Author: admin

Authored by Nick Colas via DataTrekResearch.com,

Earlier today we ran into a former colleague who now serves as a risk management consultant to the hedge fund industry. I can’t tell you much about this person for obvious reasons, except to say that they fit the classic definition of someone you should listen to: they talk to the right people. And, even more importantly, the right people pay our gal/guy for their views.

Over the course of a wide-ranging conversation, we gleaned the following from “Lou” (what we’ll call our source):

On Wednesday’s meltdown: hedge fund de-risking drove much of the late-day selloff. This makes sense to us for two reasons. First, Tech led the way lower and that’s been a popular hedge fund trade all year. Second, no one sells a down 2% day unless someone is telling them they have to reduce risk immediately.

On Trump and the Fed: Lou feels that President Trump’s increasingly critical commentary regarding Chair Powell’s rate hikes is causing part of the latest bout of US equity market volatility. Essentially, the Fed may have to raise rates further than justified just to prove their independence. And that’s not good for the Fed, the President, or the US economy and capital markets.

US midterm election: Lou is concerned that US equities will remain volatile into midterm elections on November 6th. It is a hard event to position for in hedge fund land. If the Republicans do manage to hold on to the House, US stocks should rally (so you don’t want to be too short). If the GOP loses the House (as expected), the market response is uncertain (and you won’t want to be too long). Asset prices may even head lower depending on the magnitude of the GOP loss and the rhetoric coming out of the Democrats.

Also in the mix: mid quarter redemption notices from hedge fund investors, due by November 15th. It has been a hard year to have a differentiated investment edge, and many funds are doing poorly. Even more so after yesterday’s forced selling, by Lou’s approximation. Some funds are even worried about their survival if they receive too many redemption requests.

Lou’s odds of a new 2018 low for the S&P before the end of the year: higher than 30%. Like all good risk managers she/he has no structural view on equities, but rather assesses the tape as it comes. Lou is advising clients to be very cautious just now and not try to call a “V bottom” but rather take down exposure (long and short) and live to fight another day.

In the end, we took away three conclusions from our time with Lou.

#1. US equity hedge funds still have the market influence to set closing prices and drive market volatility. Keep in mind that smaller funds (and there are thousands) can flip positions on a dime. The same people selling Tech into the close yesterday might have bought today’s open.

#2. Since many funds are flat or even down on the year, there will be tremendous pressure on them to make something between now and year-end. Midterm elections are a tradable event, so look for more volatility into early November. And since traders seek out volatility one would expect markets like energy, Tech stocks and VIX-related products/options to see larger price swings.

#3. All this adds up to continued US equity market volatility, as we highlighted in yesterday’s Data section. We were a little taken aback by the thought that the S&P 500 has a +30% chance of making a fresh 2018 low. But then we realized that’s why hedge funds pay Lou for her/his advice. Considering the outlier event and planning for it… That’s what risk management is all about.

via RSS https://ift.tt/2CHkg4v Tyler Durden

According to the latest data from China’s SAFE, net FX outflows from China picked up to US$21BN in September (vs. US$11BN in August) and the highest since mid-2017 with Goldman noting that “outflow might have increased moderately further in October, but has unlikely reached the level seen in late 2015/early 2016 in our view.”

It may not have reached the furious outflows from the peak of the post-depreciation period, but as Goldman concedes, this risk will rise over time if the authorities continue to resist interest rate differential-driven depreciation pressure.

And, to counter the risk of a return to China’s dramatic outflow phase, Reuters writes this morning that China is likely to resume selling some of its vast $3 trillion currency reserves to stop any precipitous fall through the psychologically important level of 7 yuan per dollar “as it could risk triggering speculation and heavy capital outflows.”

Indeed, as noted in our morning wrap, on Friday the yuan hit a fresh 22-month low of 6.9641 against the dollar. Additionally, earlier in the session the offshore Yuan tumbled as low as 6.9769 after the PBOC fixed the onshore Yuan north of 6.95 and weaker than consensus expected, at which point however Beijing intervened, when at least one big China bank sold the US dollar in the afternoon, prompting the yuan to reverse loss, and triggering stop-loss orders by short-sellers of the yuan.

And with the Yuan just inches away from the key level of 7.00 vs the dollar, dropping 6% against the dollar so far this year, reflecting its slowing economy as well as pressure on exports due to an ongoing tariff war with the United States, Beijing is starting to sweat.

According to Reuters, to counter any potential spike in outflows, “a defense of the yuan at 7 per dollar would be mounted to show investors that the authorities wouldn’t allow a runaway market.”

“If the yuan falls through 7, there could be a rapid depreciation of the exchange rate”, said one policy insider. “In order to avoid such a passive situation, the authorities are likely to step in the market to stabilise the yuan.”

And, according to a second Reuters source, should the Yuan hit 7.00 against the dollar, the PBOC would make a stand, rather than allow any sudden break through a psychologically important level to feed pessimism among investors.

“The central bank will intervene – intervene directly or indirectly. It’s necessary. The central bank has many policy tools. We cannot let the yuan fall past 7, as it would have a psychological impact on people,” the second source said.

That said, China is now juggling two opposing tasks, with Beijing’s priority now to ward off a sharper slowdown in the economy, which grew only 6.5% in the third-quarter, while at the same time it is worried about the impact of the weaker currency on capital outflows.

To address the slowing economy, the central bank has cut reserve requirements for lenders four times this year, and is expected to ease monetary policy further, while on the fiscal side the government has pledged more tax cuts next year to support growth. Those actions, however, have caused the yuan to weaken to just shy of a decade low.

Should the PBOC loosen monetary policy further to depreciate the yuan more in order to bolster sagging economic growth, policymakers will be on guard against spooking markets as the exchange rate nears 7 per dollar, a third Reuters source said.

“We need to loosen monetary policy and should allow the yuan to depreciate to help expand exports, otherwise it will be more difficult,” the source said. “But they (the authorities) will pay special attention to the psychological effect of breaking the 7 per dollar level.”

The good news is that if China does revert to its currency defense posture from 2015/2016, when it burned through $1 trillion in reserves to halt outflows, it still has a sizable cushion, even if as noted last week, they have started to decline again: as a result, traders are closely watching to see if China’s foreign currency reserves fall below $3 trillion, having slipped to $3.087 trillion last month.

Specifically, reserves fell $52.9 billion in the first nine months of 2018 – with 43% of the drawdown happening in September, but the scale of the decline is dwarfed by a record annual drop of $512.7 billion in 2015, showing the authorities have been far less interventionist.

Meanwhile, and as one would expect, capital outflows have picked up as the yuan moves closer to the key 7 per dollar level, with net foreign exchanges sales by China’s commercial banks rose to $17.6 billion in September, the highest in 15 months.

That number will only rise as the Yuan weakens further, sparking the same dynamic that was observed in the months ahead of the Shanghai Accord in early 2016.

Meanwhile, so far this year, Chinese policymakers have been less interventionist on the yuan than they were in 2015, as a weaker currency helps cushion a slowing economy and take some of the sting out of higher U.S. tariffs, even though Beijing has rejected talk that it’s deliberately pushing down the yuan to spur exports.

The good news is that should China engage in a full-blown defense of the Yuan, Trump will be happy as it will mean his crusade to stop Beijing’s “devaluation” of the Yuan will have succeeded. The US president may not be so happy however, if the selling of hundreds of billions of USD-denominated assets leads to an acceleration in the global market rout, in a repeat of what happened in early 2016 when global market tumbled sharply and only coordinated intervention from the world’s central bankers prevented a global bear market.

Trump will most certainly not be happy if a sudden dump of US Treasurys by Beijing results in a sharp spike higher in US interest rates.

And now that China has set an intervention “trigger” bogey, FX traders will quickly test just how serious Beijing truly is. Expect the USDCNH to hit 7.00 in days, if not hours. What happens after could set the tone for risk returns for a long time.

via RSS https://ift.tt/2Rk1kNp Tyler Durden

Back in June, Nomura’s head of cross-asset strategy, Charlie McElligott, recommended two tactical trades: one has worked, the other has not.

One was a “structural shift” call according to which we were transitioning into the final “Financial Conditions Tightening Tantrum” phase 2 of a “Two Speed Year” thesis, and even included the “Tantrum” call at the end of October. However, his tactically-bullish SPX 1 to 3 month view in large-part based upon belief that rates would resume their selloff after the expected “tantrum” (i.e. NOW) has been, in his words, “hot-garbage” — especially the part where he said cyclicals could rally over defensives even if Growth Tech/Comms sold-off.

McElligott concedes as much in his latest morning note, coming hot on the heels of the next “risk-off” down-trade as former equities leadership (and massively-crowded “Growth Longs”) in Tech/E-commerce finally “crack” on earnings disappointments (AMZN and GOOGL) “and crunches both Equities investor performance- and psyche- further, with Spooz back to Wednesday’s lows.”

As a result of the latest tech-wreck, the macro “gross-down” gaining steam resulting into two specific trades:

• Havens USTs / Gold are again rallying, against positioning that has seen them as MONSTER shorts from the leveraged community
• Conversely, former / recent legacy macro “Max Longs” in U.S. Equities and Crude are seeing more capitulatory selling

So what happens next?

According to McElligott, next week is “make or break” on the rest of the year SPX “rally” trade, “especially after what should be today’s potential CAPITULATION in Equities “Growth”—positioning has been RINSED; majority of the buyback resumes; seasonality and mid-term “bullish” analogs “kick-in”; and VIX curve inversion “bull signal” should GO all against more CRITICAL data in the form of CPI to get the positive growth-and inflation- related move higher in yields resuming.“

That said, if equities are unable to rally over the next week, the Nomura strategist expects that a “retest of the year lows (2550) is an inevitability as late-comers further capitulate” for two reasons:

• The “80th to 90th %Ile “Gross Exposure Levels” for both Equities Long-Short- and Mutual- Funds are further de-risked by mechanical VaR / risk-management “book down” behavior
• At same time, we would move ever-close to the next wave of Systematic rules-based deleveraging as well with stock momentum collapsing—2631 is the next CTA “sell level” from here to go down to just “14% Long”; as of TODAY, a move and close below 2577 would see the CTA Trend position flip to outright “-100% Max Short”

Whether or not this happens will ultimately depend on whether the market’s Macro “big picture” assessment changes. Here are some of McElligott’s latest takes on where that stands currently:

• The U.S. short-term Rates market over the course of the past two weeks has again suddenly priced-in anywhere from a “Fed Pause” or even an outright “End to the Hiking Cycle” in 2019 / “Beginning of Easing Cycle” in 2020, while U.S. Equities have even more “jarringly” priced-in a “Negative Growth Shock” if not an explicit “Recession”
• The sequencing of catalysts for this reversal: the powerful “bearish rates” movement back at the start of Sep was the big AHE beat; then the powerful uptick in “hawkish” Fed rhetoric—especially with regard to the “neutral rate”; then it was the mega standard deviation +++ beats in ADP and ISM Non-Manufacturing at the start of Oct (“overheating”); finally it was Fed Chair Powell’s commentary that we would likely be running well-above “restrictive” that jarred the world into this “POLICY ERROR” scare
• Same update, different day: the 2019 Eurodollar calendar spread is now only pricing in 40bps of Fed hikes next year (down from an implied 60bps of hikes just 3 weeks ago, and all vs the Fed’s dots at 75bps); the 2020 Eurodollar calendar spread remains inverted, thus implying 2020 Fed “easing” on the margin
• Now further-complicating matters are last night’s disappointments from the last of the U.S. Equities “Generals,” as e-comm darlings AMZN and GOOGL disappointed in earnings against increased spending; this further throws into question the multi-year legacy consensual positioning of “Max Long Secular Growth vs Short Cyclical Growth,” thus with the potential to drive a new leg of Equities portfolio de-risking.

via RSS https://ift.tt/2CEZbYs Tyler Durden

“The good news is: It’s Friday. The bad news is: everything else.” For traders, Bloomberg’s summary of today’s early morning action couldn’t be more spot on.

On the last day of a turbulent week, global market turmoil is back with a vengeance and traders in the US are greeted by another sea of red as stocks in Europe renewed their plunge along with Asian shares and U.S. futures as the tech-wreck returns after  disappointing results from technology giants Amazon and Google slammed sentiment one day after a torrid dead cat bounce.

Disappointing Amazon and Alphabet results reignited investors’ anxieties about the overwhelming dominance of tech stocks – prized for seemingly unstoppable growth – in this market cycle, as well as peak earnings with e-commerce revenue growth now clearly rolling over. “There’s a huge amount of hot money in the FANG stocks,” said Christopher Peel, chief investment officer at Tavistock Wealth, and now it’s clearly going out.

The rosy picture of U.S. indexes finally ending their 6-day losing streak faded very quickly with Asian equities falling again, and after yesterday’s solid bounce, S&P futures were trading below the Wednesday session lows with the Nasdaq once again inside correction territory, down over 10% from its September highs.

The MSCI All-Country World Index was down 0.3% after trading began in Europe. It was set for its fifth straight week of losses, its worst losing streak since May 2013. “Expectations for US company earnings are quite high, so whenever they are not being met, the reactions are quite severe,” said Miraji Othman, credit strategist at BayernLB. “We have grown used to solid numbers, 18 percent revenue growth, 25 percent revenue growth and so on. The valuations have become quite ambitious.”

“You’re going to see a lot more volatility,” Con Michalakis, chief investment officer at Statewide Super, told Bloomberg TV in Sydney. “It’s going to be a feature of this environment.”

In Europe, Thursday’s rebound proved a brief respite as the Stoxx Europe 600 Index headed for the biggest monthly decline since the US downgrade in August 2011, with all sectors in the red and tracking a decline in U.S. futures after tech stocks Alphabet and Amazon missed results expectations, further sapping risk appetite as European earnings also disappointed with Valeo harshly punished. 

The Stoxx Europe 600 fell 1.6% with Germany’s DAX down 1.7% and France’s CAC 40 down 2%. Overall the third-quarter earnings season has been marred by rolling sell-offs across global markets and sharp downgrades to earnings estimates.

Three main issues were plaguing European companies overall: rising costs from raw materials and wages, new trade tariffs, and a slowdown in China. Wary analysts were downgrading their earnings estimates for MSCI Europe at their fastest pace since Feb 2016.

Shares in French auto parts maker Valeo sank a record 20% percent after its second profit warning in three months, flagging disruption from tougher European emissions tests and a sharp sales downturn in China. Peer Faurecia also tumbled 7.7% after it announced an agreement to buy Japanese car navigation system maker Clarion from Hitachi. The autos & parts sector index fell 2.3 percent, the worst performer.

In other disappointing results, Europe’s biggest appliance maker, Electrolux fell 7.3% after it trimmed its market demand expectations and forecast higher costs due to increasing raw material prices and tariffs. Shares in French household appliances maker SEB also fell 9.4 percent, their worst day since 2012, after it cut its revenue guidance due to a “difficult environment” with FX and raw material costs rising. “If on one side the valuation is interesting and the top-line momentum is strong, we… need more visibility on the operating leverage in a more competitive market context,” wrote Equita analysts.

Results from banks were more mixed after more encouraging results from UBS had boosted it in the previous session. Spain’s Banco Sabadell topped the IBEX with a 4.3 percent gain after its third-quarter profit beat expectations. Britain’s RBS meanwhile tumbled 4.5 percent after it warned of economic uncertainty and its profit lagged forecasts

Earlier in the session, Asian shares sank deeper into a bear market, with Japanese stocks sliding more than 5% this week. MSCI’s index of Asia-Pacific shares outside Japan dropped 0.9%, erasing gains made in the opening hour and hitting its lowest level since February 2017. The MSCI Asia index has been bruised by a sell-off in the past several days, and is on course for its fifth weekly loss – its longest losing streak since 2015. It has fallen more than 4% this week amid concerns the global tech bubble has burst.

Over in China, shares were pulled lower and the yuan fell past 6.96 to the dollar, touching its weakest level against the dollar since December 2016, before the National Team stepped in, however despite a solid last hour push, it failed to bring the Shanghai Composite to the green….

… while the tumbling Chinese Yuan suddenly reversed its losses abruptly to trade stronger when at least one big China bank sold the greenback in the afternoon. The big lender’s selling triggered stop-loss by short-sellers of the yuan according to Bloomberg.

Elsewhere, on Hong Kong, the Hang Seng index was 1.1 percent lower, with tech shares dropping 3.13 percent. Tech firms also fell in South Korea, where the broader market slid 1.75 percent. The Kospi had earlier touched its lowest level since December 2016. Australian shares ended flat. Japan’s Nikkei stock index closed 0.4 percent lower, ending the week down 5.98 percent.

Markets remain on edge after more than $6.7 trillion was lost from global equities’ value since late September, as lofty expectations for earnings were tested amid heightened trade tensions and tightening financial conditions. The focus now turns to U.S. GDP, consumer-price and consumption data later Friday amid debate about the Federal Reserve’s policy path.

Emerging markets have suffered the worst monthly losses since May 2012 as increased volatility in the run-up to U.S. midterm elections ended a nascent rebound from a $5.5 trillion sell-off. Currencies were poised for a weekly drop and bond-risk premiums rose. The MSCI Emerging Markets Index declined for the 15th time in 20 trading days this month. Asian emerging markets were the worst performers and were on course for the worst year since the financial crisis. The Thai baht and South Africa’s rand led Friday’s losses among currencies, while Indonesian bonds trailed peers in the local debt markets. October has seen global assets fall in step, a departure from the first nine months of the year when much of the pain was felt in emerging markets amid concerns over the U.S.-China trade war and Federal Reserve tightening. World equities have erased $15 trillion, or 17 percent, of their value since January, with China alone losing $3 trillion

* * *

In currency markets, the euro fell after ECB President Mario Draghi said the bank’s 2.6 trillion-euro ($2.96 trillion) asset purchase program would end this year and interest rates might rise after next summer, despite fears about the monetary union’s economic and political future. The single currency was 0.2% lower at $1.1351.

Stock rout and PBOC comments over restrictions on using support tools for bond financing in some sectors with overcapacity kept the Antipodean and commodities currencies under pressure. The Aussie slipped to a two-year low and the dollar touched its strongest level since June 2017.

Meanwhile, the dollar extended its rally, staying at the highest since June 2017 as risk appetite remained under pressure. The Bloomberg Dollar Spot Index touched a higher high for an eighth day, the first time in six months; the gauge rose 0.2% to take gains for the week to 0.8%, its best performance since August.

Traders expect a strong reading of U.S. gross domestic product data on Friday, which could see the dollar strengthen.”Today’s robust U.S. GDP will illustrate to the market the deep division between the U.S. and the euro zone when it comes to growth performance,” said Commerzbank analyst Thu Lan Nguyen.”

Antipodean currencies lead losses in G-10 currencies as sentiment was dented with stocks in the red and after China’s central bank said financing support for some companies will be limited.

The British pound was near seven-week lows against the dollar on Friday and three-week lows against the euro, as doubt grew about whether the UK and the European Union can clinch a Brexit deal. Bloomberg, citing people familiar with the matter, reported on Friday that Brexit talks were on hold because Prime Minister Theresa May’s cabinet was not close enough to agreement on how to proceed.

U.S. Treasury yields fell as equity markets plunged. The 10-year yield fell to 3.0774% percent compared with its U.S. close of 3.136 percent on Thursday. Core European bonds gained and gold rose to a three-month high as the risk-off mood spread.

Oil prices headed for a third weekly loss after Saudi Arabia warned of oversupply and the slump in stock markets and concern about trade clouded the outlook for fuel demand. U.S. crude dipped 1 percent to $66.68 a barrel. Brent crude fell 0.73 percent to $76.33 per barrel.

Expected data include GDP and University of Michigan Consumer Sentiment Index. Aon, Colgate-Palmolive, Phillips 66, Moody’s and Ventas are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 1.1% to 2,658.25
• MXAP down 0.4% to 146.26
• MXAPJ down 0.9% to 461.97
• Nikkei down 0.4% to 21,184.60
• Topix down 0.3% to 1,596.01
• Hang Seng Index down 1.1% to 24,717.63
• Shanghai Composite down 0.2% to 2,598.85
• Sensex down 0.3% to 33,584.39
• Australia S&P/ASX 200 up 0.02% to 5,665.16
• Kospi down 1.8% to 2,027.15
• STOXX Europe 600 down 1.2% to 350.76
• German 10Y yield fell 2.8 bps to 0.37%
• Euro unchanged at $1.1375
• Italian 10Y yield fell 11.0 bps to 3.12%
• Spanish 10Y yield fell 0.5 bps to 1.582%
• Brent futures down 0.6% to $76.40/bbl
• Gold spot up 0.4% to $1,236.88
• U.S. Dollar Index down 0.1% to 96.62

Top Overnight News from Bloomberg

• U.K. Prime Minister Theresa May’s Cabinet is not close enough to agreeing a way forward for top level Brexit negotiations to resume, even as time is running short to reach a deal, according to people familiar with the matter. There will almost certainly be no new plan put forward by the British side before next Monday’s budget
• A no-deal Brexit would mean a difference of 1.6 percentage points to U.K. growth next year
• Some Bank of Japan officials are comfortable with yields on 10-year government bonds fluctuating further above their zero percent target than the 0.2 percent assumed by many investors, according to people familiar with the matter
• If Britain leaves the EU without an agreement, reverting to WTO’s most-favored-nation status rules, gross domestic product would increase only 0.3% in 2019, according to the National Institute of Economic and Social Research said
• The Italian government could use about EU15b of funds allocated but not spent by previous administration to aid banks if they’re at risk due to holdings of Italian state debt, La Stampa reports, without saying where it got the information
• Two Federal Reserve officials who vote on rates this year downplayed the effects on the economy of the rough October for U.S. stocks, saying the market turbulence would have to be sustained to alter their outlook for growth
• China’s forex reserves and stable fundamentals will keep yuan stable, Market News reports, citing Pan Gongsheng, head of State Administration of Foreign Exchange, as saying
• Australia is on track to ratify a new Pacific trade deal by Nov. 1, the country’s trade minister said, a move that would trigger the first tariff cuts this year in an 11-nation accord that survived an exit by President Donald Trump
• China’s government has told at least two of its state oil companies to avoid purchasing Iranian oil as the U.S. prepares to impose sanctions on the Persian Gulf state, according to people with knowledge of the matter

Asian stocks were broadly negative as early attempts to nurse the prior day’s sell-off and replicate the rebound seen on Wall St, were thwarted amid Amazon revenue disappointment which weighed across equity futures. ASX 200 (Unch) traded choppy but managed to pare back losses towards the end of the session and Nikkei 225 (-0.4%) failed to hold on to opening gains as the Japanese benchmark gradually deteriorated with earnings dominating news flow. Elsewhere, Shanghai Comp. (-0.2%) and Hang Seng (-1.1%) both conformed to downbeat tone, although the mainland briefly outperformed after this week’s substantial liquidity injection and with China also said to be considering additional tax and fee reductions including a VAT adjustment. Finally, 10yr JGBs eventually traded higher amid the widespread risk-averse tone in the region and with BoJ’s present in the market for JPY 1.1tln in 1yr-10yr JGBs.

Top Asian News

• Chinese $640 Billion Share-Pledge Risk Looms on Banks, Brokers
• Dealmaker to Tech Stars Has Record Flop After Hong Kong IPO
• The 1% Mark on Japan Yields Isn’t Enough to Sway Dai-Ichi
• Some at BOJ Are Said to See 10-Year Yield Limit Higher Than 0.2%
• Hong Kong’s Bad Run Continues as Tencent Drags for Fourth Day

European stocks are negative across the board in a continuation of the sell-off experienced in Asia overnight and on Wall St.  yesterday. Almost 80% of the Stoxx 600 companies are in the red, while Eurostoxx 50 (-2.0%) flirts around levels last seen in  November 2016, with the biggest losers consisting of German and French heavyweights such as Deutsche Bank (-4.5%), Airbus (- 3.9%) and Total (-3.5%) France’s CAC 40 (-2.3%) underperforms its peers with the index pressured by Valeo (-21.1%) after the company cut revenue guidance for FY 18. Over in Germany, the DAX (-2.0%) is weighed on by index heavyweight BASF (-2.2%) after the company forecasts adjusted EBIT guidance to the lower end of their previously guided range, while Covestro (-5.4%) rests at the foot of the index amid a downgrade at Berenberg. Sectors are experiencing broad-based losses with energy names pressured by price action in the complex and IT names uninspired following a revenue-miss reported by Alphabet (-5.9% pre-market). On the flip side, gainers in the Stoxx 600 are fuelled by earnings with Neste (+7.0%), Fingerprint Cards (+7.0%) and Banco de Sabadell (+4.5%) all higher following their numbers

Top European News

• Norway Wealth Fund Delivers $21 Billion Return on U.S. Stocks
• U.K. Bank Regulators Ask EU for Cooperation in Brexit Plans
• Surging Spreads Prompt More Italy Questions for ECB’s Draghi
• Draghi Faces Seven-Week ECB Confidence Test on Euro Economy
• RBS Drops After Making Provision for Brexit-Related Uncertainty

In FX, the DXY trades marginally firmer, extending on gains seen yesterday which pushed the index back above 96.50. Subsequently, EUR/USD remains on a 1.13 handle and below support at 1.1358 with relatively upbeat tones from Draghi yesterday unable to support the multi-bloc currency. Focus today for the EUR (absent of any negative Italian headlines), could well fall upon the slew of option activity with a slew of option expiries due to roll-off at the NY cut; 1.1350 (1.3bln), 1.1375 (1.3bln), 1.1400 (918mln), 1.1450-55 (1.1mln). From a tech perspective, if EUR/USD makes a break of 1.1350 to the downside, focus will turn to the August 16th low at 1.1336. GBP/USD has breached yesterday’s lows in recent trade alongside the aforementioned USD strength, with the latest Brexit-related commentary also bringing markets back to reality. Sources suggest that Brexit talks are on hold as UK PM May’s team cannot agree a way forward on how to proceed with negotiations and as such Cable is back below 1.2800. A sustained break below this level could open a test of YTD lows around 1.2660, particularly so, with November’s emergency EU leaders summit far from confirmed.  Once again, focus during Asia-Pac trade continued to focus on the CNY after the PBoC opted to set the fix beyond 6.9500 for the first time since early January 2017. This subsequently prompted selling in high-beta currencies with AUD and NZD feeling the brunt with AUD/USD knocked below Feb 2016 lows of 0.7023. However, prices eventually bottomed out amid comments from the PBoC Vice Governor said the central bank will take necessary and target measures to deal with those who short the CNY; USD/CNY subsequently retreated from 6.9500 to 6.9350. Looking ahead, EM focus could be guided by events in Russia with the CBR due to come to market with their latest policy announcement. After the CBR unexpectedly raised rates by 25bps at its previous policy meeting, the consensus expects the central bank to maintain its one-week auction rate at 7.50%. Analysts at Barclays suggest that September’s rate hike has probably done enough to contain the pressure in the RUB and given the still below target inflation and a weak economy.

In commodities, gold is on target to notch a fourth week in the green, marking the yellow metal’s longest set of weekly gains since January; spurred on by ongoing economic constraints and concern over US corporate earnings. Prices continue to extend north of USD 1230/oz, while printing fresh session highs. Copper prices have retreated overnight as the red metal was weighed on by the market’s negative tone, eroding Thursday’s gains from a drop-in inventory. WTI and Brent are both extending losses in excess of a percent with the latter losing the USD 76.00/bbl level, in-fitting with the risk sentiment and signs that global trade is slowing with both container and bulk freight rates dropping, while yesterday’s comments of an upcoming oversupply by Saudi Arabia’s OPEC governor Al-Aama also weighing on prices. Additionally, markets are waiting for today’s Baker Hughes rig count which showed an increase of four operational oil rigs last week.

The key highlights for today are the advance Q3 GDP release for the US and the outcome of S&P’s sovereign ratings review for Italy. On the data front, in Europe, we get the ECB’s survey of professional forecasters along with France’s September PPI and October consumer confidence. In the US, we get the final University of Michigan October survey results as well as advance Q3 personal consumption, GDP price index and core PCE. Away from data, the ECB’s Draghi and Coeure will be speaking at different times. In addition, Total will release its earnings.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 3.3%, prior 4.2%
  • Personal Consumption, est. 3.3%, prior 3.8%
  • Core PCE QoQ, est. 1.8%, prior 2.1%
• 10am: U. of Mich. Sentiment, est. 99, prior 99; Current Conditions, prior 114.4; Expectations, prior 89.1

DB’s Jim Reid concludes the overnight wrap

If you joined the financial market as a graduate around about the third week of September you may have been shocked by yesterday’s trading session. Yes US equities can actually go up as well as just down. After 19 down days out of 24 since September 21st for the S&P500, yesterday saw a strong rally in the US as well as in Europe. Before you think it’s safe to come out of hiding though, after the close tepid earnings from Amazon and Google helped erase around half of the gains and that negative momentum has driven the Asian session. The Nikkei (-1.11%), Hang Seng (-1.44%), Shanghai Comp (-0.58%) and Kospi (-2.52%) are all lower along with most Asian markets. Elsewhere futures on S&P 500 (-0.95%) are pointing towards disappointing start.

Before this, the S&P 500, DOW, and NASDAQ ended +1.87%, +1.63%, and +3.35%, respectively. They are all now back into positive territory for the year, but failed to fully retrace their losses from Wednesday’s selloff. The FANG index gained +5.77% – its largest gain since the NYSE started tracking them in 2014 – and are now higher over the last two days, as strong earnings from Twitter boosted sentiment during the New York session.

European bourses also closed higher yesterday to eclipse their Wednesday losses, with the STOXX 600 up +0.51% and the DAX gaining +1.03%. On both sides of the Atlantic, cyclical (tech, materials, consumer discretionary) sectors outperformed safe haven sectors (utilities, consumer staples). The VIX fell -2.2pts but remains somewhat elevated compared to the recent past at 23.1 (24.2 in Asian trading), while Treasuries resumed their selloff. Ten-year yields rose +1.5bps (again reversed overnight though), while the dollar gained +0.19% to close within 0.15pp of its recent high from August.

Corporate earnings were strong yesterday morning, before Google and Amazon both disappointed after hours. First the good news. Twitter reported earnings beating estimates with revenues up +29% yoy (Q3 revenues at $758mn vs. $703mn expected) and earnings beating expectations by +50% (21c vs. 14c expected), despite monthly users falling by 9mn. Twitter shares climbed +15.47%. Freight shipping firm Union Pacific beat expectations, signalling robust US economic activity, while Comcast, Altria, and ConocoPhillips all posted positive results as well. After US markets closed, Amazon and Google both beat profit expectations, with Amazon posting earnings per share of $5.75 versus consensus expectations for $3.11 (a whopping +85% beat) and Google reporting EPS of $13.06 versus expected $10.45 (a +25% beat). Both stocks reported softer-than-expected revenue growth though, missing consensus expectations by -0.9% for Amazon (first back to back miss for 4 years) and -0.4% for Google, and traded down -7.14% and -3.75%, respectively after hours. Another instance of companies being brutally punished for even marginal top-line misses this earnings season.

The market gyrations this week somewhat overshadowed the ECB meeting yesterday, and even with the excitement of recent days and the ongoing Italian saga, Mr Draghi still managed to successfully turn the ECB meeting and press conference into a dull affair. As Mark Wall described it (see report here ), it was a classic “buying time” performance from Mario Draghi – the ECB was treading water at this press conference. They did acknowledged recent weaker-than-expected data, but the full conclusions and ramifications were left until the new forecasts are available in December. Mark still thinks that, based on the data and communications, the hurdle to extend QE is very high, even though they’ve given themselves until the last minute in December to make a final decision.

Reinvestments were not discussed by the ECB Governing Council, but Draghi added during the presser that he would be surprised if the ECB were to use a different concept than the capital key for carrying out reinvestments. On Italy, Mr. Draghi expressed confidence that the EU and Italian government will reach an agreement on the budget. He also quoted the EC Vice President Dombrovskis, who was present at the ECB meeting, saying that we have to respect fiscal rules but the EU is seeking a dialogue with the Italian government.

Continuing with Italy, Italy’s finance ministry denied the Thursday morning report from Italian daily Il Messaggero that Finance Minister Tria is looking at possible budget adjustments for pensions and if needed, adjustments to citizen’s income following the EU’s rejection of the budget plan. Elsewhere, Italian Deputy Premier Di Maio said that the widening of Italian BTP spreads to record levels was on account of concern that the country might leave Euro and was not a reaction to the Italian budget plan. He expects the spreads to narrow over the next few weeks as the Italian government discusses budget plan with the EU officials. Yields on 10y BTPs fell by -11.3bp yesterday.

Later today, we have the result of the S&P rating deliberations on Italy. With Moody’s downgrading the country to the lowest notch of IG (Baa3) but deciding on a stable outlook, it’s tempting to suggest that S&P (BBB currently) will do the same. However there are differences. S&P upgraded Italy only a year ago and, unlike Moody’s, hasn’t recently had a negative outlook. So although the most likely outcome is a downgrade – and justifiable given the recent developments – they may simply change the outlook to negative and wait to see what happens over the coming weeks.

Staying with Europe, our equity strategist Sebastian Raedler has turned tactically positive on European equities. He highlights that after the 10% correction since late July European equities are priced for a sharp growth slowdown. However, he thinks the slowdown is unlikely to materialize, given that: (a) Euro area PMIs are likely to have troughed, as the lagged impact of EUR strength and the roll-over in the inventory cycle start to fade and (b) China PMIs should have upside over the coming months, as the growth boost from the recent monetary easing and RMB weakness outweighs the drag from US tariffs. These macro projections are consistent with a Stoxx 600 fair-value range of 370 to 385 until mid-Q1 next year, 4% to 8% above current levels. His favourite trades are overweight banks, mining & airlines and underweight pharma and real estate.

Elsewhere, on trade, the WSJ reported, citing officials on both sides, that the US is refusing to resume trade negotiations with China until they comes up with a concrete proposal to address US complaints about forced technology transfers and other economic issues. The Chinese Yuan has been pressured this year amid the trade fracas, and drew some attention yesterday when it touched its weakest level of the year at 6.9669. The Yuan has depreciated all year as Chinese monetary policy diverges from the US, and data released yesterday indicated that, in September, Chinese banks bought dollars at the highest pace since June 2017. This could signal a shift in expectations by onshore investors, who want to move ahead of further currency weakness.

In central bank speak, Fed Vice Chair Richard Clardia and Cleveland Fed President Loretta Mester both downplayed the impact of the recent drop in equity prices on the Fed Policy with Vice Chair Clardia saying that that the fundamentals of the economy are “very, very solid” and Fed’s Mester saying, “while a deeper and more persistent drop in equity markets could dash confidence and lead to a significant pullback in risk-taking and spending, we are far from this scenario.”. Mester also added that she judges growthto be 3% this year and 2.75%-3% in 2019 while highlighting that firms in the Cleveland district are increasingly limited by labor shortages, and she expects unemployment to fall slightly below 3.5% by end-2019. On inflation, she said, “with appropriate adjustments in monetary policy, my outlook is that inflation will remain near 2%.” Both are voting members of the FOMC this year.

US data releases were somewhat soft yesterday, but didn’t change our economists’ expectation for a 3.3% Q3 GDP print today. with preliminary September durable goods orders printing at +0.8% mom (vs. -1.5% mom expected) but excluding transport they came in at +0.1% mom (vs. +0.4% expected). Capital goods orders stood at -0.1% mom (vs. +0.5% mom expected). The latest weekly initial jobless claims came in line with consensus at 215k expected while continuing claims stood at 1,636k (vs. 1,644k expected).  September pending home sales came in at +0.5% mom (vs. 0.0% expected) – the first rise in 3 months which helped S&P homebuilders climb +3.71% after a -26.3% fall from the August local peak and the -39.6% fall since the all-time highs in January. Finally the October Kansas City Fed manufacturing index printed at 8 (vs. 14 expected), its weakest print since December 2016.

Other data releases from yesterday included Germany’s October IFO business confidence, which came in at 102.8 (vs. 103.2 expected). This was a slightly less steep drop compared to yesterday’s PMIs, with the expectations index standing at 99.8 (vs. 100.4 expected) and current conditions at 105.9 (vs. 106.0 expected). Spain’s September PPI came at +0.7% mom (vs. revised +0.4% mom in last month). France’s Q3 total jobseekers stood at 3.46mn (vs. 3.44mn in last quarter).

The key highlights for today are the advance Q3 GDP release for the US and the outcome of S&P’s sovereign ratings review for Italy. On the data front, in Europe, we get the ECB’s survey of professional forecasters along with France’s September PPI and October consumer confidence. In the US, we get the final University of Michigan October survey results as well as advance Q3 personal consumption, GDP price index and core PCE. Away from data, the ECB’s Draghi and Coeure will be speaking at different times. In addition, Total will release its earnings.

via RSS https://ift.tt/2CGIRGz Tyler Durden

Now that the Saudis have admitted that the killing of Jamal Khashoggi was a premeditated act, Turkish President Recep Tayyip Erdogan is stepping up his rhetoric, saying in a speech to AKP party officials that whoever ordered the 15-man hit squad to travel to the Saudi consulate on Oct. 2. must reveal himself.

Erdogan also demanded that the kingdom reveal the location of Khashoggi’s body, adding that the Turks have information about the killing that hasn’t been publicly disclosed. If the Saudis truly did hand over Khashoggi’s body to a “local cooperator”, as they have claimed, Erdogan demanded they share the cooperator’s identity with Turkish investigators, per Reuters.  The team of Saudi intelligence agents and a doctor specializing in autopsies was lying in wait for Khashoggi when he visited the embassy on that day to pick up documents to allow him to marry his Turkish fiance.

“Who gave this order?” Erdogan said in a speech to members of his AK Party in Ankara. “Who gave the order for 15 people to come to Turkey?” he said, referring to a 15-man Saudi security team Turkey has said flew into Istanbul hours before the killing. Erdogan also said Saudi’s public prosecutor was due to meet the Istanbul prosecutor in Istanbul on Sunday.

While he has so far avoided using his name, the subtext of Erdogan’s remarks was clear: the Turkish leader insinuated that Saudi Crown Prince Mohammad bin Salman, who is widely suspected of ordering Khashoggi’s murder, admit to his role in the killing.

The kingdom has arrested 18 Saudi nationals and fired 5 intelligence officials in a purge that it said would help it hold the “rogue” killers accountable. MbS has been put in charge of a committee to oversee a reform of the kingdom’s intelligence service. The Saudis notoriously denied having anything to do with Khashoggi’s disappearance after he entered the consulate, before changing their story, saying instead that Khashoggi had been killed during a “botched” interrogation.

According to the FT, Erdogan angrily demanded answers from the Saudis and denounced the repeated changes in their story as “childish.”

“These childish statements are not compatible with the seriousness of a [nation] state,” he said.

If they are truly responsible, Erdogan demanded that Saudi Arabia hand over the 18 suspects arrested to Turkey so that can be tried and punished in Istanbul.

“If you want to eliminate the suspicion [about you], the key question is these 18 people. If you cannot make them talk then hand them over to us. This incident happened in Istanbul. Let us put them on trial.”

In what may have been a subtle reference to his briefings with CIA director Gina Haspel, Erdogan claimed that Turkey had shared some of its undisclosed evidence with foreign officials, and that their responses had been “very interesting.”

While Erdogan has, so far, mostly held back from implicating any members of the Saudi high command, it appears he is slowly turning up his rhetoric to demand that the Crown Prince, with whom he reportedly has a frosty relationship despite MbS’s claims to the contrary, be held to account by the rest of the royal family. President Trump has also been more willing to place the blame with the Crown Prince, saying earlier this week that, whether he ordered the killing or not, Khashoggi’s death was the prince’s responsibility.

Any further clues could be revealed in the Saudi reaction, as the kingdom appears to be inching closer to the real story about what happened inside is consulate on Oct. 2.

via RSS https://ift.tt/2AuGntt Tyler Durden

Authored by Tom Luongo,

During the years the U.S. and its satraps in Poland and the Baltics fought the Nordstream 2 pipeline it was always apparent Germany was in the driver’s seat.  It was also apparent that this would be the wedge issue that would ultimately force Germany to pursue independent policy from the U.S.

Nordstream 2 is and was always a reaction to the U.S.’s meddling in Europe’s energy policy which this cycle of began with the scuttling of the South Stream pipeline in 2013.

From the EU’s perspective changing the rules under which South Stream would operate after the contracts for it were signed was a way of gaining leverage over Russia and Gazprom.  So too was the help protesters in Kiev received to overthrow the Yanukovich government from the U.S. and the EU.

That operation was meant to put the Ukrainian pipelines under EU control where they could dictate terms to Gazprom and choke the profit out of its gas deliveries.  It would also advance NATO and the EU to Russia’s western border and there was to be nothing Putin could do to stop the U.S. from putting nukes targeting Moscow there.

Too bad for them it didn’t work out that way.

This is one of the reasons why the U.S. is so incensed with Russia and Putin over Ukraine.  It’s why his chickenhawks in his cabinet and John McCain pushed so hard for sanctions and weapons support to Ukraine before the dearly-departed Brain Tumor killed him.

Obviously, the other was being stymied in taking over Crimea and forever losing the opportunity to grab the port at Sevastopol.

So, why the history lesson?

Because German Chancellor Angela Merkel just announced a long-delayed LNG terminal will be built by Germany with state assistance.  You see, LNG or liquefied natural gas, isn’t really that profitable for European customers, otherwise this import terminal would have found enough backers in the private sector.

So, Merkel announced a small concession to Trump by throwing some money at some LNG import terminals which any supplier can and will use.

This announcement was immediately spun as a win for President Trump by Oilprice.com’s Tim Daiss because, well, reasons.

Now, it looks as if Trump’s recent tirade against America’s European allies over its geopolitically troubling reliance on Russian gas supply may also be bearing fruit. On Tuesday, The Wall Street Journal reported that earlier this month German Chancellor Angela Merkel offered government support to efforts to open up Germany to U.S. gas, in what the report called “a key concession to President Trump as he tries to loosen Russia’s grip on Europe’s largest energy market.”

The rest of the article is boiler-plate Russia-baiting and bad economics, but that’s to be expected from American writers at Oilprice.  It’s similar to the Russian writers there who overstate Russia’s advantages.

That said, there are always nuggets of truth buried in the manure.

Despite Daiss’ bias what he fails to mention in his MAGA-enthusiam is that Germany making this announcement is far more significant than Merkel’s perceived kowtowing to Washington.

Politically, this cost Merkel nothing.

What this admits is what Gazprom deputy chairman Alexander Medvedev said back in May.  Everyone should forget about fighting Nordstream 2 because Germany will need Nordstream 3. 

Output is falling in Norway and Scotland, too. According to a recent report by the Oxford Institute of Energy Studies, absent the discovery of new fields, Europe’s gas production is set to decline from 256 billion cubic meters per year today to 212 billion cubic meters per year by 2020, and 146 billion cubic meters per year by 2030.

Amid falling domestic production, demand for gas is set to go up, as European countries close down old thermal coal power plants, and Germany prepares to shutter its nuclear power plants by 2022. German NPPs, it’s worth noting, once accounted for nearly a quarter of the economic giant’s power consumption.

“And no, no American, Qatari or even Russian LNG supplies will be able to replace these volumes,” Lekuh stressed. “Such supplies are simply a triviality when compared to the price of pipeline gas, and there are currently no technical solutions to this disparity. And while it may be possible to raise gas prices for the public, for Europe’s industry, a predominance of liquefied natural gas simply means death. The rise in the price of energy-intensive production would result in a lack of competitiveness in global markets,” the observer noted.

So, yes, Germany building LNG import terminals is an opportunity for U.S. companies to sell Germans some gas.  But, it also means that Novatek can sell LNG to Germany from its massive Yamal project on the Baltic Sea and still undercut U.S. deliveries.

At the same time, the Saudis are ready to buy a $5 billion stake in Novatek’s next project called Arctic 2 in Siberia.

Why?

Well, it could be a bribe to keep the Russians quiet on l’affair Khashoggi but it more likely about location.

Transport costs matter in the LNG game.  Period.  The cost to move the gas from one place to another is big driver of final price and profitability.

So too does the currency arbitrage.  And Trump’s own belligerence towards Russia to weaken the ruble while driving oil and gas prices higher is only making the price discrepancy between Russian and U.S. gas worse.

Also, if the U.S. was winning this war of sanctions and tariffs and forcing the Germans to heel, then why is Trump folding on kicking Iran out of the SWIFT system of international electronic money transfers?

Could it be because SWIFT’s threat as the financial nuclear weapon it once was is now easily shot down like Tomahawks coming near a Pantsir-S2 missile battery?

The announcement of Europe’s Special Purpose Vehicle as well as Moscow’s own version of SWIFT are credible deterrents to the kind of financial bullying the White House has been used to engaging in for decades.

And it all stems from the U.S. going nuclear on Iran in 2012 with Obama’s sanctions, cutting Iran out from SWIFT.  And then there was the threats against Russia in 2014 over, what?  Crimea.

That spurred Putin into action to build a domestic version of SWIFT, a system the Kremlin is touting as having international support.  Transactions going through Russia’s system cannot and will not be monitored by the U.S. financial authorities.  All the U.S. can do is then threaten sanctions under ‘Magnitsky rules’ to banks and companies for doing business with people the U.S. claim as ‘bad people.’

And now even that won’t work for much longer.  A connected world is one that resists control.  This is what passes for foreign policy these days.  Cheap moralizing to protect unsustainable business models and imperial ambitions.

So, this is why I opened with the history lesson.  It’s all connected as one big web of cause and effect, action/reaction.

And it’s why at the end of the day incentives matter.  And as the Saudis are finding out now, bribes only work for so long.  Eventually costs rise to the point where no amount of money in the short term can overcome them.

Trump got a small win here.  The U.S. will sell Germany some gas after these terminals are built.  Merkel gets to pay her ‘fair share’ on NATO by overpaying for some gas while keeping her defense spending acceptable to the rising hard-left in Germany.

But, the big winner ultimately is the Russian/Iranian axis that called Trump’s bluff on sanctions, tariffs and protectionism to flip Germany’s political incentives to their side of the ledger.

via RSS https://ift.tt/2EKUQFH Tyler Durden