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930ET on the dot… and US equity futures plunge…

“Efficient” indeed.

And as stocks tumbled, gold jumped…

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Please be advised, the following two charts may not be good for your wealth…

The almost unprecedented surge in stocks off the Mnuchin Massacre lows that bracketed Xmas Day has reinvigorated investors, commission-takers, and asset-gatherers worldwide in some Pavlovian belief that all is well in the world once again and it’s just a matter of time before wealth is back at record highs and retirement walks along sandy beaches are being advertised on TV.

Sadly, as the following two charts show… there’s no ‘there’, there.

While investors wish that three weeks of gains for the Stoxx Europe 600 meant that the market was getting ready for a stellar earnings season? Here’s the reality: neither investors nor analysts are expecting much good news from European companies…

In fact, European profit downgrades exceeded upgrades by the most since 2011.

We can see what happens when stocks attempt to “know better” than the earnings estimates.

“Market sentiment on earnings is cautious and fourth-quarter results are widely expected to disappoint,” said Emmanuel Cau, head of European equity strategy at Barclays Plc in London.

“Fourth-quarter estimates have been lowered and the sharp p/e de-rating of 2018 lowers the bar for positive surprises, but we believe that full-year 2019 estimates are still too high and will see further downgrades.“

And US markets are no cleaner a dirty shirt to pin your hopes on as forward earnings expectations have plummeted (and continue to plummet) despite the v-shaped recovery in stock prices…

So, hey, BTFD, why not? Everyone else is doing it… after all, the slump in earnings expectations is “probably nothing.”

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Blain’s Morning Porridge, submitted by Bill Blain

I got up early to see the Super Blood Wolf Moon this morning. It hung in the western sky, a baleful dark pink ball in the sky – caused by the earth eclipsing the moon. Reading the headlines about Chinese growth this morning – annual growth at 6.6% is the slowest since 1990 – I can’t help but wonder if the Blood Moon was trying to tell us something? (Its going to be a quietish day – US closed for Martin Luther King holiday. Actually US is closed anyway.)

Wow: 6.6% Chinese growth? Any occidental economy would rejoice to even achieve half that number. What’s to worry about?
Well… quite a lot.

Taken at face value, there is nothing particular in China to cause undue concern. The slowdown can be explained in terms of weaker than expected numbers reflecting businesses scaling back to counter any negative trade war events, related knocks to consumer and business confidence, slowing orders for consumer tech (like falling iPhone orders), and are all a natural reflection of the cycle. (I was about to write business cycle – but I’m not sure that’s what it is.) For years the likelihood of China economic collapse of has been one of the most overstated market threats.

But the world is changing and evolving. It’s worth considering the whole picture and outlook for China in light of just how different the world functions today.

China is a state juggling half a dozen flaming hand grenades while walking on a high wire suspended above a pit of hungry tigers – just like any other government, attempting to deliver peace and prosperity. But, China’s basis is very different to other economies, and it’s now approaching a critical period in its history – the next few years could see China evolve into something very much darker and different.

The reality behind 6.6% China growth is an economy now showing signs of deep internalised trouble. The party has to balance a host of factors from last week’s liquidity injection to stall a credit/debt crisis, the consequences of long-term out of control local government spending, environmental degradation, while managing the implicit pact with the population to provide rising living standards, jobs, accommodation and wealth in return for citizens turning a blind eye to repressive government. If that pact between state and citizens fractures, then tanks on Tiananmen square will be the least of China’s worries.

China is learning that controlling an economy is a very difficult thing. It sorts of works in the West because political competition ensures the rule of law as a check and balance – if politicians or businesses cheat, they tend to get caught and punished. A lack of political completion breeds corruption – and that remains the key reason why Socialist/Communist economies have failed to deliver socialist paradises and become kleptocracies instead. It’s basic human nature.

(If you want a quick primer on the reality of state institutionalised corruption in China – read some banned books. I’d recommend “China Dream” by dissident Ma Jian. It’s a fascinating (and entertaining) insight into the failures of the cadre economy.)

The current “slowdown” in China reflects the difficulties in managing a state controlled economy. Give them credit. China’s state economy has lasted longer and been stronger than other Soviet economies because it successfully mixed an element of private enterprise into the system. Interestingly, the fledgling USSR tried to do something similar in the early post-Civil War 1920s when Lenin’s New Economic Policy was launched to stimulate private enterprise, especially in agriculture. But it was swiftly reversed by Stalin who mounted pogroms against the rich “Kulack” peasants, and purges across the party to strengthen his own position at the cost of plunging the state into famine and a stagnation some economists believe still influences Russian business today.  

Chinese premier Xi knows how difficult keeping China in balance will be. He’s very aware that it might be a very small move in expectations and delivery that pushes the State/Citizen balance over the tipping point – which is why his short term goal will be to avoid a damaging trade war with the US that could trigger domestic strife. Xi’s primary objective will be accommodation with the US to avoid further economic sentiment shifts – expect China to settle with Trump. They don’t want to “lose face” – but they will basically accept all the US demands in manner that looks like a fairly negotiated settlement. Place your bet’s accordingly.  

However, its more complex than just trade agreements. In the medium Term Xi is fighting a desperate battle to secure and enhance his position and reign back the communist party’s excesses – to fight corruption in the only way he believes China will understand: by being a strong dictator. He is not as secure as many in the West believe. Hence the recent moves towards a “cult of Xi” reviving memories of the Maoist era. It looks to the West that he is in control of the state, but experienced China hands tell me his control of the state is far less secure that any previous Chinese leader – there is a serious likelihood that any breakdown in the implicit state-citizen pact will be met with extreme violence, and Xi will be the fall-guy.

But, this get’s even more complex: Long-Term, China may be in a far stronger position – and that’s because of Tech. While the West agonises about how social media and big data might be abused and misused, the Chinese have no such civil-liberty foibles. Their tech-environment is now providing the data and direct oversight of individuals to enable a far more effective and functional secret police run state. The kind of data oversight available to the Chinese state will enable it to keep the lid of the populace, and even – if they so choose – state corruption. That could be a complete game changer for China – and for any tin-pot dictators in Asia, Africa, Lat Am, and Extended Europe who the Chinese sell the system to. (And, of course, anyone using such tech will effectively be selling their citizens’ data straight to Beijing.)

If this sounds far-fetched and too dystopian. then feel free to ignore my ramblings. But, what if I’m right? Huawei might be the tip of the real iceberg: China’s Tech vision versus the West.

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Just as it warned it would several days ago, as part of its latest quarterly economic outlook report the IMF just slashed its forecast for 2019 global GDP to just 3.5% from 3.7% as of October, its lowest forecast in three years, while warning that trade tensions pose further downside risks to global growth.

In its second growth downgrade in three months, the IMF blamed softening demand across Europe and recent stock market volatility, and while its US GDP forecast remained somewhat surprisingly unchange, still seeing a solid 2.5% in 2019 GDP growth, the IMF took a machete to its German GDP forecast, which the IMF now sees growth only 1.3% this year, down 30%, or 0.6% from its forecast last October. The Monetary Fund blamed soft consumer demand and weak factory production after the introduction of stricter emission standards for cars was behind the shift. To be sure, recent German economic data has been disastrous, and confirmed the sharp slowdown in the economy, and it will be up to Q1 data to confirm or deny whether a German recession has arrived.

Despite seeing sharp slowdowns to other key European economies, including Italy, where it cited weak demand and higher sovereign borrowing costs, and France, where the so-called Yellow-Vest protests have hurt the economy…

… the overall outlook was somewhat more upbeat than some had feared especially as many investors openly fear a U.S-led slowdown taking hold, the fund left its projections for the U.S. and China unchanged and even anticipates a pickup in worldwide expansion to 3.6 percent next year.

Nonetheless, risks “tilt to the downside” said the IMF just hours after China revealed the slowest expansion since 2009 last quarter. It will set the tone for this week’s World Economic Forum meeting in Davos, Switzerland.

“The global growth forecast for 2019 and 2020 had already been revised downward in the last WEO, partly because of the negative effects of tariff increases enacted in the United States and China earlier that year” the report said.

“The further downward revision since October in part reflects carry over from softer momentum in the second half of 2018—including in Germany following the introduction of new automobile fuel emission standards and in Italy where concerns about sovereign and financial risks have weighed on domestic demand—but also weakening financial market sentiment as well as a contraction in Turkey now projected to be deeper than anticipated.”

“It is important to take stock of the many rising risks,” said Gita Gopinath, the fund’s new chief economist.

The IMF also said that “a range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a “no-deal” withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.”

Among the threats cited in the report were more trade tariffs, a renewed tightening of financial conditions, a “no deal” Brexit and a deeper-than-anticipated slowdown in China. And while some of the key issues the IMF flagged in Europe may be temporary, the IMF said that they came amid a backdrop of global trade policy uncertainty and concerns about China’s outlook.

“The possibility of tensions resurfacing in the Spring casts a shadow over global economic prospects,” the IMF said, which also predicted that global trade will grow by 4.0% in 2019 and remain unchanged in 2020, a 0.1% cut from its prior forecast. As recently as 2017, the IMF predicted global trade would grow 5.3%.

In addition to slashing Europe’s GDP prospects, the IMF also cut Mexico’s GDP by up to half a percentage point, while admitting that the slump in Venezuela may be deeper than previously anticipated.

While the IMF’s U.S. forecast was unchanged at 2.5% in 2019, it said growth in the world’s biggest economy will cool to 1.8% in 2020 as stimulus from tax cuts fades and the economy responds to higher Federal Reserve interest rates.

Finally, as for China, the IMF still expects GDP to grow 6.2% in 2019 after 6.6% in 2018 – the lowest since 1990 – and to continue slowing due to the trade war and the government’s failing attempts to reduce systemic leverage.

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Authored by Christophe Guilluy via Spiked-Online.com,

The gilets jaunes (yellow vest) movement has rattled the French establishment. For several months, crowds ranging from tens of thousands to hundreds of thousands have been taking to the streets every weekend across the whole of France. They have had enormous success, extracting major concessions from the government. They continue to march.

Back in 2014, geographer Christopher Guilluy’s study of la France périphérique (peripheral France) caused a media sensation. It drew attention to the economic, cultural and political exclusion of the working classes, most of whom now live outside the major cities. It highlighted the conditions that would later give rise to the yellow-vest phenomenon. Guilluy has developed on these themes in his recent books, No Society and The Twilight of the Elite: Prosperity, the Periphery and the Future of France. spiked caught up with Guilluy to get his view on the causes and consequences of the yellow-vest movement.

spiked: What exactly do you mean by ‘peripheral France’?

Christophe Guilluy: ‘Peripheral France’ is about the geographic distribution of the working classes across France. Fifteen years ago, I noticed that the majority of working-class people actually live very far away from the major globalised cities – far from Paris, Lyon and Toulouse, and also very far from London and New York.

Technically, our globalised economic model performs well. It produces a lot of wealth. But it doesn’t need the majority of the population to function. It has no real need for the manual workers, labourers and even small-business owners outside of the big cities. Paris creates enough wealth for the whole of France, and London does the same in Britain. But you cannot build a society around this. The gilets jaunes is a revolt of the working classes who live in these places.

They tend to be people in work, but who don’t earn very much, between 1000€ and 2000€ per month. Some of them are very poor if they are unemployed. Others were once middle-class. What they all have in common is that they live in areas where there is hardly any work left. They know that even if they have a job today, they could lose it tomorrow and they won’t find anything else.

spiked: What is the role of culture in the yellow-vest movement?

Guilluy: Not only does peripheral France fare badly in the modern economy, it is also culturally misunderstood by the elite. The yellow-vest movement is a truly 21st-century movement in that it is cultural as well as political. Cultural validation is extremely important in our era.

One illustration of this cultural divide is that most modern, progressive social movements and protests are quickly endorsed by celebrities, actors, the media and the intellectuals. But none of them approve of the gilets jaunes. Their emergence has caused a kind of psychological shock to the cultural establishment. It is exactly the same shock that the British elites experienced with the Brexit vote and that they are still experiencing now, three years later.

The Brexit vote had a lot to do with culture, too, I think. It was more than just the question of leaving the EU. Many voters wanted to remind the political class that they exist. That’s what French people are using the gilets jaunes for – to say we exist. We are seeing the same phenomenon in populist revolts across the world.

spiked: How have the working-classes come to be excluded?

Guilluy: All the growth and dynamism is in the major cities, but people cannot just move there. The cities are inaccessible, particularly thanks to mounting housing costs. The big cities today are like medieval citadels. It is like we are going back to the city-states of the Middle Ages. Funnily enough, Paris is going to start charging people for entry, just like the excise duties you used to have to pay to enter a town in the Middle Ages.

The cities themselves have become very unequal, too. The Parisian economy needs executives and qualified professionals. It also needs workers, predominantly immigrants, for the construction industry and catering et cetera. Business relies on this very specific demographic mix. The problem is that ‘the people’ outside of this still exist. In fact, ‘Peripheral France’ actually encompasses the majority of French people.

spiked: What role has the liberal metropolitan elite played in this?

Guilluy: We have a new bourgeoisie, but because they are very cool and progressive, it creates the impression that there is no class conflict anymore. It is really difficult to oppose the hipsters when they say they care about the poor and about minorities.

But actually, they are very much complicit in relegating the working classes to the sidelines. Not only do they benefit enormously from the globalised economy, but they have also produced a dominant cultural discourse which ostracises working-class people. Think of the ‘deplorables’ evoked by Hillary Clinton. There is a similar view of the working class in France and Britain. They are looked upon as if they are some kind of Amazonian tribe. The problem for the elites is that it is a very big tribe.

The middle-class reaction to the yellow vests has been telling. Immediately, the protesters were denounced as xenophobes, anti-Semites and homophobes. The elites present themselves as anti-fascist and anti-racist but this is merely a way of defending their class interests. It is the only argument they can muster to defend their status, but it is not working anymore.

Now the elites are afraid. For the first time, there is a movement which cannot be controlled through the normal political mechanisms. The gilets jaunes didn’t emerge from the trade unions or the political parties. It cannot be stopped. There is no ‘off’ button. Either the intelligentsia will be forced to properly acknowledge the existence of these people, or they will have to opt for a kind of soft totalitarianism.

A lot has been made of the fact that the yellow vests’ demands vary a great deal. But above all, it’s a demand for democracy. Fundamentally, they are democrats – they want to be taken seriously and they want to be integrated into the economic order.

spiked: How can we begin to address these demands?

Guilluy: First of all, the bourgeoisie needs a cultural revolution, particularly in universities and in the media. They need to stop insulting the working class, to stop thinking of all the gilets jaunes as imbeciles.

Cultural respect is fundamental: there will be no economic or political integration until there is cultural integration. Then, of course, we need to think differently about the economy. That means dispensing with neoliberal dogma. We need to think beyond Paris, London and New York.

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It has been an overnight session of two different narratives, with Asian markets rising on Chinese economic data where despite the biggest annual drop in GDP since 1990 (which boosted hopes for more stimulus), Beijing goalseeked a slightly better than expected retail sales and industrial production December print…

… while European bourses and US equity futures dipped on a late Sunday report from Bloomberg pouring cold water on US-China trade talks, and according to which the two sides have so far made “little progress” on the issue any deal Trump strikes with China may ultimately be judged on: ending what the U.S. has dubbed as decades of state-coordinated Chinese theft of American intellectual property. BBG added that this stood in contrast to movement on other fronts that has lifted stocks in recent sessions, including a report on Friday that China offered a highly unrealistic path to reducing its trade surplus to zero by 2024.

As a result, emerging-market currencies weakened and stocks erased gains as traders assessed potential road blocks in U.S.-China trade talks later this month. The yuan weakened as the U.S. and China negotiators were said to remain far apart over the key issue of intellectual property, with the next round of talks scheduled for Jan. 30-31, even as the Shanghai Composite rose 0.6% to close above 2,600, while the Nikkei was fractionally in the green, rising 0.3% to 20,719 and Australia was also green.

Chinese optimism did not carry over to Europe, however, where the Stoxx 600 index was on course for its first drop in five days, tracking S&P 500 futures lower in muted volumes due to the MLK market closure in the US. That said, European stocks trimmed early losses, with Stoxx 600 hitting session high, still down 0.2%, with telecom, utilities and banks shares leading declines, while airlines rallied. 

European telecom companies were the first sector to give up 2019 gains, with the Stoxx 600 Telecommunications Index falling as much as 1.5%, making it Monday’s biggest sector decliner in Europe and erasing this year’s gains after slightly negative reports on several large carriers. The sector is now down 0.6% on the year, the first industry group (but certainly not the last) in negative territory for the period, with Deutsche Telekom leading declines with a 2.4% drop after a Berenberg downgrade; Orange, Vodafone and Telecom Italia all dropped as well.

Earlier in the session, Germany report that PPI rose 2.7% Y/Y in Dec, missing expectations of 2.9% and far below November’s 3.3% print as Europe’s inflationary impulse appears to be fading.

S&P 500 futures dropped as much as 0.5% and hit a session low around 5am, although they have since posted a modest rebound and were down 8.5 points last.

Monday’s muted start was in stark contrast to last week’s rally, when risk assets extended gains amid positive manufacturing numbers and signs the U.S. and China were closing in on a trade truce (even though many of these were officially denied). However, as Bloomberg notes, the “picture is complex”, as reports on intellectual property paint a less optimistic view on the outlook for talks, while data on Monday confirmed China’s economy expanded at the slowest pace since the global financial crisis.

In FX, the pound erased a loss before Theresa May returns to Parliament to explain what she’s going to do next on Brexit. On Sunday, the U.K. prime minister ditched cross-party talks and was set to try to get her failed deal through Parliament with votes of Conservatives and her Northern Irish allies. Elsewhere, the dollar was steady, while bonds in Europe were mixed. The yen rose versus all its G-10 peers as global risks, including a lack of progress on the key U.S.-China trade issue of intellectual property, underpinned demand while Treasuries didn’t trade due to the MLK holiday.

Top Overnight News

• Theresa May briefed her Cabinet on Sunday evening that there was little prospect of cross-party Brexit talks yielding a workable alternative plan to the one that Parliament overwhelmingly rejected last week. Instead, according to two people who were on the conference call between May’s most senior ministers, she said she would seek changes to the Irish backstop section of the deal she’s negotiated with the European Union
• European Union governments disagree over how long they think the U.K. should delay Brexit, with some pushing for an extension of as much as a year, diplomats said
• China’s economy expanded at the slowest pace since the global financial crisis, as a domestic financial clean-up, weakening global demand and trade conflict with the U.S. all dampened momentum
• According to people close to the discussions, the U.S. and China have so far made little progress on the issue any deal Trump strikes with China may ultimately be judged on: ending what the U.S. has dubbed as decades of state- coordinated Chinese theft of American intellectual property
• The No. 3 House Democrat on Sunday offered a path for a deal to end the almost month-long partial government shutdown, focused on a permanent solution for so-called “Dreamers” rather than the three-year reprieve offered by President Donald Trump
• Administration officials are planning for President Donald Trump’s second summit with North Korean leader Kim Jong Un to take place in Vietnam, said people familiar with the plans

Asian equity markets began the week higher as the region followed suit to the optimism seen last Friday amongst the US majors after reports China is to offer concessions to eliminate the US trade imbalance, but with gains capped as participants digested a slew of Chinese data including 2018 GDP which was at the slowest growth in 28 years as expected. ASX 200 (+0.2%) and Nikkei 225 (+0.2%) were both positive from the open as they benefitted from the US-China trade optimism, but then pulled-back from their highs heading into the Chinese data and after US Trade Representative Lighthizer noted there was little progress made with China regarding intellectual property theft. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp. (+0.4%) had a relatively tepid open on caution prior to the key data releases and after the PBoC skipped liquidity operations, although Chinese markets later breathed a sigh of relief from the inline GDP numbers, as well as better than expected Industrial Production and Retail Sales data.

Major European equities are mostly in the red [Euro Stoxx 50 -0.2%] as sentiment is dictated by China’s 2018 GDP printing, as expected, the slowest growth in 28 years. FTSE MIB (-0.6%) is the underperforming index, weighed on by Telecom Italia (-1.9%) after the Co’s proposal to confer all network assets into a separate company has been opposed by the communications regulator. Meanwhile, UK’s FTSE 100 (+0.3%) outperforms on currency effects and as the Pound awaits PM May’s Brexit “Plan B”. Sectors are similarly in the red, with underperformance seen in Telecom names; where the aforementioned Telecom Italia is amongst those weighing on the sector. Other notable movers include William Hill (-2.6%) after the Co. state their full year operating profit for 2018 is expected to decrease from 2017’s level. Separately, Henkel (-5.3%) are towards the bottom of the Stoxx 600 after guiding FY19 EPS lower to mid-single digits.

In FX, the DXY is little changed and closer to the top of a 96.200-380 range following a relatively rangebound Asia-Pac session, with little reaction to the confirmation by USTR Lightihzer regarding little progress in intellectual property issues in US-Sino trade talks, while US President Trump dismissed the WSJ report about US mulling to lift China tariffs to move forward dialogue. Liquidity in the markets will likely be thin as US participants are away on MLK day, while State-side data remains scarce as the US government has been shut for almost a month.

• GBP, EUR – More angst for the Pound as PM May heads to the Commons later (around 15:30 GMT) to pitch her so-called “Plan B” with little expected in regard to a realistic strategy. Downing Street denied weekend reports that the Premier is looking to tweak the Good Friday agreement with Ireland to break the Brexit deadlock, while the Irish European Foreign Affairs Minister stated Ireland will not take part in bilateral talks and dialogue between EU and the UK, in turn pouring cold water on the Handelsblatt report from last week that the EU are ready to make further concessions on the backstop if the initiative comes from Ireland. Going back to May’s statement, there were reports over the weekend that MPs are to ambush the Premier with amendments aimed at stopping a no-deal scenario. Two amendments to be aware of are the Cooper and Grieve amendments, the former is aimed at giving parliament power to extend Article 50 while the latter gives parliament the power to hold “indicative votes” on Brexit options (such as a Norway or Canada-style).  GBP/USD current resides nearer to the bottom of a 1.2831-1.2900 range, below its 100 DMA at 1.2891 and around its 200 HMA at 1.2844. Meanwhile, the EUR remains firmer, albeit marginally as EUR/USD straddles around its 50 DMA at 1.1379 and closer to the middle of a 1.1361-1.1400 range ahead of the ECB interest rate decision on Thursday, while EUR 1.2bln in option expiries rest at strike 1.1400 for today’s NY cut.
• JPY, CHF – Mixed trade for the “safe-haven” currencies with the Yen slightly firmer upon the release of Chinese GDP which printed the slowest annual growth in almost three-decades, though this was widely expected by analysts amid the ongoing US-China trade disputes. USD/JPY resides in the middle of a 109.50-80 range, while the absence of US participants will drain liquidity. Elsewhere, further suspicious activity in the weakening Franc as EUR/CHF stabilises nearer to the top of a 1.1300-1.1350 range and similarly USD/CHF closer the top of the intraday range with speculation of potential SNB intervention taking place.

In commodities, Brent (-0.1%) and WTI (Unch%) recouped most of the initial losses, though prices remain below USD 63/bbl and USD 54/bbl; as the risk tone is directed by the slowest GDP growth in 28 years from China. Separately, China produced 3.86mln BPD for December which is a 2.85% increase Y/Y; however, 2018 domestic output decreased to 3.8mln BPD vs. Prev. 3.85mln BPD. Friday’s Baker Hughes Rig Count showed total decreased by 25 to 1050; with oil rigs decreasing by 21 to the lowest level in since May 2018. Gold (-0.2%) is in the red but trading within a narrow USD 4/oz range, largely due to a lack of catalyst in the dollar as it is a US market holiday. Elsewhere, China’s primary aluminium output increased for the second month to a record in high in December of over 3mln tonnes; in contrast China’s daily average steel output in December fell to the lowest level since March, due to weaker profit margins.

DB’s Jim Reid concludes the overnight wrap

So far this year the market has shaken off its cast from December and is rehabilitating well. It’s a packed week though with lots to test the recovery and before we preview it we’ve already had the first test with China releasing all important data this morning. The good news is that there were no huge surprises with Q4 GDP printing in line with expectations at 6.4% (vs. 6.5% in Q3). That said, it confirms the lowest quarterly rate of growth in China since Q1 2009 (when it was also +6.4%) while the 2018 GDP growth rate of 6.6% is the lowest since 1991. Meanwhile the December activity indicators also out in China this morning were broadly in line. Retail sales printed at +8.2% yoy (vs. +8.1% expected) and fixed asset investment at +5.9% ytd yoy (vs. +6.0% expected) with industrial production (+5.7% yoy vs. +5.3% expected) the biggest positive surprise.

Markets in Asia are up across the board to kick off the week with Chinese bourses leading the way. The Shanghai Comp and CSI 300 are +0.68% and +0.69% respectively while the Hang Seng (+0.34%), Nikkei (+0.34%) and Kospi (+0.08%) have posted more modest gains. The CNY (-0.17%) is a touch weaker after that data along with most other EM currencies while US equity futures are down -0.30%. A Bloomberg story out early this morning suggesting that trade negotiations between the US and China – specifically over accusations of IP theft by China – are failing to make progress appears to be impacting sentiment this morning too. A reminder that China Vice Premier Liu He is travelling to the US on January 30th – 31st for trade negotiations. We should note that US equity and bond markets will be closed today on account of the Martin Luther King Jr. holiday. So it should quieten down as the day progresses.

Even after the China numbers we have a busy week with the world’s most powerful and influential people (plus me) at Davos. So expect lots of headlines (hopefully not involving me). Outside of this, we see U.K. PM May present her alternative Brexit plan today, the ECB and BoJ policy meetings (Thursday and Wednesday), global flash PMIs (Thursday) and earnings season starting to get busier. The ongoing partial government shutdown (31 days and counting today) in the US should also be a talking point with certain US data releases continuing to be delayed as a result and more worries about what it might do to Q1 growth.

Going through these in a little more detail, in terms of Brexit it’s an important week (how many times have we said that) as PM May is due to present her Plan B to Parliament today ahead of a vote on January 29th. The latest is that there isn’t really any latest but lots of behind the scenes activity. TheTimes and various other media outlets last night reported after a cabinet meeting yesterday that May’s tactic seems to have moved from hopes of cross party agreements to getting a deal that the Tories and the DUP can coalesce around. That really involves the backstop and further negotiations with the EU/Ireland. There’s no sign that this will be forthcoming and could be disappointing to the market.

However the Sunday Times earlier reported that we could again be set for more unprecedented procedural dramas in the days ahead. Leaked emails they obtained show that “Dominic Grieve, the former attorney-general, has been in secret communications with Colin Lee, the clerk of bills, with the explicit intention of suspending Britain’s departure from the European Union”. So, while we’re no nearer to a breakthrough the odds of no Brexit might be edging ever so slightly higher from a low base. Related to this it seems likely that an amendment will be put to the next bill that asks for a second referendum. If so it will be interesting to see how the vote for such an amendment would go cross parties. An interesting 8 days lays ahead. Overall it feels like the U.K. Parliament will somehow ensure that a no-deal Brexit is unlikely but that the breakthrough continues to be as illusive as ever. We should add that Sterling has traded broadly flat overnight however Bloomberg is reporting that PM May briefed her Cabinet last night suggesting that cross party Brexit talks had yielded little. The story suggests that the PM will instead seek changes to the Irish backstop to secure enough support from the DUP and pro-Brexit Tory members.

Elsewhere, tomorrow sees the World Economic Forum in Davos officially get underway with the theme of this year’s Forum being “Globalisation 4.0: Shaping a New Architecture in the Age of the Fourth Industrial Revolution”. Please let me know if you or anyone from your office want to attend my slots on Wednesday (globalisation) and Thursday (Will robots take your job?).

The flash PMIs on Thursday could be the most market moving event of the week. We’ll get the manufacturing PMI for Japan, and manufacturing, services and composite readings in Europe and the US. For Europe the composite Euro Area reading is expected to rise 0.3pts to 51.4 broken down by the manufacturing and services rising 0.1pts and 0.3pts respectively.

Any slight rise could be a big deal as the problem with the European PMIs is that their falls have now been long standing and consistent (albeit from very high levels just over a year ago). For example, the Eurozone and German manufacturing PMIs have both been sequentially down 11 months out of the last 12. Equity and credit markets remain cheap to PMIs but the problem so far is that PMIs haven’t stabilised. This will be a big test. So, this is probably the highlight of the week.

Onto the ECB and there’s fairly low expectations around the policy meeting on Thursday. The ECB is in a bit of a wait and see mode for now ahead of the next meeting in March when policy makers will then get the added benefit of new economic projections. Potentially important things to keep an eye on however include an acknowledgement of risks to the outlook tilting to the downside and comments around reassessing the impacts of TLTRO – both of which were acknowledged as talking points from the minutes of the December meeting. Also given Draghi’s hint last time out that the ECB are aware of the damage to the banking system of persistent negative rates it will be interesting if he now expands upon that. On this it was interesting to read a piece by Mark Wall on Friday looking at net interest income of the four major economic sectors in Europe pre and post the GFC. Since the GFC, non-financial corporates and governments have seen theirs improve whereas households and financials have seen theirs deteriorate. It should be a zero-sum game at economy wide level but perhaps it’s gone too far inter-sector wise. That partly explains the funk the European banking sector is in and may even be a small part of explaining why populism has grown. To restore balance, policy at some point might have to take from the government and corporates and give to consumers and the banks. Anyway the report can be seen here.

Elsewhere in central bank world, the BoJ is also expected to be a bit of a non-event on Wednesday. Our Japanese economists expect the BoJ to vote to maintain its current policy stance and anticipate downward revisions to inflation forecasts for FY18 and FY19 in the outlook report by 0.1 and 0.2 percentage points respectively. In the view of our colleagues none of the conditions they deem necessary for monetary policy normalization – stable core inflation above 1%, stronger policy side effects, government declaration of end of deflation – have been realized at this point. In addition, the economic outlook is unlikely to be reduced to an extent that would demand further easing. In sum, our colleagues estimate the probability of further easing this year at around 10%.

Meanwhile the ongoing partial government shutdown in the US continues to complicate the timing of economic data releases with a decent backlog now built up. Our US economists estimate that to date the impact on real GDP growth for Q1 is approximately -0.2 to -0.3 percentage points assuming the government reopens by the end of this week. However if it lasts for the entire quarter, it could subtract around a full percentage point. Significantly the lack of timely data releases is increasing uncertainty for the Fed to get a better picture of how Q1 growth is tracking and this will continue until the BEA reopens. Friday’s new home sales and durable goods orders fall under this category while the backlog includes retail sales, trade data, housing starts and building permits amongst others. However we will get the Richmond Fed and Kansas Fed manufacturing reports on Wednesday and Thursday respectively which will be worth watching in light of other soft regional Fed surveys of late.

As for earnings, we’re due to get quarterly reports from 59 S&P 500 companies this week including Johnson & Johnson and IBM on Tuesday, United Technologies, Proctor & Gamble and Ford on Wednesday, Starbucks, Intel and American Airlines on Thursday and AbbVie on Friday. UBS (Tuesday) and Ericsson (Friday) are the highlights in Europe. It’s still early days in earnings season however for the US with about 10% of the S&P 500 having reported, 80% have beaten earnings expectations and 55% have beaten sales expectations. The full day by day week ahead is at the end as usual.

Turning to a recap of last week, the S&P 500 advanced +2.87% (+1.32% on Friday) on positive trade headlines and earnings reports. On the former, a Wall Street Journal article said that Treasury Secretary Mnuchin is arguing for removal of tariffs on China and a Bloomberg News article claimed that China has offered to buy additional US products in an effort to close the trade deficit. There were various denials from the White House but markets want to believe there is no smoke without fire. Equity gains were broad-based, with the DOW and NASDAQ also advancing +2.96% and +2.66% (+1.38% and +1.03% on Friday), respectively. Banks outperformed, as fourth quarter results from major US banks showed declining FICC revenues but overall strength and a more positive Q1 outlook, with an index of bank stocks up +7.57% (+1.56% Friday). Banks in Europe also gained +2.83% (+2.11% Friday) while the STOXX 600 advanced +2.25% (+1.80%). In Asia, the Nikkei and Shanghai Composite rallied +1.50% and +1.65% (+1.29% and +1.42% Friday), respectively. The VIX index slid a bit more to 17.8 (-0.4pts on the week and -0.3pts Friday), closing at a six-week low.

The positive risk sentiment pushed Treasury yields a bit higher, with 10-year yields up +8.4bps to 2.784% (+3.4bps Friday), while bund yields rose +2.4bps (+2.0bps Friday). Peripheral spreads rallied, with Italian and Spanish spreads to bunds down -12.3bps and -9.8bps (-3.4bps and -1.7bps Friday), respectively. The dollar strengthened +0.70% (+0.28% Friday) as US economic data mostly steadied. Initial jobless claims fell, industrial production surprised to the upside, though regional Fed surveys were mixed and consumer sentiment deteriorated. Credit continued its strong start to the year, with US and EU HY cash spreads narrowing -22bps and -19bps (-10bps and -8bps Friday), respectively. The US side was helped by another strong week for oil, as WTI crude prices rose +4.28% (+3.32% Friday), which has supported the HY energy sector. US HY energy credit is -128bps tighter this year with the overall market -92bps tighter.

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Kamala Harris has joined Elizabeth Warren and Kirsten Gillibrand in officially declaring her intention to seek the 2020 Democratic nomination, launching her campaign in a twitter sent early on the MLK Day holiday.

I’m running for president. Let’s do this together. Join us: https://t.co/9KwgFlgZHA pic.twitter.com/otf2ez7t1p

— Kamala Harris (@KamalaHarris) January 21, 2019

In addition to the tweet, Harris also announced her campaign during a Monday morning appearance on Good Morning America, saying she is “very excited about it.”

BREAKING: @KamalaHarris announces this morning on @GMA that she will officially be running for president in 2020. “I’m very excited about it.” https://t.co/W1vUNMab63 pic.twitter.com/Jhklmo3Oa9

— Good Morning America (@GMA) January 21, 2019

Of course, the timing of her announcement is hardly surprising after the New York Times skewered her prosecutorial record as California’s Attorney General in an opinion piece published last week.

And as one twitter user pointed out, for all the hype around Harris, she is surprisingly unpopular.

She’s not even popular among blacks… https://t.co/5CfYFdLoou

— PapaSwamp (@PapaSwamp) January 21, 2019

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Authored by Tim Daiss via Oilprice.com,

Russia’s proposed pipeline to bring more gas from Russian fields into Europe via an undersea pipeline to Germany seems unable to shake both geopolitical maneuvering as well as headline-grabbing quotes from both sides of the divide.

On Thursday, Wolfgang Ischinger, chairman of the Munich Security Conference, and a seasoned diplomat said Germany should finish the Russian-backed Nord Stream 2 gas pipeline despite U.S. opposition and growing domestic concerns, but future energy projects should be coordinated by the EU.

He added that the initial “birth defect” of the $11 bn pipeline project was the fact that European treaties had allowed the German government to deem the project as purely commercial. He also added, (what U.S. government officials have been claiming for quite some time, but most EU officials have been denying) that it was clear such a large project clearly had a political nature, particularly given Russia’s annexation of the Crimea region of Ukraine in 2014 and other actions in recent years.

According to a Reuters report yesterday, Ischinger cautioned against abandoning the project as it neared its completion date of late 2019, citing German foreign policy’s focus on consistency and sustainability.

“Saying ‘forget it’ now would not be good German foreign policy.”

The $11 billion gas pipeline will stretch some 759 miles (1,222 km), running on the bed of the Baltic Sea from Russian gas fields to Germany, bypassing existing land routes over Ukraine, Poland and Belarus. It would double the existing Nord Stream pipeline’s current annual capacity of 55 bcm and is expected to become operational by the end of next year.

Geopolitically charged pipeline

The Nord Stream 2 pipeline has also been a point of contention, perhaps even on a personal level, between Trump and Germany as well. In a televised meeting with reporters and NATO Secretary-General Jens Stoltenberg before a NATO summit in Brussels last year, Trump said it was “very inappropriate” that the U.S. was paying for European defense against Russia while Germany, the biggest European economy, was supporting gas deals with Moscow. Russia, for its part and unsurprisingly, deems the pipeline as a purely commercial venture.

Richard Grenell, the U.S. ambassador to Germany stoked a media firestorm in the country earlier this week after he told German companies involved in the Nord Stream 2 project that they could face sanctions if they continued with the plan that is already far advanced. German media group and broadcaster Deutsche Welle (DW) said that “Grenell’s latest move remains highly unusual and is likely to prompt fresh tensions between Washington and Berlin.”

Though Trump has also been criticized for politicizing the pipeline, both of his predecessors Barack Obama and George W. Bush also opposed the pipeline amid security concerns. And at the end of the day, given Russian President Vladimir Putin’s unorthodox and even aggressive moves during his two stints as president for a total of some 15 years, these security concerns are founded.

Moreover, there is a growing, but often silent group inside Russia that disapproved of Putin’s geopolitical actions that has brought multiple sanctions on the country and considerable economic hardship. As a young, lower level manager for a well-established Russian energy company told me last year at a conference in Vietnam, “hey don’t blame all Russians for Putin’s actions, the guy has been president since I was in grade school. We can’t control what he does…”

Nord Stream 2 likely to proceed on schedule

Yet, going forward it seems probable that the pipeline will be built on schedule, all the while prolonging Europe’s reliance on Russia’s decades-old gas monopoly in Europe. The way forward, for some EU countries already tried of Russian interference and geopolitical hegemony using the gas weapon in the region, including Poland and several Baltic states, will be to procure more U.S.-sourced LNG, as well as from Qatar and other players. To this end, however, LNG is currently and will be in the future at a decided pricing disadvantage compared to cheaper Russian pipeline gas.

Finally, Germany has also indicated recently, likely bowing to pressure from Trump, that it will expand its LNG infrastructure, including signing more LNG deals with U.S. producers. While this will not be enough to nullify the enormous stakes and risks of an operational Nord Stream 2 pipeline, it will at least offer marginal diversity of supply.

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