose lose your Twitter account forever.

And while one would hope that Twitter carefully weighs already-public information and the public interest when they make these decisions, it would be easy for one to conclude that the notoriously left-leaning social media giant is scrambling to mute people who think differently on their de-facto public square leading up to the 2020 election.

As Bloomberg’s Richard Breslow writes this morning in a note lamenting that there is “little obvious” about this market, “some days it’s best just to let things play out for a little while. Economic numbers that came out overnight haven’t hurt. Very dovish comments by a senior Bank of Japan official. Upbeat comments by the governor of the Reserve Bank of Australia. And then the big one, hopeful comments concerning potential progress in dealing with the virus outbreak. And the market has taken off.“

Indeed, at roughly 3:40am ET, futures surged as much as 30 points, rising to 3,335 and surging just shy of the Jan 22 all time high of 3,337.50, after the following Reuters headline hit: 

• CHINESE TV: RESEARCH TEAM AT ZHEJIANG UNIVERSITY HAS FOUND AN EFFECTIVE DRUG TO TREAT PEOPLE WITH THE NEW CORONA VIRUS

Even though Reuters itself said it has not confirmed the veracity of the report, it was enough to unleash a case of viral (or is that virus) optimism, with futures filling the gap back to all time highs, as algos bought first and asked questions, well never. And in typical broken market fashion, two hours later, when a WHO spokesperson, asked about a coronavirus treatment breakthrough, said there are no known effective therapeutics against the virus, futures barely dipped, or to summarize Dow futs up 300 point on unconfirmed optimism, and down 50 on reality.

What is notable is that Chinese state media first covered this yesterday but was largely ignored by mainstream media; the report got a second wind this morning today however after traders focused on the fact that over 900 people have recovered from the coronavirus, which some took for evidence the treatment is becoming more effective, while ignoring that the 500 or so deaths reported so far is likely are greatly underrepresented number by China which has been burning the vast majority of casualties to literally eliminate the evidence.

Optimism was also boosted by a separate Sky News report which said U.K. scientists made significant progress for a vaccine by reducing a part of the normal development time from “two to three years to just 14 days”; the scientist added that it will be in animal models by the beginning of next week, and the next phase will be to move from early animal testing into the first human studies, which could happen in “months”, with the report adding that the vaccine will be too late for this current outbreak but it will be crucial if there is another one.though human trials wouldn’t begin for a few months; at roughly the same time news hit that Chinese researchers have applied for a local patent on an experimental Gilead drug that they believe might fight the coronavirus.

“Traders have taken the view that the situation is now more likely to be under control and hopefully the spread of the health crisis will be stemmed,” said David Madden, market analysts at CMC Markets.

But what is the reality on any vaccine? Stated simply, it would take months of trials before anything legitimate got off the ground. In short, nothing that hit overnight provides any indication the world is remotely closer to having an effective means to slowing the current pandemic, but all algos cared about was the optimism that was unleashed by the reports, and lo and behold, we are back to all time highs.

Meanwhile, stocks also rallied on bad news, as expectations of more central bank stimulus lifted world stocks to their highest in more than a week on Wednesday with the MSCI global benchmark rising 0.3%, helping investors look past a mounting coronavirus death toll and policymakers’ concerns for the disease’s economic impact.

The unconfirmed report and the stimulus expectations offset at least partly the news that the virus’s death toll had killed 500 and sickened 25,000.

So as a result of both good and bad news, futures on all US indexes turned sharply higher and Europe’s Stoxx 600 Index rebounded after a string of reports on possible vaccines or treatments for the deadly pathogen. Contracts on the S&P 500 Index climbed as Tuesday’s the surge in tech stocks continued in premarket trading for Apple and Nvidia. Gilead Sciences edged lower after jumping this week on speculation over its antiviral drug.

Data also showed euro zone and UK business activity accelerated last month, though the figures are now meaningless as the surveys were collected before the coronavirus spread much beyond China. The concerns for economic growth were reflected in signals from the Bank of Japan and the Monetary Authority of Singapore that they were ready to ease policy. BOJ Deputy Governor Masazumi Wakatabe pledged not to rule out any option, including lowering already-negative interest rates; meanwhile in Thailand, the central bank unexpectedly cut rates to a record low 1.0% as the economy has been hard hit by the Coronavirus.

“Clearly… all the central banks are ready to act if necessary,” said Justin Onuekwusi, a portfolio manager at Legal & General Investment Management.

Earlier in Asia, stocks notched their first back-to-back daily gain in two weeks and headed for their best two-day gain in almost two months as investors assessed earnings releases in the region and the latest status of the coronavirus outbreak, even as quarantines were set up in the Chinese base of iPhone maker Foxconn, at land borders with Hong Kong, on a cruise ship off Japan and U.S. military bases. The region’s benchmark MSCI Asia Pacific Index jumped as much as 0.8%, with most markets trading in the green. China’s Shanghai Composite Index had its best two-day advance since June, while the ChiNext Index rose another 3% in a continued rebound after the post-holiday slump. Japan’s Topix index advanced as Mitsubishi Corp. and Itochu Corp. climbed after reporting quarterly earnings that beat estimates. China (PBOC) is also likely to lower its key rate on Feb. 20, sources told Reuters. while Thailand unexpectedly cut interest rates.

In rates, 10-year Treasury yields rose three basis points to 1.637% while German yields rose 4 bps to a one-week high. Sovereign bond curves across Europe bear steepened, though Treasuries were harder hit by the sell-off.

In FX, the dollar was roughly unchanged even as 10Y yields rose, while the Australian dollar led gains in G-10; the franc led declines against the greenback with the yen holding little changed after erasing an earlier gain. The pound extended gains after better- than-forecast services U.K. PMI, which also led money markets to price out expectations for BOE rate cuts to less than 25bps

In commodities, crude oil headed for its first gain in six sessions in New York trading: Brent crude also bounced 2.5%, after losing 16% since Jan. 21. It was supported too by expectations OPEC and its allies would cut output to offset lower demand.

Economic data include mortgage applications, trade balance and Markit services PMI. Qualcomm, Boston Scientific and General Motors are due to report earnings.

Market Snapshot

• S&P 500 futures up 0.8% to 3,324.50
• MXAP up 0.8% to 168.04
• MXAPJ up 0.8% to 544.32
• Nikkei up 1% to 23,319.56
• Topix up 1% to 1,701.83
• Hang Seng Index up 0.4% to 26,786.74
• Shanghai Composite up 1.3% to 2,818.09
• Sensex up 0.9% to 41,169.64
• Australia S&P/ASX 200 up 0.4% to 6,976.05
• Kospi up 0.4% to 2,165.63
• STOXX Europe 600 up 1% to 422.48
• German 10Y yield rose 2.6 bps to -0.373%
• Euro down 0.05% to $1.1038
• Brent Futures up 3% to $55.57/bbl
• Italian 10Y yield unchanged at 0.785%
• Spanish 10Y yield rose 2.6 bps to 0.295%
• Brent Futures up 3% to $55.57/bbl
• Gold spot down 0.01% to $1,552.78
• U.S. Dollar Index unchanged at 97.96

Top Overnight News from Bloomberg:

• The death toll from the coronavirus outbreak climbed toward 500 as confirmed cases worldwide almost 25,000. Hong Kong announced plans to quarantine travelers coming from the mainland, while thousands remained stuck on cruise ships
• Chinese researchers have applied for a local patent on an experimental Gilead Sciences Inc. drug that they believe might fight the novel coronavirus outbreak
• The euro area’s private sector expanded at a faster- than-anticipated pace in January, providing a foundation for economic growth to accelerate in the course of the year, with a composite Purchasing Managers’ Index rising to the highest since August
• The Bank of Thailand cut its benchmark interest rate to a record low as the coronavirus outbreak, a stalled government budget and bad drought imperil economic growth, while most other monetary policy makers have stuck to expressing concern and signaling a willingness to act on risks from the virus. Australian central bank Governor Philip Lowe reinforced expectations that policy makers will refrain from more interest- rate cuts
• Poland became the first emerging-market sovereign to get paid for borrowing in euros via a syndicated bond deal
• OPEC+ officials gathered in Vienna for a second day of debate on the impact of the coronavirus, a process that could result in an emergency ministerial meeting where Saudi Arabia would push for an oil-production cut

Asian equity markets were positive across the board as the global rebound filtered through to the region after having underpinned the major indices on Wall St and pushed the Nasdaq to a fresh record high. ASX 200 (+0.4%) and Nikkei 225 (+1.0%) were both higher after taking impetus from stateside peers with tech and commodity-related sectors the outperformers in Australia but with gains limited by resistance at the 7000 level and with gold miners suffering as investors shunned safe-havens, while gains in Tokyo were exacerbated by a weaker currency. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp. (+1.3%) notched respectable gains as the bargain hunting resumed in the mainland, unfazed by softer Caixin Services and Composite PMIs, continued increases in the number of coronavirus cases and the PBoC skipping open market operations in which it noted that current liquidity is ample and can fully meet market demand. Finally, 10yr JGBs extended on this week’s pullback from the 153.00 level and following the bear-steepening in USTs in which T-notes retreated below 131.00 as the gains across stocks sapped safe-haven demand.

Top Asian News

• Singapore Dollar Tumbles After MAS Flags Scope for Decline
• Hong Kong Will Quarantine Travelers Coming From Mainland China
• China Virus Shuts Airbus Plant, Hitting Narrow-Body Jet Output
• Thailand Cuts Interest Rate as Virus Outbreak Hurts Economy

European equities are firmer across the board [Eurostoxx 50 +1.0%] following a tame open, as risk sentiment was bolstered by unconfirmed reports that a research team at a Chinese university has found an “effective” drug to treat people with Coronavirus. Moreover, reports via Sky News suggested that a team of UK scientists reduced the normal development timeframe for a vaccine to 14 days from 2-3 years, but crucially, the report noted that the “vaccine will be too late for this current outbreak, but it will be crucial if there is another one.” Nonetheless, bourses have held onto gains with sectors staging a complete turnaround from the open. European sectors now largely reflect risk appetite with defensives lagging cyclicals (ex-healthcare). Movers this morning are mostly orientated around earnings – with DAX heavyweight Siemens (+0.5%) initially opening with earnings-induced losses in excess of 1.5% before conforming to the overall gains in the German bourse. On the flip side, Imperial Brands (-7.8%) rests at the foot of the pan-European index following a profit warning in which it now forecasts a circa 10% drop in H1 profits. Other earnings-led movers include Smurfit Kappa (+7.8%), Barratt Developments (+3.3%), Danske Bank (-0.7%), Novo Nordisk (+1.5%) and Infineon (+9.0%). Elsewhere, Adidas (+1.0%) and Puma (+0.2%) shares opened lower to the tune of around 2% after US peer Nike noted that the coronavirus outbreak is expected to have a “material impact” on its Chinese operations. Adidas’ CEO also echoes some comments from Nike in which it sees a negative impact on its Chinese business, but stopped short of giving details or extent of impacts.

Top European News

• Vodafone Warns of 5G Delays if Huawei’s Share Capped Beyond U.K.
• U.K. Services Rebound More Than Expected in Post-Election Bounce
• ABB Says Coronavirus Threatens China’s Already Fragile Recovery
• Romania’s Orban Faces Confidence Vote He Doesn’t Mind Losing

In FX, the Dollar is holding up firm in the face of a marked pick-up in sentiment surrounding China’s coronavirus based on media headlines suggesting that scientists and researchers may be closer to finding a vaccine than previously anticipated. The reports have boosted the YUAN for obvious reasons, with Usd/Cnh retreating from around 7.0100 to sub-6.9750 and below the 200 DMA (6.9905) not to mention the PBoC’s 6.9823 overnight Usd/Cny mid-point fix. However, the Greenback is forging gains at the expense of safer havens, like the YEN, EURO, SWISS FRANC and GOLD, with the DXY clinging to 98.000 and on course to keep its head above a key Fib retracement level (98.011), barring any bad miss via ADP, final Markit PMIs and/or the non-manufacturing ISM.

• JPY/CHF/EUR/XAU – As noted above, all weaker vs the Buck and overall on a broad unwind of FTQ premium/positioning, as Usd/Jpy climbs further above 109.50, Usd/Chf reclaims 0.9700+ status, Eur/Usd retreats from near 1.1050 to just under 1.1025 and Usd/Xau retests support circa Usd 1550/oz after briefly tripping stops on a break of Tuesday’s low (Usd 1549) to trade a whisker below Usd 1548.
• AUD/GBP/NOK/SEK/NZD/CAD – The Aussie has extended post-RBA gains with the aid of commentary from Governor Lowe reinforcing a wait-and-see stance on top of the more encouraging Chinese outbreak news. Aud/Usd has now climbed firmly back above 0.6750 to revisit late January peaks (0.6777), while Aud/Nzd has rebounded over 1.0400 to the detriment of Nzd/Usd that has not been able to regain a sure grip on the 0.6500 handle in wake of somewhat mixed NZ jobs data. Conversely, another handsome UK PMI beat vs consensus has boosted Sterling across board, as Cable hovers close to best levels of the wtd (1.3070) and Eur/Gbp sub-0.8450 following rather contrasting Eurozone services PMIs. Elsewhere, the Scandi Crowns have rebounded alongside risk appetite and the Norwegian Krona especially fuelled by a strong recovery in crude prices whereas its Swedish counterpart is being partially hampered by poor hard data offsetting an upbeat services PMI. Similarly, the Loonie is not deriving that much from the aforementioned bounce in oil ahead of Canadian trade data and a speech from BoC’s Wilkins, albeit with Usd/Cad nearer the base of a 1.3299-62 band.
• EM – Most regional currencies have tracked Yuan and high-beta peer appreciation, but the SGD and THB have both been subject to dovish MAS and Thai CB vibes in the form of guidance and an unexpected 25 bp ease respectively, while the Try is still on the defensive due to geopolitical factors. Conversely, SA Government backing for COSATU proposals to cut Eskom debt have given the Zar and extra fillip.

In commodities, WTI and Brent futures have extended on overnight gains amid the aforementioned reports of seemingly constructive coronavirus headlines. WTI and Brent front-month futures hit fresh 2020 lows (of ~49.30/bbl and 53.70/bbl respectively) in light of a larger than expected headline API inventory build (+4.18mln vs. Exp. +2.8mln). Thereafter, prices clambered off worst levels before piggybacking on the virus headlines which, if true, could significantly improve the demand outlook for the complex. Elsewhere, OPEC’s JTC will convene for the second day of discussions later today after the technical committee reportedly did not discuss production cuts yesterday but will revisit the topic, according to delegates who noted it studied between 200-400k BPD impact on oil demand from the coronavirus. Reports also note that OPEC numbers suggest a circa 400k BPD demand impact for around six months from the coronavirus, although these forecasts are highly contingent on how long the epidemic lasts alongside any prolonged effects. Analysts at ING note that a 500k BPD of additional OPEC cuts in Q1 and a rollover of current cuts in Q2 (through to end-June) should be almost enough to balance the oil market, assuming the OPEC figures are correct and factoring in supply disruptions in Libya. Next up, traders will be eyeing the weekly DoEs with headline crude forecast to print a build of 2.831mln barrels, according to Reuters Estimates. Elsewhere, spot gold conformed to the overall risk appetite as prices briefly dipped below 1550/oz before encountering stops just below the figure. Copper continues yesterday’s sentiment-led rebound as the red metal almost wipes out a bulk of last week’s losses.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 7.2%
• 8:15am: ADP Employment Change, est. 158,000, prior 202,000
• 8:30am: Trade Balance, est. $48.2b deficit, prior $43.1b deficit
• 9:45am: Markit US Services PMI, est. 53.2, prior 53.2; Markit US Composite PMI, prior 53.1
• 10am: ISM Non-Manufacturing Index, est. 55.1, prior 55

DB’s Jim Reid concludes the overnight wrap

With coronavirus fears continuing to ease, the last 24 hours have been kind to risk assets once again. The latest numbers show 24,324 cases and 490 deaths as of this morning versus 20,438 and 425 this time yesterday but the fact that there appears to be a slowing in independent incidents in countries outside of China and a slowing in the rate of transmission in cases outside of Wuhan province appear to be making investors more comfortable for now. While this could change, our conclusion was that these were the conditions that needed to be satisfied for markets to feel more at ease following DB’s client call with a virus expert on Monday. For those that missed it the replay details can be found here (link here).

As for markets, coming off the back of 8 sessions where by the S&P 500 flipped between gains and losses, yesterday’s +1.50% return means the index is up +2.23% in the last two sessions. The NASDAQ also rallied +2.10% yesterday – a new record high and the biggest gain since August – and the DOW +1.44% which means all three indices are back in positive territory YTD again. Also worth noting was the +4.11% surge for the NYSE FANG index meaning the index is up an impressive +9.10% in the last two sessions. Even copper – which had been on a 13-session losing run – finally joined the party, rising +1.40%.

At a micro level it was the incredible +13.73% surge for Tesla which really grabbed the spotlight yesterday though. That means the stock is up +36.35% over the last two sessions and 112% this year already. More impressive still is the 435% rally from the 2019 lows. With a market cap of nearly $160bn that also puts the company in between the nominal GDPs of Ukraine and Kazakhstan. For what it’s worth Tesla isn’t in the S&P 500 but a quick look at the index would mean it would be around the 50th largest and would have added roughly 13pts to the index this year. Incidentally, the electric car maker may soon be eligible to join the index now that it is close to posting four straight quarters of profits – the only requirement the company was short.

The more macro focus yesterday was the results of the Iowa caucus and following “inconsistencies in the reporting” we’ve finally had an update overnight. At the time of writing, 71% of the vote has been made official. Currently South Bend Mayor Peter Buttigieg is leading among delegates with 26.8%, followed closely by Senator Sanders with 25.2%, then Senator Warren with 18.4%, and Vice President Biden at 15.4%. This would be a very disappointing result for Biden, who came into the night polling in second place. Mayor Pete became the winning Moderate and while the results are not final, they stand to show the current break in the Democratic primary between the Left (Sanders + Warren = 43%) and the Moderate (Biden + Buttigieg + Klobuchar = 56) wings. Markets are not likely to react strongly to the democratic primary until you see the more Left candidates’ numbers climb higher.

Prior to this President Trump addressed the nation in his 2020 State of the Union, however there wasn’t a huge amount to report. Trump previewed his 2020 general election pitches; touting a strong economy on the back of deregulation, renewed trade deals, and lower corporate taxes, promising continued focus on immigration reforms, and pushing plans on health care changes. Staying with Trump, yesterday Gallup’s latest approval rating put the President at 49%, which is the most since he took office.

Back to markets and a quick glance at our screens this morning shows the positive momentum has continued into Asian markets with Chinese bourses leading the advance – the CSI (+1.13%), Shanghai Comp (+1.25%) and Shenzhen Comp (+2.63%). The Nikkei (+1.42%), Hang Seng (+0.47%) and Kospi (+0.58%) are also making gains. In FX, the Singaporean dollar is down -0.75% this morning as the country’s central bank said that it sees room for more easing. Elsewhere, futures on the S&P 500 are down -0.12% and Brent crude oil prices are up +1.30% overnight even as Saudi Arabia’s push for deeper output reductions to combat the drop in consumption received resistance by Russia. As for overnight data releases, China’s January Caixin services PMI came in at 51.8 (vs. 52.0 expected) bringing the composite to 51.9 (vs. 52.6 expected).

Looking ahead to today, whether the positive risk momentum continues may depend on the data. Of particular note are the ISM non-manufacturing and ADP employment change prints. The consensus expectation is for the headline in the former to tick up slightly to 55.1 however it’s the employment component which will also be watched closely given payrolls is due at the end of the week. Our economists have highlighted that this series was up a little over three points in December from its September low of 51.7. Thus, further improvement would be a positive sign given that the services sector accounts for nearly 84% of private payrolls. With respect to the ADP employment survey, it has missed the initial BLS prints over the past couple of months by fairly wide margins. Market participants may therefore want to discount somewhat its signal.

Back to yesterday where, in other markets, there was also a decent bounce back for European equities where the STOXX 600 rallied +1.64%. More interesting were some of the comments at a corporate level regarding the impact of the coronavirus. Oil giant BP suggested that one-third of global oil demand is under threat while Carlsberg mentioned that it’s breweries in China remain closed. Pandora also flagged the risk to its lucrative Asia business. Adding to these comments, one of the key Apple suppliers in China, Hon Hai, slashed its sales growth forecast range overnight to 1% – 3% (from 3% – 5% earlier). Walt Disney also said overnight that it expects the Shanghai park closure alone to reduce profits in the current quarter by $135m, assuming it is shuttered for two months, while the loss from closing of the Hong Kong park would likely add another $40m. In bond markets yesterday the risk-on sentiment saw yields move sharply higher. Indeed 10y Treasury yields backed up +7.2bps while 10y Bunds were +4.3bps higher. Brent and WTI oil retraced over 2% intraday gains to finish down -0.90% and -1.10% respectively as demand concerns mount while Gold edged down -1.31%. In credit, US HY spreads finished 11bps tighter.

In other news, yesterday’s data was mostly an afterthought in the US. The final core capex orders reading was revised up one-tenth to -0.8% mom while durable goods ex transport were unrevised at -0.1%. Meanwhile, factory orders were reported as rising +1.8% mom.

Finally, to the day ahead, where this morning the focus will be on the remaining PMIs in Europe with final January services and composite prints due. Away from that we’re due to get December retail sales for the Euro Area while in the US the PMIs are due along with the January ISM non-manufacturing, January ADP report and December trade balance. Elsewhere, the ECB’s Guindos, Perrazzelli, Lane and Lagarde are all due to speak – the latter in Paris at 12.15pm GMT, while the Fed’s Brainard speaks this evening albeit on payment innovation. As for earnings, Merck, Glaxo, Siemens and General Motors are among the highlights.

After the parabolic melt-up in Tesla’s share price on Tuesday to 968, shares have since plummeted 12% to 848 on Wednesday morning following a report that Tesla Giga Shanghai will delay Model 3 deliveries. 

 

However, we must note, investors have been well aware of possible production woes in Shanghai for the last week. 

As momentum accelerated in Tesla shares, it seems options traders refused to be left behind and call volumes have exploded higher relative to put volumes.

But the last few days have seen put volumes begin to accelerate as hedgers step in. 

A senior Tesla executive said a temporary delay will be seen at the production facility in Shanghai and will affect made-in-China Model 3 car deliveries.

The executive blamed coronavirus for the delay and said restart production wouldn’t begin until Feb. 10.

However, it could take several weeks for the factory to ramp up Model 3 production to full capacity. This would undoubtedly hurt the March-quarter profit and delay deliveries of the vehicles. There are also concerns that supply chain disruptions could be seen for cars built at its California plant.

With supply chain disruptions imminent for Tesla in China, Canaccord Genuity lowered the company’s rating to a Hold after it was set at Buy.

“While we continue to favor TSLA as the leading EV juggernaut and believe the April battery day will be a critical positive milestone for investors to understand how formidable the lead is that TSLA holds, we believe patient investors will likely get a more attractive entry point,” reasons Canaccord analyst Jed Dorsheimer.

“Just as we observed a clear buy signal coming into 2020, we see the risk of China’s coronavirus as a clear headwind to the Shanghai facility, suggesting a more pragmatic position,” he adds.

Dorsheimer notes the expectations for Model 3 production of 3K units per week out of Shanghai is at risk in Q1.

“Folks are asking a lot of questions,” exclaimed  Morgan Stanley’s Adam Jonas adding that “many investors are struggling to identify a strong fundamental underpinning for the move.”

“The Big Short’s” Steve Eisman has cut his short on TSLA, telling Bloomberg TV’s Tom Keene, “look, everybody has a pain threshold.”

“When a stock becomes unmoored from valuation because it has certain dynamic growth aspects to it, and has cult-like aspects to it, you have to just walk away.”

As we’ve noted in the last days to several weeks, global automakers, already suffering from an auto bust, have had to close production lines in China due to government orders. These include Tesla, Hyundai, PSA, Ford, Peugeot Citroen, Nissan, and Honda Motor.

Guess who’s puking Tesla stock this morning? Millennials who have been day-trading the stock to pay for student loans…

what stage of the cycle is this @awealthofcs @michaelbatnick pic.twitter.com/rBrGyLZhKM

— LVD (@LVDTrades) February 4, 2020

This won’t end well. Tesla is just like Bitcoin, right before it imploded.