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Whether it’s the “storm” of news this week, or August’s anxiety strewn wasteland of low liquidity, high potential chaos events, former fund manager and FX trader Richard Breslow warns, “markets are beckoning traders to come out and play” and as we wait with bated breath to see what happens, here is which way markets appear to be leaning in anticipation…

via Bloomberg,

The most glaring marker is that global bond yields all look like they want to test higher.

A “will they, won’t they” JGB market appears to be salivating to test the BOJ’s yield curve suppression strategy. If you think the 10-year Japanese yield is pushing on its ceiling, just look at the longer durations.

German bunds are doing their bit. So much so that the spread to Treasuries is in danger of tightening instead of breaking out above 260 basis points. The chart says that this is a very tradable level.

We either fail here with all of the implications it will have for relative equity and currency plays or validate the flag pattern that EUR/USD is tracing out. For a market that has been going sideways, it is showing animal spirits rather than lack of interest.

And say what you will about the U.S. 10-year not being able to get above 3%, it isn’t backing off either. And I have to say, if one more person says last Friday’s GDP number was a miss, I might be tempted to be impolitic.

Equity markets seem to be at some sort of crossroads. They have by and large traded well but look very iffy and suddenly undecided. I don’t necessarily see last week’s price action as a failure in the S&P 500 above 2825 as much as a get back to neutral before the data move.

But that remains an important pivot level that must be taken out again forthwith or be looked at in retrospect as a bridge that was too far. And that can be said for a whole range of major indices globally. It’s actually set up to be a fairly straight-forward trade as the chart points are rather obvious and not very far away.

The Bloomberg Commodity Index is valiantly trying to rally. Everyone I hear from is getting all bulled-up on oil prices again. Here’s an easy one. My pivot is only 0.25% above here. Given last Thursday’s price action, I’d be ever-so cautious thinking it is a lay-up trade.

Oddly enough, the dollar is the least interesting trade out there. I’m, temporarily, agnostic. It’s a strange way to fight a currency war. I’m a closet bull, but willing to wait. It should be higher and isn’t and that bothers me.

As Breslow concludes, this is going to be an interesting week, and there is no shortage of assets in play. This isn’t shaping up to be an old-fashioned quiet August.

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Authored by Mike Shedlock via MishTalk,

Vanguard just threw in the towel on a Metals and Mining Fund. It morphs into a Global Capital Cycles Fund.

Sentiment is not a timing mechanism, but gold bearishness is mounting in a market that has gone sideways for years.

Vanguard couldn’t take it any more.

“The $2.3 billion Vanguard Precious Metals and Mining Fund (VGPMX) will be renamed to Vanguard Global Capital Cycles Fund as part of a restructuring intended to broaden the fund’s mandate and diversify its portfolio.” They don’t ring bells at tops&bottoms?https://t.co/cGqBPu9B3E

— fred hickey (@htsfhickey) July 27, 2018

AFTER the huge 30%, 6 month climb in gold (160% up for gold stocks) in the summer of 2016, Schwab sent to its customers a “Guide to Investing In Gold.” It was the death knell for the rally. Haven’t been able to break through that top since. Maybe now we have the sign (Vanguard).

— fred hickey (@htsfhickey) July 27, 2018

At the top late 99, many funds changed name to include “internet” in them.

— Gary Kaltbaum (@GaryKaltbaum) July 27, 2018

This may not be “the bell” but it is a bell. Despite the recent declines, many miners are up tremendously off the lows.

Newmont

​

Hey, let’s throw in the towel and buy something that trending. Maybe we should short gold. Facebook sure looked attractive last week.

via RSS https://ift.tt/2M2sjL9 Tyler Durden

One month ago, following the latest negative note from Goldman’s auto analyst David Tamberrino, Elon Musk decided to take it personally and in a leaked memo to his employees, said that Goldman is “in for a rude awakening 🙂“

With Tesla stock sliding 15% since then, it is not exactly clear who has had a more rude awakening, the bulls or bears, but in having kept silent for the past month, Goldman (which has a Sell reco and a $195 PT on TSLA), has come out with another negative note on Tesla, just two days before Tesla’s Aug. 1 earnings, in which Goldman details the key investor questions and recent debate on the stock from its conversations with clients.

As Tamberrino writes, “the key focus areas revolve around (1) sustainability of Model 3 production, (2) pace and demand-variants of Model 3 order conversion, (3) margin improvement potential, and (4) FCF burn.“

More importantly, for the first time, the Goldman analyst introduces a new analysis on Model 3 sentiment based off social media posts. “This stems from our work on Model 3 order conversion and customer reception.”

And the punchline: “Ultimately, we believe the data potentially points to waning customer enthusiasm for the vehicle as order availability and test drives have increased.“

We expect another very angry Elon Musk memo to be “leaked” shortly.

* * *

With that out of the way, here is Goldman’s Q&A on several key questions relating to the Model 3 roll out:

1. Post the 5k/week Model 3 production achievement in the last week of 2Q, how is the run-rate so far in 3Q?

We track VIN registrations closely for the Model 3, and following the end of 2Q18 the company has registered another 20,700 VINs. With historical conversion from VIN figures to production numbers (as of the end of 2Q18, TSLA had 56k VINs registered and produced 41k Model 3s), we believe this implies that TSLA has produced approx. 15k vehicles in the past four weeks. This essentially equates to a production figure of approx. 4,000/week. We believe questions on the conference call will focus on the sustainability and potential to increase this rate up to (and possibly beyond) the 5,000/week rate – and what the company eventually does with its GA4 assembly line. The sustainability of this rate – particularly without the aid of the GA4 tent assembly line (which produced 20% of the 5,000 vehicles in the last week of 2Q18), is important as it potentially sets the company up for positive FCF in 3Q18 as well as potential for putting incremental capex into Model 3 assembly to increase the production rate to the 10,000/week target – timing for which has been uncertain after the production delays in late 2017/early 2018.

Are reservation holders converting?

As production improves for the Model 3, our conversations with investors have quickly shifted to (1) reservation conversion to orders, (2) demand by Model 3 variants, and (3) new order rates. With TSLA offering Model 3 variants starting at the $49,000 price point – with options that can take the price up to $80,000 – investors question how many of the 420,000 reservation holders will convert at those higher price points (given the vehicle was originally offered with a base price of $35k). Further, investors have questioned the pace of reservation conversion given the company’s advertised wait times for the Model 3 on the website, quoting 2-4 months from order to delivery – suggesting reservation holders may not be converting immediately.

As we have detailed in the past, we believe that the company could convert approx. 23% of its reservation holders to higher price variants —per our price elasticity of demand analysis on the US sedan market (Exhibit 1). This would imply that approx. 100,000 reservation holders could opt for a vehicle with an average selling price around the mid-to-high $60k range. However, this would imply a vast majority of reservation holders could be waiting for availability of a lower price Model 3 variant.

To help further inform our perspective, we discussed initial customer preferences with various Tesla sales personnel in different regions across the US. What we learned is that most areas have recently received (in the past few weeks) a Model 3 that they can offer for test drives. Most stores are still working through reservation holders within their respective areas, but foot traffic to view the vehicle has increased. Interestingly, customers coming to check out the Model 3 arrive in all types of vehicles – with some looking to potentially trade-up from a Camry or a Civic, others looking to swap out of a 3-Series or a C-Class, while others are looking to trade down (with some noting Model S owners are looking to move into a smaller sedan). Altogether, it appears interest in the vehicle still remains high (at least anecdotally) – particularly as the Model 3 began to hit stores. However, what remains unknown – and hopefully communicated with 2Q18’s earnings release, is how new Model 3 order rates are trending.

Lastly, we also looked to gauge sentiment on the Model 3 with an analysis based on daily Twitter and Reddit posts (Exhibit 2). Posts are categorized into basic positives, basic negatives, and neutral buckets. We then subtract the number of negative posts from the positive posts and divide by total posts to develop the sentiment skew within social media. From the data, we see a few trends:

1. Weekly posts about the Model 3 are declining: with 2016 averaging 4,400/week, 2017 averaging 3,900/week, and YTD 2018 averaging 3,000/week;
2. Positive skew has faded: with 2016 carrying a +18% positive skew, 2017 a 12% positive skew, and YTD 2018 tracking at a 4.5% positive skew;
3. With the recent increased availability of the Model 3 and increased production, we note a lack of peak (which would indicate significant buzz around the product) in social media posts;
4. Lastly, we find that sentiment has recently declined from a slightly positive skew (i.e., from +5% in 1H18) to a slightly negative skew the past few weeks 0 corresponding with the time period where the vehicle began to hit stores and orders were opened to all.

What is the scope for material cost reduction?

Before (and certainly after) the news reports (from various sources, including Bloomberg and Reuters) that TSLA was  looking for refunds from its suppliers, investors were digging into potential material cost reductions for the Model 3. This comes as the expected growth in Model 3 production would drive increased parts orders from suppliers, and potentially kick in price reductions as certain minimum order quantity thresholds were met. This is typical of a supplier/OEM relationship, where (1) economies of scale and/or (2) new business opportunities (i.e., RFPs for new vehicle programs) are used by OEMs to extract price savings from its supply base. Normal annual price downs can range from 1% to 3%, depending on how commoditized a part is – and potentially higher depending on over-supply within the market. Further, ‘quick savings’ granted from suppliers to OEMs can come as a part of new business awards – where suppliers trade-off price on existing contracts in order to help win new business. For TSLA, the company very likely should achieve contractual price downs as its volumes increase – though the volume thresholds are unknown. That said, with original targets for production of 5k/week exiting 2017 and 10k/week exiting 2018, we believe TSLA is likely behind on its potential for volume break-points with its supply base. As a result, the sequential improvements we forecast in 2018/2019 for Model 3 gross margins are largely driven by a reduction in man-hours per vehicle produced – with achievement of targeted 25% margins on the vehicle further out as volumes continue to ramp.

Last but not least, How much cash will the company burn in 2Q?

Lastly, investors question the ending cash balance and the company’s potential need for a capital raise. As most have  picked through the delivery release, the large increase of vehicles in transit sticks out as a potential working capital headwind for the quarter. This should be somewhat offset by the favorable cash conversion cycle on US Model 3 deliveries. However, altogether with an incremental 9,000 vehicles in transit at the end of 2Q18, we forecast working  capital to be a $170mn headwind for the quarter. This puts our FCF estimate (traditional definition) at a $930mn burn in 2Q18 and an adjusted FCF (TSLA definition, including auto/solar lease added back) burn of $620mn; as a result, we forecast the quarter-ending cash balance to be approx. $2.2bn. Looking ahead to 3Q18, we do forecast working capital to be a major positive (+$590mn from the Model 3) – helping the company show positive FCF; however, we see this unwinding to some degree in 4Q18 and still expect the company to raise capital in order to maintain a cash balance above $2bn.

What does all this mean for Tesla and Goldman’s forecasts? This is how the analyst has revised his estimates and assumptions:

• 2Q18 actual deliveries —where Model S/X deliveries were n slightly below our estimates but Model 3 deliveries fell a few thousand short (our 2Q18 delivery recap note);
• Improved Model 3 weekly production in 3Q18 and beyond – we now forecast TSLA sustaining 4,000/week in 3Q, improving to approx. 5,000/week in 4Q;
• Lowered Model S / X deliveries – we now forecast slightly softer demand internationally, primarily as a result of the price increases announced in China; our full year Model S/X forecast of 90k falls below the company’s guidance for 100k;
• Slightly lower gross profit margins – the combination of increased manual labor, the incremental production lines, and FX headwinds from the Euro and RMB;
• Lowered SG&A profile – stemming from the company’s announced headcount reductions, we now forecast a reduction from 1H18 to 2H18 in SG&A expense as well as re-base future expense creep;
• FCF estimates are also lowered for the quarter on a use of working capital – primarily due to the large increase of vehicles in transit at the end of 2Q18; we now forecast TSLA’s adjusted FCF burning $600mn in the quarter – leaving approx. $2.2bn in cash at the end of 2Q18. For the year, we now estimate a $1.5bn cash burn – and continue to forecast a capital raise in 4Q18a

With all that in mind, Goldman writes that “the net result of this is an increase to our 2018 and 2019 EBITDA estimates, but a reduction to 2020 and 2021.”

For the next two years, a faster ramp in Model 3 production/deliveries and lower SG&A expense accrue to the bottom line of our forecast (GS EBITDA +11% on average). However, in 2020 and 2021 the lower volume trajectory and margin profile for the S/X slightly reduce our estimates (down an average 6%). For 2018 EBITDA, we are still 15% below FactSet consensus – and our 2019 through 2021 EBITDA is an average 30% below the Street.

But the real take home here is that Musk will only focus on Goldman now using twitter to gauge enthusiasm for the Model 3. As such expect a lot of fake troll accounts to be created somewhere in Myanmar praising the electric vehicle at a rate of 60 tweets per minute, or whatever the clickfarm rate is these days.

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When it comes to industrial bellwethers, few companies are as closely followed as Caterpillar, and in a time when traders are especially concerned for the outlook facing the industrial sector as a result of rising tariffs and escalating trade wars, many traders were especially interested in today’s CAT earnings. They had little to be worried about.

Moments ago, CAT reported Q2 earnings that beat on the top and bottom line:

• Q2 Adjusted EPS of $2.97, vs $1.49 a year ago, beating exp. of $2.73 and matching the highest forecast.
• Q2 Revenue of $14.0BN, vs $11.3BN a year ago, beating exp. of $13.98BN

Commenting on the result, CEO Jim Umpleby said that “Caterpillar delivered record second-quarter profit per share. Our team is doing a great job executing our strategy for profitable growth, focusing on operational excellence, expanded offerings and services.”

The company reported that during Q2, Machinery, Energy & Transportation (ME&T) operating cash flow was $2.1 billion, and the company repurchased $750 million of Caterpillar common stock. In June 2018, the board of directors approved an increase to the quarterly dividend of 10 percent to $0.86 per share. The second quarter of 2018 ended with an enterprise cash balance of $8.7 billion. In July 2018, the board of directors authorized the repurchase of up to $10.0 billion of Caterpillar common stock effective January 1, 2019.

But more important was the company’s surprisingly strong forecast:

CAT now sees full year 2018 EPS of $10.50 to $11.50, and adjusted EPS of $11.00 to $12.00.  This is an increase of 75 cents across the forecast range: the prior profit per share outlook range was $9.75 to $10.75, and the adjusted profit per share outlook range was $10.25 to $11.25.

“Based on outstanding results in the first half of the year and continued strength in many of our end markets, Caterpillar is again raising our profit outlook for 2018. We remain focused on operational excellence, cost discipline and investing for long-term profitable growth,” said CEO Jim Umpleby.

How about the all important question: how are tariffs impacting the company? It appears not that much, especially once costs are passed on through to customers:

Recently imposed tariffs are expected to impact material costs in the second half of the year by approximately $100 million to $200 million, and the company expects supply chain challenges to continue to pressure freight costs. However, the company intends to largely offset these impacts through announced mid-year price increases.

As a result of the strong earnings, CAT shares are up 3.6% in the premarket. And since the company makes up 3.8% of the Dow Jones, the CAT results have also pushed Dow futures off the unchanged line.

 

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A “storm of news” may be coming this week ahead of the start of summer vacation season, but the overnight session has been surprisingly quiet, with the BOJ’s bond market intervention – the 3rd in the past week – the most notable event so far.

“It’s been a somewhat slow start, but not surprising given the action-packed week that lies ahead which includes the BOJ, BOE, Fed, global PMI data, NFP,” said Oanda’s head of APAC trading, Stephen Innes. “Indeed, central bank policy is back at the forefront of market discussions and particularly the BOJ rate decision and outlook report July 31.”

Among the most notable overnight moves, the JGB curve steepened again leading core rates markets, even as the BOJ’s latest YCC operation saw heavy offers accepted as BOJ buys above market price. Sparked by fears the BOJ may tweak its QE program, large futures blocks in gilts, USTs and bunds through early trading accelerated the selloff. Meanwhile, the USD slowly weakened across G-10; SEK spiked higher on strong domestic GDP data while TRY tumbled as Erdogan showed little concern for potential U.S. sanctions; the Chinese yuan initially slumped but is now broadly unchanged. European equity markets hold small losses with Heineken (-5.0%) sliding and dragging the food and beverage sector lower after poor earnings guidance; U.S. equity futures bounced from overnight lows however still at bottom end of Friday’s range.

World stocks fell modestly, US equity futures were flat, the dollar dropped on Monday, 10Y yield rose as high as 2.985%, JGBs sold off before possible BOJ monetary policy tweaks, and most metals fell on continued concern over global trade and China’s economy as a busy week of central bank meetings and company updates started.

Disappointing updates from U.S. tech heavyweights soured the mood across stock markets, knocking European shares off their six-week highs at the open and dragging down by 0.11% the MSCI world index.

As we discussed in “A Record Number Of Companies Are Beating Estimates… And It’s Not Enough“, JCI Capital’s strategist Alessandro Balsotti said that “quarterly results continue to be more than good overall, but markets appear to be particularly sensitive to the sporadic negative updates, especially from tech stocks.”

JPMorgan reported relatively aggressive moves into “value” stocks – in particular banks – and away from shares leveraged to economic growth: “Tech really began cracking on Tuesday before the floodgates opened on Friday,” JPM analysts wrote. “The rotation will likely continue, benefiting value categories at the expense of momentum/tech as rates are biased higher. Europe’s higher weighting to banks/resource will help it vs the U.S.”

Miners and food and beverage makers were among the top losers in the Stoxx Europe 600 Index. Equity specific news is supporting the FTSE MIB and IBEX with Mediaset (+3.0%) reporting positive earnings. The AEX (-0.4%) is currently the underperforming bourse as index heavy-weights Heineken (-4.1%) and Altice (-2.4%) are both in the red on the back of negatively revised guidance and a branch sale.

Earlier, Asian stock markets similarly began the week on the back foot after the tech-led declines last Friday on Wall Street and amid cautiousness ahead of this week’s slew of risk events, while further CNH weakness also dampened sentiment. ASX 200 (-0.4%) and Nikkei 225 (-0.7%) were in the red with the worst performing stocks pressured by corporate updates including Syrah Resources and Dainippon Sumitomo Pharma. Elsewhere, Hang Seng (-0.6%) and Shanghai Comp. (-0.2%) were initially choppy after the PBoC refrained from reverse repo operations for a 7th consecutive occasion but noted that month-end fiscal spending will increase bank liquidity, while further CNH weakness eventually weighed on sentiment and proved to be the deciding factor.

Futures on the S&P 500, Dow and Nasdaq all pointed to a softer open following declines across most Asian markets.

In FX, after starting off strong, the dollar slipped against most G-10 peers at the start of a busy week which sees decisions from the Fed, BOJ and BOE. The Bloomberg Dollar Spot index edges lower by 0.1% with the greenback down against seven of G-10 peers.

The Japanese yen erased initial gains and Japanese 10-year yields retreated from an almost 18-month high after the the BOJ offered to buy an unlimited amount of bonds to stem fears the bank will tweak their ultra-loose policy this week and unleash a rout. The euro rose after German regional inflation data. Sweden’s krona strengthened the most in four weeks against the euro after data showed the nation’s economic growth accelerated more than forecast in the second quarter.

Helped by the weaker dollar, emerging-market shares slipped while their currencies were stable, with a few notable exceptions: the Yuan and Lira have picked up where they left off last week, on the back foot, with USDCNY, USDCNH and USDTRY all higher. The PBOC yuan fixing dropped by 0.28% to 6.8131 per USD, the weakest level since June 2017 while the Turkish Lira continues to suffer after last week’s shock CBRT decision to leave key rates unchanged, with the focus now switching to the latest Inflation Report on Tuesday. The offshore yuan declined as much as 0.5% to 6.8497 per dollar, as China’s central bank weakened its daily reference rate and the dollar advanced.

“The EM FX will remain under weakening pressure in the days and months ahead,” says Prakash Sakpal, a Singapore-based economist at ING Groep NV.

Overnight Bloomberg reported that analysts say China may cut RRR in 3Q, according to a China Securities Journal commentary. In separate comments, China’s Foreign Minister Wang Yi said at a press conference in Beijing that Chinese self-defense is justifiable in the face of an aggressive U.S.

Treasuries fell with euro-area debt, with the curve bear- steepening, matching moves across most of Europe.

In commodities, oil prices rose but gains were limited as the fallout from trade tensions weighed on markets: WTI (+0.9%) and Brent Crude (+0.2%) recovered losses seen at the back end of last week following an uptick in the Baker Hughes rig count while Mexican President Obrador stated his administration will hike crude production by 600K BPD.

Looking at the week ahead (read our full preview here), core central-bank policy decisions and 145 S&P company earnings reports, including from Apple and Tesla, are set to dominate news. Tonight, traders will focus whether the BOJ will fine tune its policy and later in the week will look for any indications the Federal Reserve is shying away from two more interest-rate hikes before the end of this year.

Expected data on deck includes pending home sales and Dallas Fed Manufacturing Activity. Caterpillar, Loews, and Seagate are among companies reporting earnings

Market Snapshot

• S&P 500 futures little changed at 2,815.25
• STOXX Europe 600 down 0.2% to 391.13
• MXAP down 0.4% to 168.14
• MXAPJ down 0.3% to 543.78
• Nikkei down 0.7% to 22,544.84
• Topix down 0.4% to 1,768.15
• Hang Seng Index down 0.3% to 28,733.13
• Shanghai Composite down 0.2% to 2,869.05
• Sensex up 0.4% to 37,496.31
• Australia S&P/ASX 200 down 0.4% to 6,278.39
• Kospi down 0.06% to 2,293.51
• German 10Y yield rose 2.1 bps to 0.424%
• Euro up 0.09% to $1.1668
• Italian 10Y yield rose 3.9 bps to 2.476%
• Spanish 10Y yield rose 2.7 bps to 1.402%
• Brent futures up 0.4% to $74.56/bbl
• Gold spot down 0.2% to $1,222.26
• U.S. Dollar Index down 0.2% to 94.51

Top Overnight News from Bloomberg

• The Bank of Japan bought 1.6t yen worth of 10-year bonds at its fixed-rate operation on Monday, the third offer to buy an unlimited amount of debt for in a week amid speculation the central bank may adjust its ultra-loose monetary policy
• Confidence in the euro-area economy dropped to its lowest level in a year, suggesting that the global trade conflict can weigh down growth momentum. The European Commission’s measure of corporate and household sentiment index fell for a seventh straight month in July. Among executives, their view of the business climate dropped to an 11-month low
• No increase in interest rates is expected when Federal Reserve officials gather on Tuesday and Wednesday in Washington, according to pricing in federal funds futures and all but one of the 57 economists polled by Bloomberg
• China Foreign Minister: U.S. did not fulfill its obligations during the trade negotiations; China has a right of self-defense
• Italy’s Prime Minister Giuseppe Conte is set to burnish his government’s ties with the Trump administration, after his deputy premiers stoked tensions with the European Union
• President Trump floated the idea shutting down the government if he doesn’t get his way on immigration measures, including funding for a wall on the U.S. border with Mexico
• Second-quarter surge shows the U.S. economy is “well on the path” for four or five years of sustained annual growth of 3 percent, Treasury Secretary Steven Mnuchin said
• Billionaire industrialist Charles Koch said he worries President Trump’s actions on trade and tariffs put the U.S. economy at risk of recession
• Theresa May was given fresh hope of getting a post-Brexit trade deal from outside the U.K., even as members of her Conservative Party back home vented their anger at her proposals
• Greece is planning a return to the debt markets in a bid to regain its status as a “normal” country
• Italy’s Deputy Premier Luigi Di Maio said the government will go ahead with its plan to introduce a flat tax and an assured basic income, while scraping a landmark pension reform
• German Jul. Regional CPIs y/y (National est. 2.1%): Saxony 2.2%, Baden Wuert. 2.2%, Brandenburg 2.2%, Hesse 1.8%, Bavaria 2.2%, NRW 2.0%
• Sweden 2Q GDP q/q: 1.0% vs 0.5% est; consumer spending +0.9%, inventories add 0.3pps to overall growth

Asian equity markets began the week lacklustre after the tech-led declines last Friday on Wall Street and amid cautiousness ahead of this week’s slew of risk events, while further CNH weakness also dampened sentiment. ASX 200 (-0.4%) and Nikkei 225 (-0.7%) were in the red with the worst performing stocks pressured by corporate updates including Syrah Resources and Dainippon Sumitomo Pharma. Elsewhere, Hang Seng (-0.6%) and Shanghai Comp. (-0.2%) were initially choppy after the PBoC refrained from reverse repo operations for a 7th consecutive occasion but noted that month-end fiscal spending will increase bank liquidity, while further CNH weakness eventually weighed on sentiment and proved to be the deciding factor. Finally, 10yr JGBs were marginally lower in a continuation of the losses triggered by ongoing BoJ speculation ahead of tomorrow’s policy announcement, while T-notes were uneventful amid tentativeness ahead of the looming risk events. Heading into EU trade, the BoJ once again announced a fixed-rate JGB operation which was met with a muted reaction by the market.

Top Asian News

• China’s IPO Frenzy Is Starting to Fade as Issuers Slash Prices
• JPMorgan Leads Charge as India Logs Record $98 Billion in Deals
• China Human Vaccine Scare Wipes $483 Million From Pig Drug Stock
• No Profit? No Problem. Another Billionaire Rises in China
• July’s Been Good But Emerging Assets Aren’t Out of the Woods

Major European equity bourses are largely lower, with the FTSE MIB (+0.1%) the only bourse in the green, breaking though its 50 DMA of 21,913. Equity specific news is supporting the FTSE MIB and IBEX with Mediaset (+2.0%) reporting positive earnings and Sabadell (+2.7%) upgraded at KBW to outperform from underperform. The AEX (-0.3%) is currently the underperforming bourse as index heavy-weights Heineken (-5.0%) and Altice are both in the red on the back of negatively revised guidance and a branch sale. Taking a look at sectors, broad based losses are being seen with slight underperformance noted in the IT sector, following on from uninspiring performance in US counterparts on Friday. GVC Holdings (+5.0%) has assured a USD 200mln tie-up with the MGM group. Both the GEA Group (+6.0%) and Air Liquide (-2.6%) reported earnings, with GEA beating expectations and Air Liquide operating income falling short of expectations.

Top European News

• Swedish Economy Heats Up in Second Quarter on Consumer Spending
• Domino’s Pizza Group Falls After Media Report on Franchisees
• Italy Offers May Brexit Olive Branch as Grassroots Tories Revolt
• U.K. Ministers Fear Bloody Last Chapter in May’s Brexit Thriller
• Pound Optimism Ebbs as Brexit Gloom Overwhelms BOE Hike Prospect
• Greece’s Plan to Return to Markets While Viable Faces Risks

In currency markets, the chance of a BoJ shift has sent the yen higher in the last week or so, leaving the dollar around 111.05 yen from a peak of 113.18 earlier in the month. Against a basket of currencies the dollar was hovering at 94.606 having repeatedly failed to clear resistance around 95.652 this month. The euro edged up to $1.1664 against the dollar in early European trading, after the European Central Bank reaffirmed last week that rates would remain low through the summer. In Asia, eyes were on China’s yuan after it suffered the longest weekly losing streak since November 2015. It duly weakened further, slipping past 6.8400 per dollar for the first time since June last year.

In commodities, WTI (+0.9%) and Brent Crude (+0.2%) recuperate losses (with the latter breaching USD 74.50/bbl to the upside) seen at the back end of last week following an uptick in the Baker Hughes rig count while Mexican President Obrador stated his administration will hike crude production by 600K BPD. Though news flow remains relatively light, a 12-hour strike is to start at Total’s UK offshore platforms at 12:00BST. Metals trade mostly lower with spot gold marginally easing, yet still rangebound, moving with an uneventful greenback ahead of key risk events this week (FOMC interest rate decision on Wednesday, US jobs data on Friday). Copper continues to trade lower while reports stated that workers at the world’s largest copper mine, Escondida mine in Chile, have rejected the final contract offer over wages and are voting whether to go on strike.

US Event Calendar

• 10am: Pending Home Sales MoM, est. 0.2%, prior -0.5%
• 10am: Pending Home Sales NSA YoY, prior -2.8%
• 10:30am: Dallas Fed Manf. Activity, est. 31, prior 36.5

DB’s Craig Nicol concludes the overnight wrap

A quick glance at our screens this morning shows that markets in Asia have started the week fairly sluggish. The Nikkei (-0.68%), Hang Seng (-0.69%), Shanghai Comp (-0.16%) and Kospi (-0.12%) are all in the red, seemingly playing catch up to Friday’s weaker session on Wall Street. Futures on the S&P are also weaker (-0.27%) while the focus in bonds is on JGBs once more where 10y yields are testing that upper limit again, having broken through 0.10%. In fairness there was very little in the way of new news for markets over the weekend to change the narrative. US Treasury Secretary Steven Mnuchin said on Fox News yesterday that the US is “well on the path” for sustained growth of 3% a year for “several years”, while White House Economic Director Larry Kudlow said that President Trump “deserves the victory lap” following Friday’s solid Q2 GDP print.

Back to those central bank meetings this week, which of the three, the BoJ on Tuesday might be the most hotly anticipated given the various stories related to a possible yield curve tweaking over the last week. That said our Japan economists do expect the BoJ to maintain its current policy stance. In consideration of the side effects of its policy, the team believe that the BoJ will declare at the end of its statement that, based on its analysis in its quarterly Outlook Report, that it will maintain its easing policy for an extended period but will conduct financial market operations and asset purchasing operations to address the mounting cumulative side effects. Our colleagues believe one measure to deal with such side effects will include an overhaul of its ETF purchasing operations (a shift from Nikkei 225-linked ETF to Topix-linked ETF). An increase in the JGB yield target appears unlikely at a time when it is expected to revise downward its inflation forecast.

For the Fed on Wednesday, no change in policy is expected and given that this is not a meeting that includes a post-meeting conference or a fresh summary of economic projections, it’s likely that this will be less of a market mover. Our economists expect any changes to be perfunctory and cosmetic, though they note that the Fed could acknowledge some recent softness in the housing data. As a complement to June’s removal of forward guidance language, the statement could also include some language, such as the phrase “for now” featured in Powell’s recent monetary policy testimony. In the view of our economists, such verbiage would have the effect of including uncertainty into their gradual rate hike mantra. In our colleagues view this would de-emphasise forward guidance and reiterate that their actions are data dependent. More from our economists preview on the Fed here.

As for the third central bank this week, the consensus expectation is that the BoE will deliver a 25bp hike on Thursday, something that the market is currently assigning a 85% chance of happening. Should they hike, which our economists expect the BoE to do albeit dovishly, then this would mark the first time since 2009 that the bank rate would be above 0.5%. It’s worth noting that the latest BoE economic projections will also be released alongside the policy decision, including new forecasts for growth and inflation. It’s also expected that BoE Governor Carney will offer an updated view on the neutral rate. On that our UK economists published a preview note (link) where they argue that the UK’s current neutral rate is between 0.25% to 0.50% with the risk being that the BoE’s estimate is at the higher end of this range. This would translate into a nominal rate of between 1.75% to 2.50%.

If that wasn’t enough, as noted at the top there’s also another employment report to get through in the US on Friday – the highlight of this week’s data. Expectations are for a 193k July payrolls reading, an unemployment rate of 3.9% (down one-tenth from June) and an average weekly earnings reading of +0.3% mom. Our US economists also expect a +0.3% earnings print while their forecast for payrolls is 180k.

Other than that, we’ve also got the June PCE and Q2 ECI data out in the US on Tuesday. Our economists are forecasting +0.7% qoq for ECI and a core PCE reading of +0.1% mom reflecting the weakness in the core CPI print in June. If the latter comes in as our economists expect then the annual reading will round down one-tenth to +1.9%, however this should be taken with a grain of salt given the BEA benchmark revisions with recent quarters’ inflation data revised upwards.  In actual fact we’ll get a decent opportunity to test the global inflation pulse this the Eurozone, France and Italy on Tuesday. The Eurozone core reading is expected to come in at +1.0% yoy and up one-tenth from June.

Last but by no means least, it’s another big week for earnings with 145 S&P 500 companies due to report. The big highlights are Caterpillar on Monday – which is always a good barometer for global growth – Apple, Procter & Gamble and  Pfizer on Tuesday, Metlife on Wednesday, Dupont on Thursday, and Berkshire Hathaway on Friday. In Europe we’ll also get releases from the likes of Volkswagen, Siemens, BP, Barclays and Credit Suisse.

Earnings certainly dictated much of how equity markets performed last week and it was no different on Friday with disappointing Twitter (-20.54%) and Intel results (-8.59%) contributing to the Nasdaq’s decline (-1.46%), while the S&P 500 (-0.66%) also finished lower. The Nasdaq was actually the only US equity markets that fell last week (-1.06%), while the S&P (+0.61%) and Dow (+1.57%) both advanced. In Europe, equities were all higher on Friday, with the focus also on earnings. The Stoxx 600 closed up +0.40% on Friday and posted its highest weekly gain since early March (+1.68%). Meanwhile core European government bonds were little changed on Friday while 10y Treasury yields dipped -2.2bp following the Q2 GDP data.

Just on that, while Q2 GDP was slightly below consensus at 4.1% saar (vs. 4.2% expected) it still represented a jump of 1.9ppt from Q1. In the details, private consumer spending rose a firmer-than-expected 4.0% saar while a 9.3% saar jump in exports drove a 1.1ppt positive contribution to growth from net exports. The Q2 core PCE print was also slightly below market at 2.0% qoq (vs. 2.2% expected). Over in France, Q2 GDP was below expectations at 1.7% yoy (vs. 1.9%), in part as household consumption posted its first decline since the first quarter of 2014 (-0.1% qoq) while net exports also contributed negatively to growth.

Looking at today’s events, in Europe, we’ll get the preliminary July CPI print for Spain followed by June money and credit aggregates data in the UK and July confidence indicators for the Euro area. In the afternoon we’ll then get the July preliminary CPI report for Germany, while in the US the data includes June pending home sales data and the July Dallas Fed manufacturing activity print. Away from that, President Donald Trump will host Italian Prime Minister Giuseppe Conte at the White House, while earnings highlights include Caterpillar.

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Ahead of the potentially dramatic BOJ decision tonight, the Japanese bond market is becoming increasingly jittery.

After 10Y JGBs sold off early in the session, with yields rising as high as 0.11% – the highest level in almost a year and a half – as the market continues to test the Bank of Japan’s intentions ahead of its policy decision, on Monday morning, the BOJ intervened again, offering to buy an unlimited amount of bonds for a third time in a week.

While unlimited in size, the central bank offer, made at 0.1% for bonds with 5-10 year maturities, drew some 1.6 trillion yen ($14.4 billion) of bids which were all accepted, the central bank reported just around 1am EDT. The 10-year yield pared the day’s advance after the move was announced.

Following the announcement, the 10-year JGB yield slid half basis point lower to 0.095%, compared with the 0.11% touched before the operation. This is over 3x more than the close of 0.03% just ten days ago ahead of media reports the BOJ will adjusted the parameters of its YCC.

As Bloomberg notes, Monday’s purchase was significantly larger than the 94 billion yen bought in the latest prior on Friday, as prevailing bond prices were below where the BOJ was buying, allow investors to take advantage of the free money.

The fixed rate of 0.10% for the operations on Friday and Monday was lower than the 0.11% offered at four previous operations for the five-to-10 year maturities. Monday’s fixed-rate operation was the seventh since the policy was introduced, and the first time it has conducted three operations within a single week as shown below.

As discussed most recently last night, speculation the BOJ will tweak to its bond purchases to limit their negative side effects – as discussed extensively by JPMorgan over the weekend – has tripled 10Y JGB yields in the past week, while spurring a steepening in global debt markets. According to sellside analysts, the central bank may allow a bigger trading range for 10-year yields, or consider adjusting its annual target to expand its balance sheet; alternatively it could do nothing in which case yields would tumble or merely punt to September.

Commenting on the latest BOJ intervention, Nomura said that “the biggest reason for this operation was the risk that the 10-year yield would rise significantly away from zero,” according to the bank’s analyst Takenobu Nakashima. “The BOJ clearly wanted to send a message it will defend the 10-year target around zero percent.” Markets have now clearly “got the message and should refrain from testing the BOJ’s resolve Tuesday” when its ends its two-day meeting, Nomura continued, adding that the BOJ’s operation last Friday indicated that the rate at which it conducts unlimited buying isn’t fixed, while the main message from Monday’s operation is to remove any speculation it wants to guide yields higher, and also to prevent the yen from strengthening.

Nakashima also warned that one can’t rule out the possibility the BOJ will decide to take absolutely no action on Tuesday, in which case, JGB yields will plunge. Taking that risk into consideration, investors can’t continue pushing yields higher, he concluded.

That said, should the BOJ proceed with adjusting its QE, any tweaks would be the first since the central bank announced yield-curve control in September 2016.

As a result, Mitusbishi UFJ writes that “the BOJ faces an extremely difficult situation,” with economist Naomi Muguruma noting that “at this meeting, it may just suggest that the rate used for unlimited bond buying isn’t fixed, as indicated by Friday’s market operation. This is just an area of adjustment in implementation, not the policy itself.”

And yet, even as Kuroda contemplates how to announce to the market he has to ween off QE sooner or later, he faces a dilemma in that persistently weak inflation – whose forecast is expected to be reduced by the BOJ tonight – dictates the need to maintain stimulus. Winding it back would strengthen the yen, further undermining efforts to spur price-gains, while also hitting Japanese exporters, and hitting the BOJ’s credibility.

While Kuroda and his board have said they would consider discussing an exit from the stimulus policy from fiscal 2019, they have also reiterated that there would be no change until the BOJ’s inflation target of 2 percent has been reached.

Which is why some analysts believe that all the build up ahead of tonight’s announcement will be for nothing: “I don’t think they may act as soon as tomorrow, it may be that they prime the market for a move later on in this year,” said BofA’s rates and FX strategist Claudio Piron. “If there’s something a bit more aggressive, let’s say they shift the targeting away from 10-year to 5-year point of the curve, then we may have more of a sustained impact as well in terms of a steeper curve and a lower dollar-yen.”

Courtesy of Bloomberg, here is the full history of the BOJ’s seven fixed-rate operations to date.

 

 

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Authored by Robert Gore via StraightLineLogic.com,

Strike while the iron is hot.

There can be no better advertisement against Democrats, neoconservatives, and never-Trumpers than their display after the Helsinki summit. Whom the gods would destroy they first make mad.

The Democrats’ destruction began long before Trump. They are wholly associated with government, their answer to all problems and the source of their identity and power. Where they once had a healthy hostility towards the military and the intelligence agencies, they are now among their stoutest defenders. Their ideology, such as it is, is simply more: more government, taxes, laws, regulations, revenues, power, surveillance, wars, and programs, in short, more blob.

Democrats and government is not just a marriage of convenience. They believe, to the core of their being, in its power with a fervor and conviction that surpasses most religious faith. Denied control of the government, they are fish on the bank, deprived of their element, flopping helplessly. The cardinal sin of whatever opposition they face is never rooted in ideology, it’s rather that the opposition has the temerity to seek control of their government.

Somewhere along the line Democrats quit caring, or even asking, whether government worked. The first Mayor Richard Daley may have been a distasteful autocrat, but Chicago during his reign called itself the city that worked. Democrats have had lengthy tenures over cities that manifestly don’t work—Detroit, Baltimore, Washington, Cleveland, New Orleans, Philadelphia, St. Louis, and now Chicago—in some cases they’re crumbling. Governance has become an exercise in patronage, payola, and making excuses, the effectiveness of city-provided services not even on the list of concerns.

Obamacare has been the apotheosis of Democrat-sponsored incompetence. It’s the latest in a long string of government failures, epitomized by the huge stack of debt and unfunded promises, and disastrous military interventions. Government über alles has become an albatross for its believers, particularly the Democrats, although there are many Republican acolytes.

The age of centralization and government is passing, cause of death the centrifugal devolution of information, computing and communications power, and weaponry to individuals. Governments will mount repressive rearguard actions, but they can’t fight the central reality of our time: they have failed, massively, and are unable to contain the fallout and blowback. Globalism—more of the same, only bigger—is running into resistance that’s still gathering steam. Just wait until the world’s debt-based financial system and economy collapse.

The Democrats have hitched their wagon to a falling star. When facts are uncongenial, take refuge in fantasy. Democrats embrace the whimsical notion that Hillary Clinton deserved to win the 2016 election. She had to cheat to beat Bernie Sanders, a socialist who would further yoke the party to the falling star. It’s charitable to call her record undistinguished. If she weren’t Bill Clinton’s wife she’d have no record at all. She had trouble citing accomplishments or detailing a program. Her campaign was inept, crowned by the “deplorables” insult that cost her the election.

The Democrats’ academic branch office and intellectual vanguard has gone farthest off the deep end. Socialists in training demand free (to them) higher education, and free (to them) housing and medical care plus a guaranteed income once they’re out of school. Who pays for all this in a country carrying $200 trillion plus in debt and unfunded obligations? Not their problem—they issue demands, not solutions.

From once illustrious institutions has come an exciting panoply of newly discovered gender variations—with matching pronouns—and sexual deviancies. No minority group claiming victimhood and mouthing the required pieties is too small for the solicitous concern of campus social justice warriors. Anyone who questions socialism, identity politics, or mandated tolerance is met with an intolerant storm of vitriol that increasingly transmutes into violence.

The left’s signature issues resonate with perhaps 30 percent of the electorate. Russiagate gets a rise out of even less. Yet these burning issues are the horses the Democrat will ride come November.

Some are inclined to write off the Trump-Russia collusion story as yet another fantasy, irrelevant to most Americans, but it’s much more than that. That it’s pure concoction finds ultimate confirmation in one simple fact: its proponents have not offered a scintilla of actual proof.

We’ve had assessments, assertions, maybes, might haves, could haves, and “informed” speculation; a remote “hack” that couldn’t be a remote hack, but rather an onsite download because of the high transmission speed; a Democratic-funded dossier used as the basis of a FISA court surveillance request and its subsequent renewals; indictments against potential defendants who will never be tried; banner headlines for and endless media trumpeting of inconsequential developments, and prosecutions and plea bargains that have nothing to do with the Trump campaign’s alleged collusion with Russia.

They’ve thrown everything but the kitchen sink at this gargoyle, but the kitchen sink for which reasonable people keep looking is any hard evidence from those who bear the burden of proof that the Trump campaign colluded with Russia. As SLL has said from the beginning, the story is pathetically flimsy, a sign of its purveyors’ weakness, not strength. It’s driven not by Russophobia, but prosecution-phobia. Washington broke into insane hysteria the night of November 6, 2016 not because Donald Trump said he’d seek better relations with Russia, but because of his catchphrase: “Drain the Swamp!”

Trump knows or suspects where some of the bodies are buried, and the powers that be fear he’ll go after them for everything from garden-variety graft, bribery, theft, and influence peddling to crimes as sordid as child molestation and murder.

“Plot Holes,” SLL, 2/26/17

Corruption and criminality have been a way of life in Washington for decades. Trump is clearly a threat.

This, not the fear that Trump will revise US policy towards Russia, is behind the Deep State’s cold sweat, motivating its hysterical—comical if wasn’t so serious—campaign to depose him. This is the first time it has faced an unfriendly in the White House, with presidential powers to investigate, expose, prosecute, scandalize, and ruin.

“Plot Holes”

Trump has driven his opposition batshit crazy. Drowning in their own fetid fantasies and irretrievable irrelevance, he’s got an opportunity to throw them anchors. It’s the perfect time to go on the offensive.

If the economy and stock market hold up, if the US doesn’t invade anybody, and if no nuclear bombs drop between now and November, the Democratic blue wave will be just another one of their fantasies. The election may well amount to an endorsement of Trump. However, nothing is set in stone and if the blue wave does materialize, Trump guarantees himself two years of headaches and obstruction, at best, and impeachment—if rabid Democrats get their way—at worse. Forget about any prosecution of the Deep State and the clowns who have led its inept coup, it could be Trump wearing the new black.

Taking Rand Paul’s suggestion and revoking the security clearances for some of those clowns—John Brennan, James Clapper, James Comey, Susan Rice, Michael Hayden, and Andrew McCabe—would be a powerful first step. It signals that something more serious—indictment and prosecution—may be on the way. He would be moving against enemies who have so overplayed their weak hand they’ve actually increased his support. Although there would be plenty of flack, especially from the captured media, the majority of Americans would applaud the move.

It would send another, subtextual message as well. It turns the treason calumny against those who have so irresponsibly used it.

You take away security clearances from people who pose a security threat. These conspirators are part of a cabal trying to remove the legitimately elected president of the United States. They are using their Russiagate concoction to oppose at every turn any attempt by Trump to improve relations with the one country on the planet that has as many nuclear weapons as the US. This dangerous, arrogant, and corrupt cabal represents a grave threat to what remains of the rule of law, the institution of the presidency, and the life of every American.

They must be stopped. It’s time for Trump to stop them.

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Authored by Andrea Germanos via CommonDreams.org,

A new USA Today investigation offers a searing indictment of maternal care in the United States, and says the country “is the most dangerous place in the developed world to give birth.”

“Deadly Deliveries,” the result of a four-year investigation, references federal data showing that more than 50,000 women are “severely injured” and roughly 700 die during childbirth each year. Perhaps even more staggering is that “half of these deaths could be prevented and half the injuries reduced or eliminated with better care,” the investigation found.

The findings, based on interviews with women and a trove of internal hospital records, “reveal a stunning lack of attention to safety recommendations and widespread failure to protect new mothers.”

Such failures often stem from inadequate or delayed responses to hemorrhages and dangerously high blood pressure.

A disturbing trend noted in the report: from 1990 to 2015, in most developed nations the number of maternal deaths per 100,000 births was steady or dropped. Not so in the U.S., where the figure soared. In Germany, France, Japan, England, and Canada the number had fallen to below 10 in the time frame. In the U.S., meanwhile, the figured soared to 26.4.

California, though, is an exception. The state’s maternal death rate fell by half—a drop attributed to it adopting “the gold standard” of safety measures.

Looking at the overall picture in the U.S., though, “it’s a failure at all levels, at national organization levels and at the local hospital leadership levels as well,” Dr. Steven Clark, a leading childbirth safety expert and a professor at Baylor College of Medicine, said to USA Today.

One of the investigative reporters, Alison Young, talked with “CBS This Morning” about the report:

The investigation follows a related analysis out late last year by ProPublica. Affirming previous studies, its analysis found “that women who hemorrhage at disproportionately black-serving hospitals are far more likely to wind up with severe complications, from hysterectomies, which are more directly related to hemorrhage, to pulmonary embolisms, which can be indirectly related. When we looked at data for only the most healthy women, and for white women at black-serving hospitals, the pattern persisted.”

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