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Following disappointing earnings from Citi and JPMorgan, which yesterday reported the first EPS miss in 15 consecutive quarters, the market breathed a sigh of relief when Bank of America reported strong top and bottom-line results, with revenue rising 6% Y/Y to $22.7BN, beating consensus estimates of $23.35BN, and resulting in stronger than expected Net Income of $7.3BN and EPS of 70 cents, up 49% Y/Y, and well above the 63 cent forecast.

BofA performance, like Citi and JPM, has been a function of strong consumer banking income, which posted an impressive increase in 2018, even as Global Markets were generally flat for the full year…

… largely the result of continued cost cuts across the business, which has seen its non-interest expense drop to the lowest this decade.

Meanwhile, even as Net Interest Income continued to grow…

… one can argue that the bank’s strong bottom line performance has been mostly a function of aggressive stock repurchases.

Going back to the 4th quarter, and looking at what did well, BofA is quick to note that it saw a 4% increase in total average deposits to a record high $1.345TN, driven by a 9% increase in Global Banking deposits.

At the same time, and in keeping with the overall cost-cutting theme, total noninterest expense was flat in Q4 versus 3Q18, as the impact of :Shared Success” year-end bonus to associates as well as higher marketing spend offset lower FDIC expense. According to BofA, compared to 4Q18, 1Q19 expenses expected to include approximately $0.5B for seasonally elevated personnel costs

While not as impressive, average loans and leases also rose 1% Y/Y to $935BN, driven by a 5% increase in Consumer Banking loans despite a clearly slowdown in loan increases as shown below.

Confirming the strong performance of the consumer bank, Net Interest Income increased $0.8B from 4Q17 to $12.3BN, thanks to “benefits from higher interest rates as well as loan and deposit growth, modestly offset by loan spread compression and higher funding costs in Global Markets.” Meanwhile, Net interest margin (or yield) of 2.48% increased an impressive 9 bps from 4Q17, while excluding Global Markets, the net interest yield was 3.03%, up 14 bps from 4Q17.

Now the not so good news: looking at the bank’s asset quality, while total net charge-offs were relatively flat Q/Q and down over $300MM Y/Y, to $924MM, there was a surprising jump in provisions for credit losses, which surged in Q4 from $716MM to $905MM, similar to what JPM reported, and will likely prompt questions what BofA may be bracing for. Separately, the allowance for loan and lease losses of $9.6B represented 1.02% of total loans and leases, while nonperforming loans (NPLs) decreased $0.2B from 3Q18, driven by improvements in Consumer, with BofA noting that 49% of consumer NPLs are contractually current.

But the biggest disappointment, as in the case of Citi and JPM, emerged in the bank’s Global Banking group, where total trading revenue ex DVA of $2.50BN  missed estimates of $2.64, and was down 6% Y/Y, largely due to yet another big miss in FICC, as BofA reported FICC trading revenue ex DVA of $1.45BN, sharply below the $1.64BN expected. This however, was modestly offset by equities trading revenue ex DVA of $1.06BN, above the $1.01BN expected.

Commenting on the results, BofA said that FICC revenue of $1.4B decreased 15% from 4Q17, “due to weakness in credit and mortgage markets and lower client activity in credit products” while “equities revenue of $1.1B increased 11% from 4Q17, driven by strength in client financing and derivatives.”

The bank also took pride in paying less as noninterest expense decreased 3% vs. 4Q17, driven by lower revenue-related expenses, while risk-taking remained muted with the average VaR unchanged Y/Y at $36MM in 4Q18.

Separately, Investment Banking was also better than expected, generating revenue of $1.3 billion, better than the estimate $1.23 billion.

Taking all of this together, the market continued the recent trend of ignoring the FICC miss and the loss provision jump, and instead focused on the solid core earnings, and has sent BofA stock sharply higher up 3% in the premarket.

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As a new migrant caravan leaves Honduras with the goal of crossing into the US over the southern border, the Pentagon announced on Tuesday that it would extend the military’s mission on the southern border, according to Reuters. The mission will be extended through at least Sept. 30, they said.

Acting Defense Secretary Patrick Shanahan approved the extension following a request from the Department of Homeland Security. There are currently about 2,350 troops assigned to the border mission. The deployment was expected to end on Jan. 31.

The deployment had previously been authorized through Jan. 31 by former Defense Secretary Jim Mattis.

President Donald Trump initially ordered the deployment in October, shortly before the midterm congressional elections, as part of a widespread crackdown on illegal immigration as several caravans of migrants from Central America resisted the Mexican government’s efforts to keep them in Mexico and continued their trek to the US.

The order comes as the number of migrant families illegally crossing the southern border has jumped in recent months, along with a spike in asylum claims from migrants fleeing violence in Central America.

The troops, who are restricted by US law from engaging in law enforcement activities, have mostly performed supporting services like building reinforcements at border bases and assisting border patrol agents.

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Stocks in Europe gained along with U.S. futures while Asian stocks were muted as investors saw potential for legislative deadlock to force London to delay its departure from the EU following the heavy parliamentary defeat for British Prime Minister Theresa May’s Brexit deal. The pound fluctuated and gilts fell before a no-confidence vote in Prime Minister Theresa May’s government…

… while S&P futures rose initially then faded some of their gains.

The MSCI world equity index, which tracks shares in 47 countries, was flat, while MSCI’s main European Index gained 0.3 percent.  Europe’s Stoxx 600 Index was modestly in the green, led by banks and insurers following China’s plans to boost fiscal stimulus, cut taxes and shore up growth and President Mario Draghi’s comments that stimulus is still needed in the euro area. The U.K.’s FTSE 100 declined as investors contemplated May’s Brexit defeat and the pound squeeze higher continued.

Earlier in the day MSCI’s broadest index of Asia-Pacific shares outside Japan ticked up 0.2 percent, with South Korea’s Kospi and Hong Long’s Hang Seng both scaling six-week highs. Asian shares responded well to China’s central bank injecting a record amount of money into the country’s financial system. That underscored Chinese officials’ commitment to signal more measures to stabilize a slowing economy.

Global markets have drawn succor from the resumption of Sino-U.S. trade talks, though scepticism over the absence of detailed progress was underlined overnight as the U.S. trade representative that he did not see any progress made on structural issues during U.S. talks with China last week.

May’s government faces a no confidence vote on Wednesday after the shattering rejection left Britain’s exit from the European Union in disarray. May is expected to survive the vote but investors see little sign of breakthrough on the Brexit impasse. As a result, they are increasing betting on Britain being forced to postpone its planned March 29 exit, though few have any clarity on what that would mean for the country in the longer run.

Markets had largely priced in the overnight defeat, and in early trade major European bourses mirrored overall resilience in Asian markets. There, stocks were also lifted by signs that China will take more steps to bolster its slowing economy and the U.S. Federal Reserve may pause its run of interest rate rises.

“The evidence yesterday is that there is a quorum of (British) MPs who will do what’s required to avoid a no-deal Brexit,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London. “So there’s a strong probability of an extension of Article 50 and that means there’s an increased probability of a softer Brexit or no Brexit at all.”

With some expecting a delay to raise chances of a softer Brexit, for example based on the opposition Labour party’s idea of membership of a permanent customs union, sterling was flat against the dollar at $1.2860. “We do think it is unlikely that sterling will fall to fresh lows unless the current government falls, and that unlikely although the risk is not zero,” said Alvin Tan, an FX strategist at Societe Generale in London. “Volatility is expected to remain high, but we do think that there is upside for sterling. Sterling is very cheap on the long-term basis, partly because of the probability of the no-deal Brexit.”

Ahead of today’s May confidence vote, Sky Deputy Political Editor said up to 100 Labour MPs will pivot towards a second referendum this morning. Meanwhile, the UK Government minister told business leaders that there is a backbench motion being prepared to delay Article 50, also says no confidence motion will fail. Elsewhere, BBC’s Political Correspondent tweets “Boris Johnson tells me May should ditch backstop, withhold at least half money till free trade deal done, accelerate no deal preparations. Says a new agreement can be reached before March 29.” At the same time, Talk Radio’s Kempsell tweets, Shadow Chancellor John McDonnell tells me he is not ruling out repeated motions of no confidence contrary to suggestions earlier.

Investors are also betting that the U.S. Federal Reserve will slow its interest rate hikes. On Tuesday U.S. policymakers agreed the Federal Reserve should pause further rate hikes until it is clear how much the U.S. economy will be held back by larger risks like slowing growth in China. Investors “are mainly focused on the outcome of the U.S.-China trade negotiations, but it may take more than a month before it will become clear,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank in Tokyo.

Treasury yields slipped amid large-size selling of call spreads on 5-, 10-year notes and the 10Y yield rose to 2.738% up from 2.71%, while the dollar recovered as the London session progressed, trading in tight ranges. British government bonds underperformed versus their German peers in early trade, with March gilt futures opening 30 ticks lower at 122.90, underperforming German Bund futures by around 10 ticks.

The mood in markets remains fairly buoyant after China pledged to step up efforts to support growth and Draghi said the euro area will avoid a recession even though recent data signaled softening momentum. Still, there are plenty of worries to give investors pause before taking this month’s rally in equities further. The political impasse in Washington continues to leave swathes of the federal U.S. government shuttered, and the U.K.’s Brexit drama threatens to impair business confidence in the second-largest European economy.

Oil prices firmed after climbing about 3 percent in the previous session as expectations that OPEC-led supply cuts will tighten markets despite signs of a global economic slowdown. Brent crude oil futures were at $61.17 per barrel at 0904 GMT, 0.1 percent above their last close.

Expected data include mortgage applications. Bank of America, BlackRock, Schwab, and Goldman Sachs are among companies reporting earnings

Market Snapshot

• S&P 500 futures up 0.2% to 2,610.25
• STOXX Europe 600 up 0.07% to 348.96
• MXAP down 0.05% to 152.37
• MXAPJ up 0.2% to 494.28
• Nikkei down 0.6% to 20,442.75
• Topix down 0.3% to 1,537.77
• Hang Seng Index up 0.3% to 26,902.10
• Shanghai Composite unchanged at 2,570.42
• Sensex up 0.08% to 36,348.11
• Australia S&P/ASX 200 up 0.4% to 5,835.16
• Kospi up 0.4% to 2,106.10
• German 10Y yield rose 2.2 bps to 0.228%
• Euro up 0.06% to $1.1420
• Italian 10Y yield rose 3.0 bps to 2.513%
• Spanish 10Y yield fell 0.9 bps to 1.381%
• Brent futures little changed at $60.64/bbl
• Gold spot little changed at $1,289.58
• U.S. Dollar Index little changed at 95.96

Top Overnight News

• The Trump administration has ordered thousands of furloughed federal employees back to work without pay to inspect planes, issue tax refunds, monitor food safety and facilitate the sale of offshore oil drilling rights
• The EU is refusing to remove the Irish-border element that U.K. lawmakers most oppose
• The European Union said it was horrified by the massive scale of the U.K. Parliament defeat of the Brexit deal agreed with PM May but said there was no option to renegotiate. Brexit pushes Britain to brink as government fights for survival
• On an hour- long conference call following Parliament’s overwhelming rejection of the government’s deal to leave the EU, Chancellor of the Exchequer Philip Hammond floated the possibility of delaying the departure beyond the March 29 deadline, according to four people with knowledge of the call
• China’s central bank injected a net 560b yuan ($83b) into the financial system through open-market operations, the biggest one-day addition on record
• BOE Governor Mark Carney told lawmakers in London that the rebound in the pound after Prime minister May’s Brexit vote defeat would appear to reflect some expectation that the process of resolution would be extended and that the prospect of no deal may have been diminished; said the BOE is in discussions with the U.K. Treasury about the powers it needs to smooth any financial ructions if the country leaves the EU without a deal
• The German government is planning to extend the contract of Bundesbank President Jens Weidmann by another eight years when it expires at the end of April, according to people familiar with the matter
• The euro-area economy isn’t headed for a recession, even though softening momentum underscores the need for ECB stimulus, according to President Mario Draghi
• China’s central bank boosted injections via open-market operations to the most on record to meet seasonal demand for cash due to tax payments and major holidays
• Federal Reserve Bank of Kansas City President Esther George, who has been one of the most hawkish members of the central bank’s policy group, urged her peers to be patient and pause before considering additional rate increases.
• Sweden’s Social Democratic leader Stefan Lofven is poised for another four years in power after convincing the Left Party to support his new centrist government, shutting out the nationalists from influence

Asian equity markets traded mixed as the region struggled for firm direction after the tech-led gains on Wall St. and PM May’s Brexit deal defeat in parliament. ASX 200 (+0.4%) finished positive as gains in tech and financials eventually outweighed the weakness across the commodity-related sectors, while Nikkei 225 (-0.6%) suffered the fallout from a firmer currency. Hang Seng (+0.3%) and Shanghai Comp. (Unch.) conformed to the indecisive tone but with the mainland kept afloat for most the session after stronger than expected Loans and Aggregate Financing data, while the PBoC also conducted its largest ever daily net liquidity injection heading into next month’s Chinese New Year celebrations in which it cited rapidly falling liquidity due to tax payments. Finally, 10yr JGBs eked only minimal gains despite the underperformance of riskier assets in Japan and firmer results in the latest 5yr JGB auction.

Top Asian News

• BOJ Is Said to Cut Inflation Forecast on Cheaper Oil
• Another Xiaomi Stock Sale Adds Grease to $32 Billion Rout
• World’s Most Valuable Startup Takes a Hit From China’s Slowdown
• China Injects Record Funds to Counter Tax, Holiday Cash Demand
• Top China Fund Sees Bonds Trouncing Stocks Again This Year

Major European equities are mixed after trimming opening gains [Euro Stoxx 50 -0.1%] with outperformance seen in the FTSE MIB (+0.5%) where banking names are up, in particular UniCredit (+2.6%) at the top of the index following the Co. stating they consider their NPE coverage to be fully adequate. Sectors are largely in the green, with financial names outperforming; in particular the Stoxx 600 Banking sector is up by over 1% as some are interpreting the governments Brexit defeat as reducing the likelihood of Britain crashing out of the EU. Other notable movers include Hammerson (+1.7%) after being upgraded at Deutsche Bank and Ryanair (+2.1%) who are up in sympathy following United Continental Holdings posting a beat on their top and bottom line overnight; were subsequently up 6% after-market. Elsewhere, Deutsche Bank (+1.7%) and Commerzbank (+1.5%) are up following reports that German officials have spoken to watchdogs regarding a potential deal between the two.

Top European News

• Reckitt CEO Kapoor to Leave After 8 Years Capped by Setbacks
• BASF Is Said to Weigh Pigments Unit Sale as Rival Also Exits
• Denmark’s DSV Bids $4 Billion for Swiss Freight Rival Panalpina
• Banks Are Said to Seek Exemptions in Looming Romania ‘Greed Tax’
• Cineworld Slips; CFO Notes Cost of ‘80s’ U.S. Cinemas Refurbs

In FX, the DXY was little changed following last night’s advances in which the index attempted, but failed to breach 96.000 to the upside, while it creeps closer to the top of a 95.850-96.080 range.  Impetus for the buck was initially provided following yesterday’s comments from US Senator Grassley who cited USTR Lighthizer as US-China talks showed little progress in key issues. The dollar then came off highs as Fed hawk (and voter) George noted that it might be a good time to pause on rate hikes. Subsequently DXY fell to around 95.850 amid the Fed member’s shift in stance before recouping losses. In terms of technical DXY eyes its 100 DMA at 96.03 to the upside, though looking ahead, US retail sales have been postponed amid the ongoing US government shutdown.

• GBP – The calm after the storm as PM May’s deal was defeated by a historical 230 votes shortly before Labour leader Corbyn tabled a motion of no confidence (as expected), scheduled for 1900GMT today. The move higher came amid hopes that Article 50 will be extended past March 29th as PM May will attempt to conjure up a revised deal with the EU or face a hard-Brexit which is unfavoured by most UK MPs. However, the EU made it clear that renegotiations will not be open, while Commons leader Leadsom mentioned that the UK Government is not looking to postpone the Brexit date ahead of tonight’s vote of no confidence. The Pound was largely unreactive to Corbyn’s no confidence motion as the Conservative party and the DUP (alongside some Labour MPs) are likely to support the Government rather than amplify the chaos in Parliament. Moving on, on the data front, Sterling side-line the release of inflation figures which largely printed in-line with expectations. Cable currently resides just below 1.2900, just above its 100 HMA at 1.2857 after having tested the big figure to the upside on multiple occasions.
• EUR, JPY- Meanwhile, the EUR is relatively flat against the buck as a lack of fresh catalysts (and all eyes on Brexit) largely shelved the single currency as it moves in tandem to the greenback. EUR/USD further extends losses below 1.1450 and fluctuates on either side of the 1.1400 level ahead of its 50 DMA at 1.1380. Of note, 950mln in options expiries are seen at strike 1.1380-1.1400. Similarly, with the Yen overnight safe-haven driven gains were largely neutralised by the strengthening dollar as USD/JPY rises to the top of a 108.38-73 range with almost 1.7bln in option expiries scattered between 108.75-109.00.

• TRY – The Turkish Central Bank left rates unchanged at with their main rate at 24.00% while largely reiterating its tight stance, stating that the CB are to further monetary policy tightening will be delivered if needed. As such USD/TRY fell from 5.4134 to an intraday low of 5.3800 before pairing back a third of the move.

In commodities, Brent (-0.1%) and WTI (-0.5%) are drifting further into negative territory, with WTI losing the USD 52.00/bbl handle. As the positive market sentiment following yesterday’s 0.560mln draw in API crude inventories begins to fade; despite a 3% rally in the previous session on the back of this. Elsewhere, ARA region crude inventories rose 2.4mln/bbl to 51.3mln/bbl for the week ending January 11th. Markets will be looking ahead to today’s weekly EIA release, where crude stocks are expected to post a draw of 1.5mln. Gold (-0.1%) is relatively flat, but towards the bottom of it’s slim USD 4/oz range; as the dollar remains relatively uneventful and FX market reaction to the Brexit vote defeat is largely positive as the prospect of a no-deal has lessened. Separately, the US Senate has voted to advance a resolution which criticises sanctions on companies tied to Oleg Deripaska, which includes Rusal.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 23.5%
• 8:30am: Retail sales data postponed by govt shutdown
• 8:30am: Import Price Index MoM, est. -1.3%, prior -1.6%; 8:30am: Import Price Index YoY, est. -0.8%, prior 0.7%
• 10am: Business inventories data postponed by govt shutdown
• 10am: NAHB Housing Market Index, est. 56, prior 56
• 2pm: U.S. Federal Reserve Releases Beige Book
• 4pm: TIC Flows data postponed by govt shutdown

DB’s Jim Reid concludes the overnight wrap

I got back late last night from Brussels and I suspect that many more U.K. politicians and Brexit negotiators will be making the opposite journey in the days and weeks ahead. To cut to the chase the DB house view is that in spite of the biggest defeat for a U.K. government (432-202) on record in the big Brexit vote, last night’s news flow was very positive for the pound and very supportive of a soft Brexit.

We’ll come to why it was so positive but first the detail. Some 118 Tory MPs broke ranks to vote against the deal as did all 10 DUP members. PM May slightly outflanked the opposition and offered them the chance to hold a no-confidence vote today, which stole Mr Corbyn thunder a bit, but he promptly demanded one. This will likely be a non-event and actually gives the Government a chance to get a confidence-restoring win with the DUP and the hard Brexit ERG Conservative group almost immediately saying they’ll back the Government. Amusingly, the 6 hour debate and 7pm vote was scheduled to follow a short lunchtime bill today that asks for low letter boxes to be banned to save postmen’s backs and to stop them being attacked by cats and dogs. Hopefully this bill survives as it will be good to see that Parliament can still get other business done in the midst of such political turmoil.

The reason DB feels this was a positive night for Sterling was that PM May surprised by immediately agreeing to cross-party talks to determine a way forward on Brexit. The exact quote from May was “… if the House confirms its confidence in this government I will then hold meetings with my colleagues, our confidence and supply partner the DUP and senior parliamentarians from across the House to identify what would be required to secure the backing of the House. The government will approach these meetings in a constructive spirit, but given the urgent need to make progress, we must focus on ideas that are genuinely negotiable and have sufficient support in this House… if these meetings yield such ideas, the government will then explore them with the European Union”.

On the positive side, since there is a large parliamentary majority in favour of a soft Brexit outcome, possibly in the form of membership of the customs union, the odds of a market-friendly outcome have risen sharply. If you were looking for doubts though then you might say a) Mrs May comments were slightly vague in who she would have cross party talks with. Is senior Parliamentarians wide enough? Will it include Jeremy Corbyn?, b) is there a consensus for anything in Parliament that the EU would accept?, c) previously the Labour Party’s executive have said that if they can’t get a general election (they likely won’t after their first attempt tomorrow) they will move policy towards a second referendum. If such an outcome materialises it might confuse the issue. It would also result in a more binary outcome and increase the risk of leaving with no deal. It could be very positive or negative, and d) how will the Conservative Brexiters react to a softer Brexit? Do they have any power? So these and many more questions remain unresolved but on balance last night opened the way to much more benign Brexit.

On c) above, Sky News reported overnight that up to 100 Labour members will shift to calling for a second referendum today, in an apparent effort to pressure Corbyn into supporting one after the confidence vote likely fails. This might complicate cross-party talks as PM May made it quite clear when extending an olive branch that the U.K. is definitely leaving the EU, so we could reach an impasse very quickly if Labour adopts this strategy. Plus, May’s spokesman said that she remains committed to an independent trade policy, which would preclude a compromise deal that includes membership in the customs union. So it remains to be seen what sort of compromise could emerge from any cross-party negotiations.

DB’s Oliver Harvey has published a special report titled “It’s time to buy the pound,” available here . He outlines the current state of play and the main risks to the view, which are: a) May losing the confidence vote today, b) May reneging on her pledge to seek a cross-party compromise, or c) parliament’s deliberations resulting in a consensus for a second referendum. The last is probably the biggest risk, but Oli is still confident that the most likely scenario is a pivot toward a softer Brexit.

In market terms the pound had depreciated -1.31% ahead of the vote, as defeat for May looked likely, but it completely pared its losses versus the dollar after PM May’s speech and her apparent pivot toward cross-party compromise. This was helped by support announced in May’s favour in the confidence vote. Futures on the FTSE 100 traded -0.47% lower after the European close, reflecting the impact of the stronger pound. Sterling is trading largely flat (-0.06%) this morning.

In reaction from the EU to the Brexit vote, officials in Brussels ruled out the prospect of an extraordinary summit of the 27 EU leaders any time soon saying there’s little to discuss if lawmakers in the UK can’t decide what they want while most diplomats said they were stunned by the extent of the loss. Elsewhere, the EC President Jean-Claude Juncker told the UK, “Time is almost up” while, French President Emmanuel Macron said that the EU won’t offer any more concessions to the UK to solve “an internal UK politics problem” and added that ‘I will be very vigilant on that, we went as far as we could.”

Prior to last night’s main event it had for the most part already been a constructive session for risk assets, helped mostly by the China fiscal headlines from earlier in the morning. That said, there was some reasonable divergence across the main US equity markets with the NASDAQ (+1.71%) leading the way in part due to a price hike by Netflix which analysts deemed will be successful (+6.52%) while the NYSE FANG index (+2.72%) turned in its third >2% move of 2019 already. The S&P 500 finished +1.07% as banks lagged a bit (+0.78%) following JP Morgan’s results – more on that shortly – while the DOW closed up a more modest +0.65%. Earlier in the day we’d seen the STOXX 600 end +0.35% and the FTSE 100 +0.58% with the latter benefit from a weakening Pound during the European session.

Elsewhere credit markets were pretty quiet with US and European HY spreads ending -4bps and -2bps tighter respectively. Yesterday we published a short note detailing our updated spread forecasts in light of the moves in credit spreads since we published our 2019 outlook in mid-November. Our qualitative expectations of moderate spread widening by year end with a bear market rally in the first few months of the year still holds. Click here for the link to the report.

Treasuries ended up pretty much unchanged and appear to have finally found a floor for now in the 2.60% to 2.70% range. Bunds (-2.4bps) were a touch stronger although the reality is that they are still in the middle of the 12bps YTD range with ECB President Draghi doing little to shake things up – confirming that “recent economic developments have been weaker than expected and uncertainties remain prominent”. Elsewhere, BTPs (+3.1bps) actually underperformed despite reports of over €35bn of bids for Italy’s first syndicated deal this year (about 10% higher than a sale last year) and Italian bank stocks dropped -2.19% after Il Sole 24 Ore reported that the ECB is implementing new rules on non-performing loans. The banks will have seven years to fully provision for current and future potential losses. Gilts were down -3.9bps and tracked the Sterling move while the eye catching move in the commodity complex came once again from oil where WTI darted back up +2.93% following two days of declines.

Turning to Fedspeak, the most notable comments came from Kansas City Fed President George, who is a voter this year and has recently been the most hawkish member of the committee. She said that another hike “is not urgent” and that called for “patience in considering our policy actions.” So a definite shift away from the hawkish end of the spectrum and toward the center of the committee, which is consistent with no rate hikes until June. Separately, Politico reported that Liu He has formally accepted the invitation to meet with US officials in Washington on January 30-31, as expected. So the twin supports of a more dovish Fed and positive progress on the trade front continued to support markets yesterday.

This morning in Asia markets are trading mixed with the Nikkei (-0.58%) leading the decline on a strengthening yen (+0.18%) while the Hang Seng (-0.09%) and Shanghai Comp (-0.06%) are off their lows and trading flattish with the Kospi (+0.37%) up. Meanwhile, the PBoC injected CNY 560bn into the financial system on Wednesday, the biggest one-day addition on record, to meet seasonal demand for cash due to tax payments and major holidays. China’s onshore yuan is down -0.11% on the liquidity injection. In other overnight news, Bloomberg reported (citing sources) that the BoJ is almost certain to cut its inflation forecast for the fiscal year starting in April citing the sharp fall in oil prices, the government’s decision to make pre-school education free and looming cuts to mobile phone charges as the reasons. The BoJ’s next board meeting and policy decision is scheduled on January 23. Elsewhere, futures on S&P 500 are up +0.24%.

Coming back to yesterday and those JP Morgan earnings that we highlighted above, the bank’s share price opened -2.32% lower but rallied to close +0.73% after earnings missed. Similar to Citigroup the day prior, fixed income sales and trading revenues came in much weaker than expected and in fact down 18% yoy and the weakest Q4 revenue in a decade. This was partially offset by strong investment banking revenues, though loan provisions were larger than expected too. Wells Fargo shares fell -1.55% as revenues and expenses both disappointed and management said they expect to operate under the Federal Reserve-mandated asset cap through end-2019, rather than through June as previously expected. A reminder that today we get results from Bank of America and Goldman Sachs.

In other news, yesterday’s economic data in the US was softer than expected but didn’t appear to really phase markets. The January empire manufacturing reading printed at just +3.9 which compared to expectations for +10.0 and an upwardly revised +11.5 in December. That was actually the lowest reading since May 2017 while the expectations component (+17.8) also hit the lowest since February 2016. That also leaves the ISM-adjusted empire index at 51.9 and the lowest since January 2017. So a marked deterioration to start the year, but not a shift into contractionary or recessionary territory. It’ll be worth seeing if the Philly Fed district report conveys a similar message to this tomorrow.

In addition to that, the December PPI reading also aired on the disappointing side at both the headline (-0.2% mom vs. -0.1% expected) and core (-0.1% mom vs. +0.1% expected) levels. That said health care PPI was solid at +0.15% which therefore points to upside for the health care component of PCE inflation and therefore the broader core PCE, which our economists expect to print around 1.89% later this month (or later, depending on the US government shutdown).

Here in Europe the main data focus was Germany’s 2018 GDP reading which hit expectations at 1.5%. Importantly, that implies only modest growth for Q4 (but at least likely positive after recent fears of a negative print) and while our economists had expected some positive payback after the WLTP shock to push growth temporarily above trend in Q1 2019, they have seen very limited evidence of this so far and as such estimate Q1 GDP at around +0.25% qoq. The result of this is a downward revision to their 2019 growth forecast in Germany to 1% from 1.3% previously. Given the recent weakness in the Euro area macroeconomic data, the ECB President Draghi said in his address to the European parliament yesterday that the Euro-area economy is not heading towards recession but to a slowdown and “it could be longer than expected.”

Other than digesting the fallout from last night’s Parliament vote in the UK today and preparing for the confidence vote, we’ll also have the December inflation data docket here in the UK to keep an eye on this morning, while there’s also the final December CPI prints due in Germany and Italy. Given the government shutdown in the US the retail sales report is to be postponed along with business inventories, leaving the December import price index and January NAHB hosing market index data as the only releases due. The Fed’s Beige Book is also due out this evening. Meanwhile the Fed’s Kashkari is due to speak late this evening while the BoE’s Carney and ECB’s Nowotny speak this morning. Earnings wise it’s the turn of Bank of America and Goldman Sachs today.

 

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By all accounts, a historic defeat like the one suffered by Prime Minister Theresa May Tuesday night when the Commons overwhelmingly rejected her Brexit withdrawal agreement by a margin of roughly 230 votes, would have prompted a British leader to resign in disgrace. But these are not normal times.

Instead, May has vowed to press ahead with another round of negotiations, pledging to reach across party lines to try and hammer out a deal that would have a chance of winning approval in the Commons. However, even if she is successful, it’s still unclear whether the EU27 leaders would accept it. After the vote, EU Chief negotiator Michel Barnier told the EU Parliament that the likelihood of a chaotic no-deal Brexit was “higher than ever” (though he hinted that a compromise could be reached if May would budge on some of her ‘red lines’ – like the size of any future payments made by Britain to the EU, or its restrictions on immigration, or membership in the customs union or single market), according to RT.

French Leader Emmanuel Macron and a handful of other European leaders were slightly less forgiving: Macron has said that the EU has “reached the maximum” of what it can offer the UK and will not sacrifice European interests to help the UK resolve its internal squabbles, RT said.

Analysts and members of Parliament reportedly now expect Article 50 to be delayed (though that hasn’t yet emerged as the official position of May’s government or the DUP, the tiny Irish party propping up her government), the path forward is looking increasingly unclear.

And to add one more layer of complication, May is expected to face another vote of no confidence on Wednesday. But this time, the motion has been tabled in Parliament by the Labour Party. A loss could open the door to another general election, which would inject a fresh helping of chaos into the Brexit process.

Courtesy of the BBC

Though Tories widely expect May to prevail, with the DUP in her corner, May’s margin, according to Bloomberg, is just 13 votes (assuming all of the DUP backs her during the vote, which the party’s leadership said they would). With this in mind, it’s hardly surprising that Bloomberg described the vote as the British government’s “most dangerous crossroads in decades”.

Here’s what would happen if May loses, according to the New York Times.

If a majority of Parliament votes on Wednesday that they have no confidence in the government, Mrs. May would have 14 days to win back the support of lawmakers. Without that, an early general election would be triggered. (The no-confidence vote on Mrs. May’s government differs from a vote she faced in December, when members of her own Conservative Party tried to unseat her as party leader. She survived that vote, 200 to 117.)

If the no-confidence measure passes, the opposition could take power. But Mr. Corbyn is unlikely to have enough votes for the measure to pass, a reality that Labour politicians have themselves admitted.

Labour is going into the vote expecting to lose. But winning isn’t the point, as Barry Gardiner, a Labour member of Parliament, explained during an interview with the BBC.

“It’s not about a one off thing…what the public will be looking at is this is a historic defeat…and they will be saying in that circumstance if a government can’t govern, surely they should resign.”

Making things even more awkward, May is facing pressure to invite her arch-nemesis to negotiate. Jeremy Corbyn has already refused her offer, but it’s still possible that May will end up negotiating with senior Labour leaders to see whether there’s anything she can do to win their support.

Meanwhile, dozens of Labour MPs are pushing for a second referendum, something May has repeatedly refused to consider.

“The time is now to pivot to support a public vote on whether we should accept the deal or remain in the EU,” said Mike Buckley, director of Labour for a People’s Vote. “If Labour doesn’t shift its position, pro-EU lawmakers in the party are planning to propose their own amendment to the next Brexit vote.”

The possibility that Brexit could be canceled has gotten currency strategists excited, with an analyst at Makor Capital Markets warning that the odds of a no Brexit scenario have “dramatically increased.”

“A most uncertain outcome though (both in the immediate future and down the road) and that may be the rationale behind GBP’s impressive resilience after a short-lived fall in the immediate aftermath of the vote,” wrote Stephane Barbier de la Serre, Macro Strategist for Makor Capital Markets. “But another much more fundamental reason could be that the odds of a second referendum have now objectively dramatically increased. Arguably, we may not go there in a straight line but, mutatis mutandis, keep buying dips on GBP and British domestic companies with a domestic bias.”

Of course, the EU27 would like nothing more than to see Brexit cancelled (it would deal a serious blow to the rising tide of populism that has so alarmed Brussels). By now, many suspect that, if the choice is between no Brexit and no deal, there would likely be more support in Parliament for the former.

With this in mind, what incentive does the EU have to accommodate May?

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Authored by Charles Hugh Smith via OfTwoMinds blog,

If we follow the logic and evidence presented in these seven points, we are forced to conclude that the fractures in France, Germany and the EU are widening by the day.

When is a nation-state no longer a functional state? It’s an interesting question to ask of the European nation-states trapped in the devolving European Union. Longtime correspondent Mark G. recently posed seven indicators of dissolving national sovereignty; here’s his commentary:

“RE: The Ghosts of 1968 (February 14, 2018):

In France the “Ghosts of 1968” have become the Poltergeists of 2018. This looks like another real watershed in European and world history. Once again Parisian mobs have appeared and have collectively realized they now hold the real power. And their issues are all anti-EU (European Union) and anti-NWO. (New World Order)

I’m honing my German Collapse Scenario as more data flows in, as it is in ever-faster and larger quantities. ‘Germany’ will implode in parallel with the EU.

So-called ‘states’ with:

1. no effective military forces

2. no control of their own borders

3. no control of their currency and banks

4. a government with a ‘diverse’ population in which the majority either has no loyalty to Berlin (recent ‘refugee’ immigrants) or has dropped its loyalty (large parts of Bavaria and Baden-Wurttemberg), and which is also losing the allegiance of the many eastern European immigrants in Germany. These people are among the most energized opponents of the ‘refugee’ influx.

5. Fast rising anarchy and lawlessness by the recent ‘refugee’ immigrants, and which is well known to the population, as are the official orders to the police to minimize crime statistics reporting by not opening official cases.

and

6. A mass media believed by no one due to the bald lies it broadcasts 24/7 daily about numbers 1-5.

…will soon cease to exist. This is confirmed by:

7. The continuing spiral of the ruling post WWII political parties into their own political black holes. CDU/CSU on the right and SDP on the left have all lost their hold on the modern German population.

The biggest joke of all is that Theresa May is negotiating the terms of “Brexit” from the EU with a political corpse and not a viable polity.

Another round or lap is coming soon. Personally I think the only thing staving off another eurozone banking crisis is the absolute certainty that no imaginable German government can currently agree to the slightest external concession without risking an internal political collapse.

Thus all the various Eurozone elites involved are refraining from provoking such a crisis for calculated narrow reasons. This leaves it to a European mob in some capital to initiate it by confronting a national government with either internal political collapse or re-entering EU-wide monetary and fiscal conflict with the ECB/EU gang.

And yes, I’m sure you spotted the next part. Poland and Hungary acting on behalf of the Phoenix Rising Ersatz Austro-Hungarian Empire will twist the EU’s tail at that time as hard as they can for maximum regional advantage.”

The fracturing of Germany is conventionally viewed as somewhere between implausible and impossible, and the same can be said of France and Germany drifting apart and the EU dissolving: the mainstream is committed to presenting Germany, the German-French alliance, the euro and the EU as rock-solid.

Yet if we follow the logic and evidence presented in these seven points, we are forced to conclude that the fractures in France, Germany and the EU are widening by the day, and that the ceaseless propaganda spewed by the ruling elites isn’t mending the fractures or restoring the illusion of stability.

(Regarding the French yellow vest dissenters: the 80,000 mobilized security forces are intentionally seeking to incite violence to justify crushing the yellow vest dissenters with massive paramilitary force: French Democracy Dead or Alive?)

In the long run of history, the apparent solidity of 20 or 30 years can shatter very rapidly as populations under increasing financial and political stress default to much more enduring divisions and loyalties.

*  *  *

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Israel has confirmed it is in extensive talks with Egypt to build a new sub-sea natural gas pipeline between the two countries as part of a previously agreed $15 billion deal to export Israeli gas to Egypt over a decade. Most significant is that the new line would hugely expand Israel’s export capacity to its southern Arab neighbor, taking it far beyond the maximum 7 billion cubic meters per year currently able to flow through the existing EMG pipeline to Sinai. 

Israeli Energy Minister Yuval Steinitz proclaimed the ambitious project under negotiation to be part of broader “efforts to transform the eastern Mediterranean into an energy export hub on the doorstep of Europe,” according to Bloomberg.

“There’s no final decision yet, but there are talks,” Steinitz told Bloomberg while attending the Cairo-sponsored first East Mediterranean Gas Forum, a cooperative forum aimed at expanding east Mediterranean energy transformation and joint ventures.

Notably, oil ministers from Israel, Greece, Egypt, Cyprus, Jordan, Italy, and the Palestinian Authority took part, and are set to participate again at another meeting in April. Reporting from the conference, Bloomberg described a common agreed upon goal “to work together to monetize reserves by using existing infrastructure and adding more capacity.”

Also significant is that this marks the first time an Israeli energy minister has visited Egypt since 2011, when “Arab Spring” demonstrations eventually brought down Hosni Mubarak, ushering in uncertainty and chaos, including brief Muslim Brotherhood rule, which for the first time brought the future of Egypt’s peace treaty with Israel into question. 

Steinitz described further to Bloomberg that, “Construction could begin as early as next year on the pipeline that would transport gas from Israel’s offshore Leviathan and Tamar fields to Egypt’s existing liquefied natural gas plants for processing and re-export.”

And separately, concerning the bigger project of the sub-sea East Med pipeline supplying energy-hungry Europe — first proposed by Greek energy minister Yannis Maniatis in 2014 — Steinitz confirmed it is moving forward, touting the ambitious project  as “the longest and deepest gas pipeline in the world,” and an initial estimated cost of $7 billion, to be financed by “private companies and institutional lenders,” according to the Israeli energy minister. 

The underground, sub-sea pipeline is proposed to connect Israel, via Cyprus, to Greece and Italy, in a massive construction project estimated to take five or six years to complete, with work to begin as early as next year. 

The transformation of the eastern Mediterranean into an “energy hotspot” could have huge global geopolitical implications, especially given that currently the E.U. relies on Russia for a third of its gas. It’s especially southeast Europe that’s been entirely reliant on Russian gas, given its lack of infrastructure.

In the past during shortages — or especially during a rare January 7, 2009 delivery shutdown by Gazprom – southeastern European countries experienced industrial shutdowns as well as broad swathes of residential areas without heat, victims of worsening tensions in Ukraine. No doubt the EU ministers that have driven the major East Med pipeline have as a prime motivator Europe’s energy independence, something Israel is keen to push forward as well, given its own delicate diplomatic dance with Russia in Syria and the broader Middle East. 

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Authored by Raul Ilargi Meijer via The Automatic Earth blog,

There will be elections for the European Parliament on May 23-26 2019. They will likely change the face of Europe more than anything has done since the EU was founded. That is not some wild prediction. Many European countries have held elections since the last European elections in 2014, and just about all had outcomes that shook up domestic political ratios.

In most cases, countries went from traditional parties to newly founded ones. France erased the Socialists and center-right in 2017, and the final round of the presidential elections was between Marine Le Pen’s Front National and Emmanuel Macron’s brand-new En Marche. Macron won sort of by default, because France as a country would never have voted for Le Pen.

In Italy, M5S and Lega have taken over. In Germany, Merkel’s CDU/CSU coalition lost bigly though it remained the biggest party, but Angela lost her ‘socialist’ SPD partner which gave up so much it didn’t want to be in government anymore. In Spain, Mariano Rajoy’s center right lost enough to cede power to the Socialists who came up tops because they played a smart game, not because the Spanish wanted it to rule.

We don’t have to go through all 27/28 different countries to establish that there are almost tectonic shifts happening all over, away from traditional parties and towards whoever showed up without insanely extreme views. And if you think this move is now completed, you may want to think again.

It’s amusing to realize that the country with the biggest political shift, the UK, is the only one that still hangs on to its traditional parties, and seeks its protest voice in a different way, namely through Brexit. That is, Britain shows it can get no satisfaction from the EU, whereas in the other major EU nations the dissatisfaction is projected onto domestic parties.

The underlying thought is the same: people are fed up with incumbent politicians and their affiliation with the European project. And nobody in Brussels really appears to be willing to realize this: the only thing they talk about is more Europe. But all these changes will now be reflected in the power politics of the European parliament.

And they do know that. They just hope they can limit the damage through the model in which power is divided in Europe. And to get any of that power, national parties need to find partners from other countries to form European parties (blocks) with. You need parties from at least 7 other nations to run for the European Parliament.

There are really only two parties in that parliament that really matter: the center right European People’s Party (EPP) which has 217 MEPs (members of European Parliament), and the center-left Progressive Alliance of Socialists & Democrats (S&D) which has 190 MEPs. Then there are the European Conservatives and Reformists – 74 MEPs, the Alliance of Liberals and Democrats for Europe (ALDE) – 70 MEPs, the European United Left/Nordic Green Left (GUE) – 52 MEPs, and the European Greens/European Free Alliance – 50 MEPs.

These numbers, like the national ones, are set to change, a lot. How exactly is hard to predict, because it’s not clear which block which -relatively- new party will be part of. But it’s not a wild guess to think that at the end of May the division of powers will not be left vs right (both of which are pretty much fake anyway), but pro-EU and anti-EU. Or rather, More Europe vs Less Europe.

Germany’s up-and-coming real right-wing AfD at their conference this weekend voted in a resolution that calls for getting rid of the European Parliament itself, calling it undemocratic, and claiming the “competence to make laws is exclusively for nation states.” Similar sentiments play out in Italy, Poland, Hungary and many other member states.

Given the changes in vote ratios mentioned before, it’s hard to see the More Europe model survive the elections. But that of course doesn’t keep the main parties (blocks) from running outspoken pro-Europe candidates to replace Jean-Claude Juncker as head chief after the elections. The EPP has German Europe stalwart Manfred Weber as ‘Spitzenkandidat’, the so-called Socialists/Democrats have Dutch Frans Timmermans, Juncker’s right-hand man.

They think they will be able to continue business as usual, and accumulate more power and sovereignty in the process, while support for the EU crumbles more by the day. But that’s all in the far far future, that is a whole 4 months away. And who knows what Europe will look like by then? Brussels sure doesn’t seem to know, or want to.

In Germany, the entire political system will have to reinvent itself after Merkel. And as said before, with an entire new look as far as vote numbers go. Far right and the Greens are on their way to becoming new power blocks, the Christian center right CDU/CSU and the formerly left SPD are on their way to much less support.

This is a pattern that plays out all over Europe, but what happens in Germany is, because of the way the EU is set up, crucial for all EU member states. Nothing happens in Europe without approval from Berlin. And what will the other 26 remaining members do when that level of power moves towards the AfD?

Of even more immediate concern may be Germany’s economic performance. Because the latest signs are not encouraging. Germany and Holland have done very well, but that is because they have all the others as their ‘domestic’ market. And now not even that turns out to be enough. Germany’s numbers are going down fast:

Then again, for now, worries about Germany will be trumped by those about France and Britain. The numbers of Yellow Vests in the streets of France was much larger again the past weekend than the last few ones. Macron keeps on making ever bigger mistakes. This Saturday, his riot police was filmed carrying semi-automatic weapons with live ammo. As he claimed that many of his people want to get things without making any effort.

Macron all along has tried to drive a wedge between the protesters and the people. But a large majority of the people support the protests, even if they don’t don a yellow vest. Still, Paris claims that the protesters are not the Republic, and they’re trying to overthrow democracy. When the Yellow vests approached government buildings last weekend, government spokesman Benjamin Griveaux fled, saying: “It wasn’t me who was attacked, it was the Republic.” Ergo: Not the people are the Republic, the government is. That should sell well.

For a very large number of French this sounds like they are not actually considered French by their own government. And now Macron insists on holding a national debate, in which everyone can have their say, but at the same time he insists he will not change his policies, which are what the Yellow Vests are protesting in the first place.

What they see is that Little Napoleon hasn’t hardly appeared in public for a very long time (big no-no!), but he does try to dictate to them what democracy is, and then in the same breath that they only have the choices he gives them. Protests are only allowed if the government gives permission, Paris proclaims.

Macron has cancelled his spot in the upcoming Davos spectacle for the wealthy and powerful, and I bet you the thought has crossed his mind that if he went he wouldn’t be allowed back in to his country. Not decisive, but that thought surely counts. He’s seen the whole Let Them Eat Cake scenario play out in his mind’s eye. Before putting his hand over his heart while looking in the mirror.

Macron does everything wrong than he can. And in that France has a lot in common with our for now last topic, subject, victim, take your pick, the UK.

Theresa May has lost another vote, and more chaos is guaranteed. Both the Leave and the Remain camps, opposites as they are, are divided into countless other camps, and there is no way there will ever be an agreement. You’d have a hard time finding even just two people who think Brexit means the same, let alone millions.

I wrote earlier today I wondered how come Britain is so quiet in the face of that, with the Yellow Vests example just a few miles away. And I really don’t know. Maybe we’ll find out tomorrow. The EU has hinted Brexit may not happen until the summer, not on March 29. But that’s the EU, and that’s what the Brexit vote was meant to move away from, not let them dictate even more.

Theresa May basically sat on her hands for two years, and wanted to do the work in 6 months, but that was always going to be a pipedream. The UK, in 40-odd years of EU membership, signed up to thousands of pieces of legislation, which contain hundreds of thousands of pages of legalese. All that must be checked, if need be changed, negotiated about, voted on, etc.

Not something anyone can do in half a year, and that has nothing to do with liking the EU or not. May has held her country hostage for the entire time she’s been PM, and she does that even more now, as she’s saying it’s either her deal or no Brexit at all. She’s decided No Deal is not an option. Which may be wise in view of all those documents, but who is she to decide eth entire nation future for decades to come? She wasn’t even elected as PM.

We’ll know more tomorrow after that Parliament vote, which May lost. Or will we? If Brussels accepts a major delay in Brexit, chances are May will stay in office, and we’ll have 4-5-6 more months of the same road to nowhere. Second referendum, general election? Poisoned chalices all of them.

Nothing will change either. All possible outcomes are guaranteed to have a large group of people standing against them. All options will create the appearance of a small group of people dictating life-changing events for everyone else.

Where are the British Yellow Vests? The mayor of Poland’s second-biggest city, Gdansk, was stabbed to death in public on a stage where he held a speech, Is that where we’re going?

And lest we forget, what happens in Europe is not very different from what happens in the US; things merely play out slightly differently in different locations. In the US, as in the UK, there are no whole new parties taking over, no AfD and Macron and Yellow Vests and Salvini, but there is Trump and Brexit.

The common denominator is people’s anger with the economic models that leave them scrambling to make do, all the while seeing their lives being taken away from them bit by bit while whoever’s in power keeps bankers and other rich folk contented.

It’s not much use seeing all this as separate incidents or developments. It’s a big wave that will reshape the world as we know it. Let Them Eat Cake has gone global, and there’s not nearly enough cake to go round.

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