Author: admin

As the FX markets came to life last night after a tense weekend in the middle east, it is clear that anxiety about the Saudi Riyal is at the forefront.

Forward bets on devaluation/depegging surged most in 7 months as shares in bin-Talal's Kingdom Holdings continued their slide to the lowest since Dec 2011.

The round-up risks overwhelming local and foreign investors struggling to get their heads around the rapid changes shaking the kingdom, but for the second day in a row, any selling was met by instant panic-buying as we suggest Saudi's very own Plunge Protection Team stepped in…

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• Gunman kills 26 in Texas (Reuters)
• Trump Urges Japan to Buy More U.S. Military Equipment (WSJ)
• Ex-Catalan leader granted freedom to campaign for independence (Reuters)
• House begins revising Republican tax bill to quell dissent (Reuters)
• Why the Next Four Days Will Be Crucial for the GOP Tax Bill (BBG)
• Broadcom offers to buy mobile chipmaker Qualcomm for $103 billion (Reuters)
• Billionaire Olayan Family Said to Put Saudi IPO Plan on Hold (BBG)
• How Doctors Are Getting Rich on Urine Tests for Opioid Patients (BBG)
• Oil hits two-and-a-half year peak on Saudi purge, world shares retreat (Reuters)
• Russia’s Sibur, on deals with Navigator, says no sanctions violations found (Reuters)
• Manafort Claims Worth of $28 Million But Mueller Has His Doubts (BBG)
• Prosecutors: Manafort needs to detail finances further in bail talks (Reuters)
• Goldman, Chinese Wealth Fund Set to Invest Billions in U.S. (WSJ)
• Trump Jr. Hinted at Review of Anti-Russia Law, Moscow Lawyer Says (BBG)
• Bank Bets Tied to Government Bailouts Soar Up to 1470% (WSJ)
• Iceland’s leftist opposition fails to form government (Reuters)
• Mattis backs Geneva process on Syrian conflict (Reuters)
• The Future Is Dodgeball (WSJ)
• Greenwich Riches, Bridgeport Woes Tell Tale of Two Connecticuts (BBG)

Overnight Media Digest

WSJ

– A young man clad in black and wearing a ballistic vest blasted his way into a Baptist church in this south Texas town on Sunday with an assault-type rifle, leaving at least 26 people dead and 20 others injured. on.wsj.com/2iyTVtU

– U.S. Commerce Secretary Wilbur Ross failed to disclose business connections to Russian President Vladimir Putin’s family and inner circle on a required personal financial-disclosure form earlier this year, according to documents released over the weekend. on.wsj.com/2ixNcQK

– Qatar Airways Co is buying a stake in Cathay Pacific Airways Ltd for $661 million, the latest in a string of investments in global rivals by the Middle East carrier. on.wsj.com/2h8bgJK

– A sweeping weekend roundup of more than five dozen princes, ministers and prominent businessmen in Saudi Arabia marks a dramatic escalation in the crown prince’s effort to consolidate power and accelerate far-reaching change in the kingdom. on.wsj.com/2h8bikQ

– The president of the Federal Reserve Bank of New York is set to announce he will retire next year, about six months earlier than scheduled, adding to an unusual wave of turnover among the central bank’s top monetary and regulatory decision makers and ushering in new uncertainty about its policy course. on.wsj.com/2h8bArW

– The U.S. Justice Department and Federal Bureau of Investigation are investigating three international banks for their roles in selling about $2 billion of debt for Mozambique, opening a new phase in the global inquiry into the bond deals, people familiar with the matter said. on.wsj.com/2h9VqOx

 

Britain

The Times

* Britain’s premier business body has complained that the government’s industrial strategy has been too long coming and that ministers have been unclear on what they are trying to http://achieve.bit.ly/2An1tYO

* A huge surge in trade with the Channel Islands and offshore tax havens has prompted calls for the government to explain the source of the growth amid concerns that it is masking the importance of trade with the European Union. bit.ly/2AkjGGa

The Guardian

* The new Marks and Spencer chairman Archie Norman has told senior managers that the retailer needs to cut clothing prices and that too much of its fashion is aimed at the http://over-55s.bit.ly/2Am7uEU

* Britain’s biggest rail franchise, which includes the strike-hit Southern service, is likely to be broken up when it expires in 2021, the government has said. bit.ly/2AmmT84

The Telegraph

* Plans for a blockbuster float of Saudi Arabia’s national oil explorer, Saudi Arabian Oil company IPO-ARMO.SE, could be thrown into further doubt after one of the company’s board members was arrested as part of a corruption crackdown in the Gulf state. bit.ly/2AngdH6

* The Church of England’s investment arm has called for the mining industry to review tailing dams and the governance of joint ventures in the wake of the Samarco mine http://disaster.bit.ly/2AkC7dL

Sky News

* Officials from Bank of England contacted other accountancy firms in recent days to signal a contest that will threaten KPMG’s hold on a position it has held since just before the run on Northern Rock in 2007, according to Sky News. bit.ly/2AmfeH1

The Independent

* Saudi Arabia has arrested 11 princes, four officials and tens of former officials as part of a sweeping anti-corruption probe which further cements control in the hands of its young Crown Prince, Mohammad bin Salman. ind.pn/2Amnzu8

 

NYT

– President Donald Trump urged Saudi Arabia to pick the Big Board as the international venue for the initial public offering of Saudi Arabian Oil Co (IPO-ARMO.SE). “I want them to strongly consider the New York Stock Exchange or Nasdaq,” he said at Yokota Air Base after arriving in Japan for a 12-day tour through Asia. nyti.ms/2iyDA8n

– William Dudley, the president of the Federal Reserve Bank of New York and a vocal proponent of improving the “culture” at big banks, was expected to announce his retirement as early as this week, according to two people familiar with the decision. nyti.ms/2h6dn0B

– Google and others, fighting for a small pool of researchers, are looking for automated ways to deal with a shortage of artificial intelligence experts. nyti.ms/2h7kHZX

– A midnight blitz of arrests ordered by the crown prince of Saudi Arabia over the weekend has ensnared dozens of its most influential figures, including 11 of his royal cousins, in what by Sunday appeared to be the most sweeping transformation in the kingdom’s governance for more than eight decades. nyti.ms/2iz3glj

– After becoming commerce secretary, Wilbur Ross Jr. retained investments in a shipping firm he once controlled that has significant business ties to a Russian oligarch subject to American sanctions and President Vladimir Putin’s son-in-law, according to newly disclosed documents. nyti.ms/2h4Vqj4

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Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way. If the rate of expansion is too low, then it will get slower and slower until expansion stops entirely, then finally, begin collapsing again in a Big Crunch. That’s bad enough. But the other possible fate of the universe is even worse. If the expansion is fast enough, then the universe will keep expanding forever. Things will get colder and colder, until the state called the heat death occurs.

If only economics had similarly vigorous controversies. It faces its own existential problems. For example, there is an analogous concept to heat death in the economics universe. Will credit continue to grow, and with it the economy? Or will some force—or law of economics—prevent slow and stop it?

There is a force that can cause the heat death of the economic universe. It is not the moralizing argument that faults man for the sin of wanting more material comfort, and condemns his desire for growth as hubris.

Everyone needs growth. Even the environmentalists couch their anti-growth policies. They want us to stop using energy, but cannot openly promote energy poverty as an ideal. So they talk in terms of sustainability.

Sustainability is an interest concept. For a process or system to be sustainable, it means that there is no reason why it cannot continue indefinitely (well at least until the sun goes red giant and engulfs the Earth, which may not happen because before that our galaxy is on a collision course with the Andromeda galaxy…)

Well, is our economy and its monetary system sustainable? How do you even approach this question in a rigorous way?

We submit one fact for your consideration. To service debt, you must generate income. If you fail to pay at least the interest when due, then the creditors suffer big losses. This impairs their capacity and appetite to lend to others, which suffocates businesses who need capital to expand. So the key is generating enough income to pay interest. We would add on top of that the need to amortize the principal too.

The analogy to heat death of the universe is a pretty good fit. Physicists are not looking at one probe that is moving out of the solar system and will chill down to near absolute zero when its power supply runs out of juice. Nor one object, such as Pluto. They are looking at the universe and all entities in it including all stars and all life on all planets.

Similarly, we as economists must look at the economic universe and all business enterprises and people in it. If one business is stranded with, e.g. an obsolete product such as mobile phone that can only do voice calls, it will fail and default on its debts. That is not under question. The question is: can it happen to the entire economy? If it does, then the monetary system will fall and everyone will lose their savings.

If it can happen what are the circumstances?

So far, we said income (that is net income, after cost of goods sold and all other expenses) must exceed debt service. And, perhaps including debt amortization.

Measuring these two quantities, much less estimating them years or decades in the future, would be quite a challenge. Just like measuring the velocities and distances of all objects in the universe.

Fortunately, we can look at something much easier. We know the economy is in motion today. So we just need to know the trend. If income is rising at least as fast as debt service, then we can say that the economy is sustainable.

We have been writing about this trend for the last month, though we did not describe it in this context. The variable we need to measure is none other than marginal productivity of debt! MPoD, as we will call it here for brevity, is a measure of how much new GDP is added for each freshly borrowed dollar.

The graph we published on Oct 15 is included again here.

Aside from the anomaly when MPoD moved up sharply in the wake of the great financial crisis (which we discussed here), it is an unmistakable falling trend. Post 2010, it is falling again from that higher level. This trend spans many decades, and it is no fluke.

A falling MPoD means we get less and less GDP for each borrowed dollar. Or conversely, we have to borrow more and more dollars to get a dollar of GDP. This is significant as growth in net income can be no greater than growth in GDP (but it is likely a lot slower, a whole ‘nother topic). This graph is saying that the income to debt ratio is falling.

We are getting close to our statement above, income must exceed debt service or else there will be a heat death of the economic universe. We have now proven income is growing slower than debt total. We have one more step, to prove income is growing slower than debt service.

Normally, debt service would grow proportionally with debt. It may seem fortunate that we don’t live in a normal universe, as we shall see in a moment. We live in an abnormal place, which is subject to one of the planks proposed by Karl Marx in his infamous Communist Manifesto.

“5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.”

The central bank conducts what it calls monetary policy. The net result of monetary policy for 36 years so far is falling interest rates. Keith has written about the various ways that falling interest causes destruction in his series of articles on yield purchasing power.

However, in light of the heat death question, falling interest would seem to have the potential to save us. It is obvious that servicing the same debt at 1% interest has a lower monthly payment than at 10%. This is why many economists say there is no problem. We are told that, “debt service today is not a greater percentage of GDP than it was when the debt was much lower decades ago.” That may be true, and we won’t even get into if net income is the same percentage of GDP as it was (we would bet an ounce of fine gold against a soggy dollar bill it isn’t).

We want to make a different argument. If debt service depends on falling interest, what happens when interest hits zero? Here is another good analogy to physics, which also asks what happens at zero. In physics, nothing. Literally. Motion stops on even a molecular level at absolute zero.

What happens to an economy when interest—we mean the long-term bond rate—falls to zero? What happens when businesses can borrow at 0%? Well, obviously, debt service goes to zero (not including amortization of the principal). With no cost to borrow, businesses can borrow for activities that produce no economic value(!)

In a normal economic universe, interest is greater than zero. As we said last week:

“A dollar to be paid next year is worth less than a dollar in the hand today. One reason is that we are mortal beings. In order to be alive next year, we must remain alive every single day between now and then. There are natural reasons for time preference—the desire to have a good today, and not postpone it. We are also not omniscient. Something may come up, such as an illness, which forces us to consume what we did not plan to consume.

Another reason is, of course, risk. Unlike the magic machine in our example, a business enterprise may cease to make money for any number reasons including a new competitor or changing customer preferences.

For many reasons, a dollar to be paid next year is not worth a dollar today. A dollar to be paid in ten years is worth even less. Future payments must be discounted. The discount is related to the interest rate, and it shares many of the same causes.”

At zero, this economic law is violated. No one can act as if he had no time preference, which is exactly what zero interest requires him to do.

And zero, itself, is not sustainable anyway. Assuming that some amount of amortization is required, then the debt service becomes unbearable and the interest rate must keep falling.

When interest is positive, or even zero, business borrowing must fund activities that generate a positive return (even if only share buybacks). However, when interest goes negative, they can borrow to engage in capital-destroying activities. So long as the rate of destruction is below the rate of interest.

For example, suppose an enterprise destroys its investors’ capital at 1% per year. That’s bad. But what if it can borrow this capital at -2%? The investors lose 2% per year. But the business nets +1%. Positive one percent. What is profitable to do, will be done at large scale across the entire economic universe.

At negative rates, investors lose a bit of their capital every year. They are subsidizing businesses who are destroying it bit by bit every year.

Negative interest rates are not sustainable. A falling interest rate can make debt service cheaper. However, it does not solve the problem of falling marginal productivity of debt. The heat death of the economic universe looms closer every day (we make no prediction of the timing of this here, that will be the subject of a future series).

So now we can write an economic law:

If MPoD < 1, the economy is unsustainable

That is, the heat death of the economic universe is inevitable.

Note that MPoD was under 1 even as long ago as the 1950’s (we suspect this pathology began either around the time of President Roosevelt’s gold confiscation in 1933, or the creation of the Federal Reserve in 1913, but we don’t have the data going back that far).

Prior to the crisis of 2008, MPoD fell below 0.1. Even now with its post-crisis boost, it is well under 0.4, and falling.

It is time for gold to enter the mainstream monetary discussion. Interest rates and MPoD do not fall when there is a free market in money and credit. And the market will choose gold, if it is free to do so.

---

The prices of the metals ended all but unchanged this week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.

It was not a gentle fall back. In about an hour and fifteen minutes on Friday morning (as we Arizonans reckon the time), the price of silver dropped from $17.16 to $16.76. Was this a case of the infamous manipulation we’ve all read about? We can’t tell you who did it, but we can show you a clear picture of what happened.

In any case, it seems that either Fed Chairman Appointee Powell is not good for silver, or else that the price of silver has little to do with continuation of current Fed (central) planning.

We will look at intraday gold and silver supply and demand fundamentals. But first, here are the charts of the prices of gold and silver, and the gold-silver ratio.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio fell a hair.

In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph showing gold basis and cobasis with the price of the dollar in gold terms.

We see a rising cobasis (our measure of scarcity) along with a rising price of the dollar (i.e. falling price of gold, in dollar terms). This is not surprising; it is the typical pattern nowadays.

Our calculated Monetary Metals gold fundamental price moved down by $12.

Now let’s look at silver.

We also see the cobasis tracking the price of the dollar. Look at how they go down together on Wednesday and Thursday, and up together on Friday. Keep in mind that the contract roll is well underway, that it impacts the silver basis more than the gold basis. Mechanically, the roll involves selling the expiring contract.

Our calculated Monetary Metals silver fundamental price rose $0.22.

Now, on to Friday’s crash. This is the opposite situation from a week ago, when gold and silver got Powelled. In more ways than one.

In Part II of this article, we show intraday graphs of both metals for Wedneday’s price spike and Friday’s price crash, and provide our analysis of the basis moves.

 

© 2017 Monetary Metals

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Steve Liesman’s Saturday night report that NY Fed president, and former Goldman chief economist is retiring, was spot on and moments ago it was confirmed by the Federal Reserve Bank of New York which today announced that “William C. Dudley, president and chief executive officer, intends to retire from his position in mid-2018 to ensure that a successor is in place well before the end of his term. Mr. Dudley’s term ends in January of 2019 when he reaches the 10 year policy-limit in the role.”

The question now is if, as some have speculated, Dudley will be replaced by Kevin Warsh, a move which may have even greater implications for monetary policy than had John Taylor become Fed chair.

Full statement from the Federal Reserve:

New York Fed President Dudley to Retire

 

NEW YORK – The Federal Reserve Bank of New York today announced that William C. Dudley, president and chief executive officer, intends to retire from his position in mid-2018 to ensure that a successor is in place well before the end of his term. Mr. Dudley’s term ends in January of 2019 when he reaches the 10 year policy-limit in the role.

 

Mr. Dudley joined the New York Fed in 2007 as executive vice president and head of the Markets Group, where he also managed the System Open Market Account for the Federal Open Market Committee (FOMC). He was named the 10th president and CEO of the New York Fed on January 27, 2009, taking over the remainder of his predecessor’s term. Mr. Dudley was appointed for his first full term as president and CEO in 2011 and reappointed in 2016.

 

First as head of the Markets Group and then as president and CEO of the New York Fed and vice chairman of the FOMC, Mr. Dudley was instrumental in the design and implementation of many of the emergency lending facilities and extraordinary monetary policy measures undertaken by the Federal Reserve to support the U.S. economy. In the years following the crisis, he has been equally instrumental in the effort towards normalizing the Fed’s monetary policy and balance sheet, and has been a strong advocate for strengthening the nation’s financial system and payments infrastructure. Following the LIBOR scandals, Mr. Dudley was part of an international effort to reform and improve reference rates, including the creation of a new set of New York Fed-administered benchmark rates. Mr. Dudley is also active in international fora, including serving on the Board of the Bank for International Settlements and has chaired the Committee on Payments and Market Infrastructures and currently chairs the Committee on the Global Financial System. He played a key role in the development and global adoption of Principles for Financial Market Infrastructures (PFMI) designed to ensure the robustness and resiliency of these critical infrastructures.

 

“I have deeply appreciated Bill Dudley’s enormous contributions to the FOMC, his wise counsel and warm friendship throughout the years of the financial crisis and its aftermath,” said Federal Reserve Board Chair Janet L. Yellen. “The American economy is stronger and the financial system safer because of his many thoughtful contributions. The Federal Reserve System and the country owe him a debt of gratitude.”

 

“For someone who has always had an interest in public policy and service, leading the New York Fed and being a member of the FOMC has been a dream job. I have had the honor to work at the Fed with colleagues who are amongst the most dedicated and talented public servants anywhere,” said Mr. Dudley. “I would especially thank Tim Geithner, Ben Bernanke and Janet Yellen for giving me the opportunity to work closely with them during the crisis and the subsequent economic recovery. I am extremely proud of the work we have done in New York, and as a System, from our efforts to help the nation navigate the financial crisis to beginning the process of normalizing the balance sheet to our work on reforming the culture of the financial services industry. I have every confidence in the institution, its leadership and staff, and know that well after I leave, the New York Fed, as a critical part of the Federal Reserve System, will continue to contribute strongly to the nation’s well-being.”

 

Sara Horowitz, founder and executive director of the Freelancers Union and chair of the New York Fed’s Board of Directors, said, “I want to thank Bill for his thoughtful stewardship. What I have come to appreciate about Bill is his humility and empathy.  I admire how he combines smarts with openness to new and differing perspectives.  This includes an appreciation of the fundamentally changing nature of work in the country. Bill has also been eager to engage with a broad range of groups and individuals, including those who are critical of the Fed.  And, he takes to heart his responsibility to explain what the Fed does and to understand how the economy and thus the Fed’s decisions affect real people in different communities. I saw this first hand during a visit to WHEDco, a community development organization in the Bronx, where his genuine interest and concern was clear. These are certainly attributes that I will be looking for as we conduct our search.”

 

The eligible members of the New York Fed’s Board of Directors, those without bank affiliations, have begun the process for finding Mr. Dudley’s successor. Ms. Horowitz and Glenn Hutchins, co-founder of North Island and of Silver Lake, are serving as co-chairs of the search committee. The committee also includes David Cote, chairman of Honeywell International, Inc. and Denise Scott, executive vice president of the Local Initiatives Support Corporation. The committee has retained executive search firms Spencer Stuart and Bridge Partners to assist with the search.

 

The committee is conducting a nationwide search to identify a broad, diverse and highly qualified pool of candidates from which to select the next president and CEO, subject to the approval of the Board of Governors of the Federal Reserve. As part of the process, the committee will engage with and solicit feedback from a broad set of representatives of the New York Fed’s constituents, including from academia, community and economic development organizations, labor, small business and industry. The search committee expects to conclude the search by mid-2018, dependent on finding the best candidate.

With Dudley’s departure, the Fed will lose one of its more prominent centrists as the following Dove-Hawk ranking from Barclays shows.

 

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German Investors Now World’s Largest Gold Buyers

– German gold demand surges from 17 ton-a-year to a 100 ton-plus per year
– €6.8 Bln spent on German gold investment products in 2016, more per person than India and China
– Germans turned to gold during financial crises and ongoing euro debasement
– Evidence of latent retail demand on increased economic concerns
– “Gold fulfils an important long-term, wealth preservation role in German investors’ portfolios”

Editor: Mark O’Byrne

India and China often grab the headlines as the world’s largest buyers of gold. In 2016 this was not the case.

When measured on a per capita basis it is Germany that takes the impressive crown of largest gold buyer in 2016, all thanks to their investment market. Last year the country set a new personal best, ploughing as much as £6.8bn ($8 bn) into gold coins, bars and exchange-traded commodities (ETCs).

This is impressive considering that back in 2008 the amount of gold purchased by Germans barely registered outside of the country. A new World Gold Council report records that ‘average demand between 1995 and 2007 was a modest 17 tonnes’. In some of those years they weren’t even net-buyers.

In 2008 this began to change as ‘the global financial crisis brought gold to the attention of German investors at large.’ By 2009, the German gold investment market became one of the world’s largest, with annual coin and bar demand growing four-fold from 36t in 2007 to 134t in 2009.

Since then it has continued to climb, as explained in the latest World Gold Council report:

So what changed and can the country keep up this record-breaking?

What changed?

It is assumed that the Germans have an innate understanding of the value of gold thanks to their tumultuous economic history.

As the WGC summarises:

The past seemed to be catching up with the future following the financial crisis when savers once again began to see their savings disappear. Following the ECB’s decision to slash interest rates German banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.

It isn’t surprising that that this triggered Germany’s gold shopping spree. This was supported by the country’s growing gold bullion network that has made it easier for customers to buy and store gold bullion and coins.

Their concerns about the banking system drove up demand for the physical, allocated gold products of the 100-150 non-bank bullion dealers across the country. Investor behaviour shows that gold buyers are clearly seeking out physical gold that they can take delivery of should they so wish.

Where does it go from here?

‘…it is clear why the market boomed. Financial and economic crises brought gold to the attention of investors, and the resulting interest triggered a wave of product innovation and market development.’ 

Given the upshot in German demand following the financial crisis of 2008, it is understandable to look out for further economic downturns as an indication of future gold demand in Germany.

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A week after his old team lost to the Astros in the World Series, famed L.A. Dodgers Hall of Fame broadcaster Vin Scully made an appearance at the Pasadena Civic Center last night for "An Evening With Vin Scully", where he shared some choice opinions about Major League Baseball, and professional sports more broadly.

During the event, an audience member asked Scully for his thoughts on the NFL anthem protest, to which, as Deadspin first reported, Scully responded that he was so repulsed by NFL players taking a knee during the national anthem that he decided to never watch another NFL Game.

"I have only one personal thought, really. And I am so disappointed. And I used to love, during the fall and winter, to watch the NFL on Sunday. And it's not that I'm some great patriot. I was in the Navy for a year — didn't go anywhere, didn't do anything. But I have overwhelming respect and admiration for anyone who puts on a uniform and goes to war. So the only thing I can do in my little way is not to preach. I will never watch another NFL game."

As Sports Illustrated notes, Scully’s remarks come at a relatively safe time for him, as he retired last year after almost seven decades as a broadcaster for the Dodgers. Over the past two seasons of the NFL, players have been kneeling during the National Anthem, despite the NFL guidelines encouraging players to stand and place their hands over their hearts.

Scully, who will turn 90 later this month, briefly served in the Navy before beginning his broadcasting career. National Anthem protests have been far less common in the MLB, where Athletics catcher Bruce Maxwell, has knelt during the national anthem.

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As was leaked by Bloomberg on Friday afternoon, this morning communications chipmaker Broadcom, which just last week announced it would move its headquarters from Singapore to the US (to make any future mega deals easier) said it offered to buy smartphone chip supplier Qualcomm Inc for $70 per share in a transaction valued at $130 billion, including $25 billion net debt, in what would be the biggest technology acquisition ever.

Broadcom’s bid consists of $60 in cash and $10 in shares, representing a 28% premium to QCOM’s closing price on Thursday, a day before media reports of a potential deal pushed up the company’s shares. The deal values Qualcomm’s equity at roughly $103bn.

The proposal stands whether Qualcomm’s pending NXP deal is consummated on currently disclosed terms of $110/shr or if deal is terminated. Silver Lake Partners has provided $5b convertible debt financing commitment letter to support transaction.

A tie-up would combine two of the largest makers of wireless communications chips for mobile phones and, as Reuters adds, raise the stakes for Intel, which has been diversifying into smartphone technology from its stronghold in computers.

In a letter to Qualcomm, Broadcom CEO Hock Tan said the “proposal is compelling for stockholders and stakeholders in both companies. Our proposal provides Qualcomm stockholders with a substantial and immediate premium in cash for their shares, as well as the opportunity to participate in the upside potential of the combined company.”

If concluded, the hostile deal would be the biggest ever takeover in the technology sector and create a company with a combined market capitalisation of more than $200bn.

The full press release below:

Broadcom Proposes to Acquire Qualcomm for $70.00 per Share in Cash and Stock in Transaction Valued at $130 Billion

• Broadcom Proposal Stands Whether Qualcomm’s Pending Acquisition of NXP is Consummated on the Currently Disclosed Terms of $110 per Share or the NXP Transaction is Terminated
• Broadcom and Qualcomm, Including NXP, Will Have Pro Forma Fiscal 2017 Revenues of Approximately $51 Billion and EBITDA of Approximately $23 Billion, Including Synergies
• Delivers Immediate, Substantial and Compelling Premium for Qualcomm Stockholders
• Silver Lake Partners Provides $5 Billion Convertible Debt Financing Commitment Letter to Support Transaction

Broadcom Limited (AVGO) (“Broadcom”), a leading semiconductor device supplier to the wired, wireless, enterprise storage, and industrial end markets, today announced a proposal to acquire all of the outstanding shares of Qualcomm Incorporated (QCOM) (“Qualcomm”) for per share consideration of $70.00 in cash and stock.

Under Broadcom’s proposal, the $70.00 per share to be received by Qualcomm stockholders would consist of $60.00 in cash and $10.00 per share in Broadcom shares. Broadcom’s proposal represents a 28% premium over the closing price of Qualcomm common stock on November 2, 2017, the last unaffected trading day prior to media speculation regarding a potential transaction, and a premium of 33% to Qualcomm’s unaffected 30-day volume-weighted average price. The Broadcom proposal stands whether Qualcomm’s pending acquisition of NXP Semiconductors N.V. (“NXP”) is consummated on the currently disclosed terms of $110 per NXP share or the transaction is terminated. The proposed transaction is valued at approximately $130 billion on a pro forma basis, including $25 billion of net debt, giving effect to Qualcomm’s pending acquisition of NXP on its currently disclosed terms.

“Broadcom’s proposal is compelling for stockholders and stakeholders in both companies. Our proposal provides Qualcomm stockholders with a substantial and immediate premium in cash for their shares, as well as the opportunity to participate in the upside potential of the combined company,” said Hock Tan, President and Chief Executive Officer of Broadcom. “This complementary transaction will position the combined company as a global communications leader with an impressive portfolio of technologies and products. We would not make this offer if we were not confident that our common global customers would embrace the proposed combination. With greater scale and broader product diversification, the combined company will be positioned to deliver more advanced semiconductor solutions for our global customers and drive enhanced stockholder value.”

Tan continued, “We have great respect for the company founded 32 years ago by Irwin Jacobs, Andrew Viterbi and their colleagues, and the revolutionary technologies they developed. Following the combination, Qualcomm will be best positioned to build on its legacy of innovation and invention. Given the common strengths of our businesses and our shared heritage of, and continued focus on, technology innovation, we are confident we can quickly realize the benefits of this compelling transaction for all stakeholders. Importantly, we believe that Qualcomm and Broadcom employees will benefit from substantial opportunities for growth and development as part of a larger company.”

Thomas Krause, Broadcom Chief Financial Officer, added, “The Broadcom business continues to perform very well. Broadcom has completed five major acquisitions since 2013, and has a proven track record of rapidly deleveraging and successfully integrating companies to create value for our stockholders, employees and customers. Given the complementary nature of our products, we are confident that any regulatory requirements necessary to complete a combination with Qualcomm will be met in a timely manner. We look forward to engaging immediately in discussions with Qualcomm so that we can sign a definitive agreement and complete this transaction expeditiously.”

Strategic and Financial Benefits

• Creates a Leading Diversified Communications Semiconductor Company: Qualcomm’s cellular business is highly complementary to Broadcom’s portfolio, and the combination will create a strong, global company with an impressive portfolio of technologies and products.
• Accelerates Innovation to Deliver More Advanced Semiconductor Solutions to Global Customers: As a result of enhanced scale, reach and financial flexibility, the combined company will benefit from the ability to accelerate innovation and deliver more advanced semiconductor solutions to its broad global customer base.
• Compelling Financial Benefits: The combined company will have an enhanced financial profile, benefiting from Broadcom’s proven operating model with industry-leading margins. The combined Broadcom and Qualcomm, including NXP, will have pro forma fiscal 2017 revenues of approximately $51 billion and pro forma 2017 EBITDA of approximately $23 billion, including synergies. The transaction is expected to be accretive to Broadcom’s  Non-GAAP EPS in the first full year after close.

The combined company is expected to have an investment grade credit
rating and strong cash flow generation to facilitate rapid deleveraging.

Approvals and Financing

Broadcom’s proposal was unanimously approved by the Board of Directors of Broadcom. Broadcom is prepared to engage immediately in discussions with Qualcomm to work toward a mutually acceptable definitive agreement and is ready to devote all necessary resources to finalize the necessary documentation on an expeditious basis.

The proposed transaction will not be subject to any financing condition. BofA Merrill Lynch, Citi, Deutsche Bank, J.P. Morgan and Morgan Stanley have advised Broadcom in writing that they are highly confident that they will be able to arrange the necessary debt financing for the proposed transaction. Silver Lake Partners, which has served as a strategic partner to Broadcom in prior transactions, has provided Broadcom with a commitment letter for a $5 billion convertible debt financing in connection with the transaction.

Broadcom expects that the proposed transaction would be completed within approximately 12 months following the signing of a definitive agreement.

Redomicile Announcement

As previously announced on November 2, 2017, Broadcom intends to redomicile to change the parent company of the Broadcom corporate group from a Singapore company to a U.S. corporation.

Letter to Qualcomm

The full text of a letter sent to Qualcomm is below.

November 6, 2017

Board of Directors
Qualcomm Incorporated
5775 Morehouse Drive
San Diego, CA 92121

Dear Members of the Board of Directors:

On behalf of Broadcom, I am pleased to submit this proposal to acquire Qualcomm in a transaction that will provide Qualcomm stockholders with an immediate, substantial and compelling premium to the value that would be achievable by Qualcomm on a standalone basis, as well as the opportunity to participate in the upside potential of the combined company.

As you know from prior discussions between our two companies, Broadcom has been interested for some time in combining Qualcomm’s mobile business with the Broadcom platform. We continue to believe that such a combination will deliver substantial benefits to our respective stockholders, employees, customers and other stakeholders. We are hopeful that you will agree that the proposal we outline in this letter presents a compelling opportunity for Qualcomm stockholders to realize both present and future value for their Qualcomm shares.

Strategic Rationale

We have great respect for the legacy Qualcomm has built since its founding more than 30 years ago by Irwin Jacobs, Andrew Viterbi and their colleagues. Based on our knowledge of the semiconductor industry, we believe that there is a significant strategic, financial and operational rationale for the proposed transaction. A combination of Qualcomm and Broadcom will create a strong, global company with an impressive portfolio of industry-leading technologies and products. Given the highly complementary nature of our businesses, we are confident that our global customers will embrace the proposed combination as we work strategically with them to deliver more advanced value-added semiconductor solutions.

Since I discussed a combination with Steve in August of last year, Broadcom has successfully completed the integration of the Broadcom-Avago combination, de-levered its balance sheet and meaningfully increased revenues and profitability. As a result, Broadcom stockholders have been rewarded with a 55% appreciation in Broadcom’s stock price since that time, ranking in the top 10% among the S&P 500 over that period. We believe these factors, coupled with our history of successful acquisitions and integrations, clearly demonstrate our commitment and ability to implement value-enhancing transactions and deliver robust results for stockholders, employees, customers and other stakeholders.

Proposed Terms

We are offering Qualcomm stockholders $70.00 per share, consisting of $60.00 per share in cash and $10.00 per share in Broadcom shares. This represents a significant premium of 28% to the closing price of Qualcomm common stock on November 2, 2017, the last unaffected trading day prior to media speculation regarding a potential transaction, and a premium of 33% to Qualcomm’s unaffected 30-day volume-weighted average price. Our proposal stands whether your pending acquisition of NXP is consummated on the currently disclosed terms of $110 per share or that transaction is terminated.

Our proposal will enable Qualcomm stockholders to achieve both immediate cash value and the ability to participate in the future success of the combined enterprise, which will benefit from greater scale and broader product diversification. The combination of our two companies and associated synergies will be accretive to Broadcom’s earnings, which will directly benefit Qualcomm stockholders through their equity ownership in the combined company. We have significant experience with acquiring and integrating companies and an established track record of delivering financial results for our stockholders. I am confident that we can deliver similar results for our combined stockholders should we consummate this transaction.

Financing

The proposed transaction will not be subject to any financing condition. BofA Merrill Lynch, Citi, Deutsche Bank, J.P. Morgan and Morgan Stanley have advised us in writing that they are highly confident that they will be able to arrange the necessary debt financing for the proposed transaction. Silver Lake Partners, which has served as a strategic partner to Broadcom in prior transactions, has provided Broadcom with a commitment letter for a $5 billion convertible debt financing in connection with the transaction. We also expect to maintain our investment grade credit rating following the proposed transaction. We and our advisors are available to review our financing plans with you at your convenience.

Regulatory Approvals

We and our advisors have conducted extensive analysis of the regulatory approvals that will be required in connection with the proposed transaction, and we are confident that the transaction will receive all necessary approvals in a timely manner. We would not make this offer if we were not confident that our common global customers would embrace the proposed combination, and we do not anticipate any material antitrust or other regulatory issues that would extend the normal timetable for closing a transaction of this nature.

Employees

We have a long history of providing outstanding opportunities for leadership and growth to employees, including business unit leaders, of companies we acquire. Employees who have joined our company as a result of acquisitions have become an integral part of our business, and we look forward to the opportunity to welcome Qualcomm’s employees to Broadcom.

Conclusion

We believe that our proposal represents the most attractive, value-enhancing alternative available to Qualcomm stockholders, and that it is in the best interests of both parties to proceed as soon as possible to reach agreement on a transaction structure and terms. We are ready to devote all necessary resources to finalize all documentation on an expeditious basis. We and our advisors are prepared to engage in discussions immediately to work toward a mutually beneficial transaction.

We look forward to working with you to complete this transaction successfully and suggest that our respective financial and legal advisors and senior management team meet at your earliest convenience to work toward this goal.

This letter does not constitute a binding obligation or commitment of either company to proceed with any transaction. No such obligations will in any event be imposed on either party unless and until a mutually acceptable definitive agreement is formally entered into by both parties.

Sincerely,

/s/ Hock Tan

Hock Tan
President and Chief Executive Officer

Advisors

Moelis & Company LLC, Citi, Deutsche Bank, J.P. Morgan, BofA Merrill Lynch and Morgan Stanley are acting as financial advisors to Broadcom. Wachtell, Lipton, Rosen & Katz and Latham & Watkins LLP are acting as legal counsel.

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Following an early shaky start, which saw the Hang Seng tumble as much as 1.6% driven by weakness in financials and real estate names following the latest warning by PBOC governor Zhou about “sudden, complex, hidden, contagious, hazardous” risks In markets and a decline in local real estate prices, and pressure global risk, US equity futures have recouped all losses and are back to unchanged on monday morning, as President Trump continues on his first official trip to Asia. An “anti-corruption” purge in Saudi Arabia, including the arrest of Prince Alwaleed bin Talal will put stocks including Citigroup, Twitter and Apple – some of his major holdings – in focus according to Bloomberg. it also helped sent oil prices to the highest level since July 2015. In company news, talks between Sprint’s majority owner, SoftBank, to combine the carrier with T-Mobile US collapsed over the weekend.

Following a torrid weekend for newsflow, when among other things we learned that NY Fed president Bill Dudley is retiring, Monday morning has been a far more subdued affair, and European markets have enjoyed a quiet start to the week, apart from ongoing speculation over Dudley’s departure; USD unwinds small overnight rally, with USD/JPY retracing gains seen after Trump’s comments on trade initially weakens JPY; GBP/USD approaches high set on Friday in reaction to non-farm payrolls. European stocks hold small losses across the board, banks underperforms. Telecom sector also weakens after Deutsche Telekom falls 3.7%, spurred by collapse of the Sprint/T-Mobile deal. Overnight gains in iron ore futures helped support mining stocks and other base metals. As Bloomberg’s rates commentators note, reduced supply this week drives up core EGBs, led by bund futures; USTs rise in tandem. Large BTP/bund block trade pushes peripheral spreads marginally wider.

European stocks were mixed before edging slightly lower after their seventh weekly advance in eight, even as the latest European PMI prints indicated strong survey momentum has continued at the start of the fourth quarter. Basic resource shares outperformed as the Bloomberg Commodity Index rose to the highest since March, but they were offset by retreating banks and telecom companies.

The Stoxx Europe 600 Index fell less than 0.1%, with miners headed for their highest level since January 2013, and leading gains as they track metal prices higher. SBM Offshore slides after making a provision of $238m in relation to a reopened investigation into legacy issues and Unaoil, based on discussions with the U.S. Department of Justice.

News out of Asia was a dominant theme for many assets, with inflation comments from Bank of Japan Governor Haruhiko Kuroda, remarks on excessive leverage from his Chinese counterpart Zhou Xiaochuan and the grievances on trade from Trump. The yen declined before erasing the loss, and stocks in the region were mixed. Asian stocks edged lower for a second consecutive session after China’s central bank Governor Zhou Xiaochuan warned that the mainland’s financial system is becoming significantly more vulnerable due to high leverage. The MSCI Asia Pacific Index was down 0.1% to 169.72. Financial stocks led the decline, with AIA Group Ltd. being one of the biggest drags. Westpac Banking Corp. also fell after its full-year profit missed estimates. The Topix index retreated from the highest level in more than a decade as technical indicators suggest the gauge is overheating.

“Zhou highlighting concerns of excess leverage and thus more regulation is weighing down on stocks,” said James Soutter, a Melbourne-based fund manager at K2 Asset Management Ltd. “If they do that, it might slow down China’s growth, which may impact the region.” Gains by technology stocks such as Tencent Holdings Ltd. and Sony Corp. helped pare the earlier decline of as much as 0.6 percent in MSCI’s broadest gauge of Asian stocks. MISC Bhd rose as much as 8 percent, the most in four years, after reporting a surge in profit for the third quarter. Analysts upgraded the stock after highlighting improvement in all business

Oh, and speaking of that Hang Seng early drop, don’t worry: the BTFDers emerged, and Hong Kong’s benchmark gauge erased a drop of as much as 1.6% to close little changed. AAC Technologies Holdings and Tencent Holdings climbed while the city’s developers slumped; AAC Technologies surges 10% to a record price, while Tencent adds 2.5%. As a result, the Hang Seng Index closes little changed at 28,596.80 even as Hang Seng China Enterprises Index dropped 0.7%, paring an earlier loss of 2%. Additionally, the Shanghai Composite Index adds 0.5%, erasing a retreat of 0.5% while the ChiNext Index added 1%.

Among the key weekend events, a helicopter transporting eight Saudi officials including Prince Mansour bin Muqrin (Deputy Governor of the Asir Province) reportedly crashed near Abha. Additionally, Prince Alaweed bin Talal who is the largest shareholder of Citi and the second largest shareholder  of 21st Century Fox was among 10 other princes and 4 ministers were arrested on Saturday night. This has been billed as a corruption crackdown, although what it really is, is a power grab from Crown Prince Mohammed bin Salman. 

In the UK, Chancellor Hammond is said to scrap plans to raise business rate tax by 3.9% in April.  Bank of England Governor Carney said that if Brexit turned out to be worse than policymakers currently expect, it was possible that
the BoE would not be able to cut interest rates in the future due to inflationary pressure.

Meanwhile in Japan, President Trump said that TPP agreement is not the right idea, adding that the US has suffered massive trade deficits at hands of Japan for many years.

U.S. 10-year Treasuries find support from rally in core and peripheral bonds in Europe; bund futures extend gains on higher volumes after stop losses are triggered on short positions; currency traders fail to find inspiration as majors are trapped in narrow ranges; euro dips briefly after interbank investors add to long dollar positions, though better-than-forecast euro-area PMI for October staves off a bigger drop for the common currency

In commodities, WTI gained 0.6 percent to $55.97 a barrel, the highest in about nine months. Gold increased 0.1 percent to $1,271.66 an ounce. Copper rose 1 percent to $3.15 a pound, the highest in more than a week.

All eyes today will be on retiring NY Fed President William Dudley who is scheduled to give a speech on “Lessons from the Financial Crisis” just after noon at an Economic Club of New York luncheon. Central Bank of Mexico Governor Agustin Carstens speaks at an event hosted by Comexi, the Mexican Council for International Affairs.

Ahead of a light week for economic data releases investor focus has turned to Asia and the U.S. president’s visit to the region. Trump has already brought up trade grievances about both China and Japan and has warned nations against challenging the U.S. He goes on to South Korea and China this week. News on central bankers also will be closely watched, writes Bloomberg. Federal Reserve Bank of New York President William Dudley is close to announcing his retirement, CNBC reported late on Saturday. His early departure would mean the top three positions at the Fed changing over within a relatively short period. Trump announced last week that Fed Governor Jerome Powell will be nominated to replace Janet Yellen when her term expires in February. Vice Chairman Stanley Fischer retired in mid-October.

Bulletin Headline Summary From RanSquawk

• European bourses lead from Asia and trade on the backfoot, while oil prices rise on Saudi Royal Purge
• USD/JPY rises to highest level since March as Trump criticises Japan’s trade practises with the US, alongside BoJ jawboning
• Looking ahead, highlights include a possible retirement speech from Fed’s Dudley

Market Snapshot

• S&P 500 futures little changed at 2,581.75
• STOXX Europe 600 down 0.01% to 396.02
• MSCI Asia unchanged at 169.84
• MSCI Asia ex Japan unchanged at 556.69
• Nikkei up 0.04% to 22,548.35
• Topix down 0.08% to 1,792.66
• Hang Seng Index down 0.02% to 28,596.80
• Shanghai Composite up 0.5% to 3,388.17
• Sensex up 0.3% to 33,798.88
• Australia S&P/ASX 200 down 0.1% to 5,953.78
• Kospi down 0.3% to 2,549.41
• German 10Y yield fell 2.6 bps to 0.338%
• Euro down 0.1% to $1.1596
• Italian 10Y yield fell 0.4 bps to 1.527%
• Spanish 10Y yield fell 0.6 bps to 1.468%
• Brent futures up 0.5% to $62.38/bbl
• Gold spot up 0.04% to $1,270.41
• U.S. Dollar Index up 0.03% to 94.97

Top Overnight News

• Trump told a gathering of business leaders in Tokyo that Japan has an unfair advantage on trade and that he intends to fix that imbalance by making it easier to do business in the U.S.
• Ousted Catalan president Carles Puigdemont and four former members of
  his government were released in Brussels pending a court ruling on an
  international arrest warrant issued by Spain
• Mnuchin reiterates goal to get tax reform bill to Trump in 2017
• Carney says BOE might not be able to cut interest rates if Brexit deal worse than expected
• PBOC’s Zhou warns China’s financial system is getting more vulnerable
• Kuroda: BOJ will continue powerful easing; 2% inflation still a long way
• Saudi corruption crackdown sees senior princes, top billionaire arrested
• U.K. Prime Minister Theresa May meets other party leaders to discuss steps to tackle sexual harassment in U.K. politics

Asian markets began the week on the backfoot. ASX 200 (-0.10%) slightly lower following a soft earnings report from Westpac (- 2.5%), subsequently failing to reach the 6000 mark. Chinese markets, in particular the Hang Seng (-0.02%) underperformed as PBoC Governor Zhou warned of risks over debt and the need to eliminate zombie companies. President Trump kicked off his tour of Asia in Japan, whereby the President stepped up his rhetoric of a tough stance being needed over North Korea. Additionally, the President also criticised the TPP agreement, noting that the US has suffered massive trade deficits with Japan for many years. PBoC sets CNY mid-point at 6.6247 (Prev. 6.6072). Bank of Japan meeting minutes from Sep 20-21 states that momentum towards price goal is being maintained. One member said current yield curve is not sufficient to achieve 2% inflation target, adding that a further increase in demand needed to raise prices. Bank of Japan Governor Kuroda expects Japans economy to steadily move toward achieving 2% inflation target, adding that the BoJ will persistently continue powerful easing.

Top Asian News

• Turkey Central Bank Boosts Lenders’ FX Buffers on Weak Lira
• Billionaire Olayan Family Is Said to Put Saudi IPO Plans on Hold
• San Miguel to Sell Unit’s Shares After Merging Liquor Assets
• PBOC Chief’s Latest Warnings Seen Signaling Tougher Debt Stance
• DBS Profit Sinks as Bank Tries to Put Bad Energy Loans Behind It
• Evergrande’s Unit Hengda Raises 60b Yuan in Third Round Funding
• China is Finally Going After Click Farms and Fake Online Sales

European equities traded heavy across the board with a risk off tone seemingly creeping into the market. The crackdown on corruption in Saudi Arabia has been a likely catalyst to this, one iconic target of the purge is billionaire tycoon, Prince Alwaleed bin Talal, a significant investor in the likes of Twitter, Citigroup, Accor and Twenty-First Century Fox. Accor trades as one of the laggards in the Cac following the aforementioned probe, with Deutsche Telekom the notable European underperformer following news that merger talks between Sprint and T-Mobile US have ended. Elsewhere, material names trade in the marginal green, buoyed by the a buoyant iron ore market. JGBs set the tone in fixed income markets, rallying strongly through Monday’s trade, a bullish bond market flooded into European bonds, with a 10k Bund order seeing the future contract trade firmly through 163.00 with the next touted resistance to be at 163.43. The Saudi international bond spreads have now widened by about 5bps following the anti-corruption crackdown.

Top European News

• SocGen Drags Banks Down as Analysts Cut EPS Ests., Price Targets
• Deutsche Telekom Falls On Sprint Deal Collapse; Watch Towers
• U.K. October Car Sales Plunge 12% in Seventh Consecutive Drop
• Euro-Area Economic Boom Spurs Fastest Job Creation in a Decade

In currencies, USD
Non-farm Monday trade has set the tone this European morning, with the Greenback trading in a rangebound fashion throughout the Asian and early EU sessions. EUR/USD longs have struggled following Friday’s NFP release, with the pair trading back below 1.60, however, the consolidation does continue, trading around the 1.60 area, with bears looking for a clean break below. GBP: weekend commentary from BoE Governor Carney, stating that if Brexit turned out to be worse than policy makers expectations, it could be possible that the BoE would be unable to cut interest rates in the future due to inflationary pressures. Sterling was relatively unfazed, following the subdued tone. JPY: The US President, on his tour of Asia, is currently in Japan. He has commented on trade, stating that TPP agreement is not the right idea, adding that the US has suffered massive trade deficits at hands of Japan for many years. The Japanese currency has been very marginally weaker overnight, following a fail of a test of 115.00.

In commodities, oil markets have been dictated to by the Saudi Arabian news, with the uncertainty resulting in oil prices seeing a 2 year high, as WTI crude futures briefly retook USD 56.00/bbl. Precious metals have come off post NFP lows with bids supported by the growing risk tone, Gold’s 1265.00 area continues to behave as key support, with silver seeing a simultaneous bounce around 16.75.

Looking ahead, there is no data due in the US however the NY Fed’s Potter and Fed’s Dudley are both due to speak. Euro area finance ministers will also discuss completing the banking union and fiscal rules for the EMU.

US Event Calendar

• No major econ releases scheduled
• 12:10pm: Fed’s Dudley Speaks on Lessons from the Financial Crisis

DB’s Jim Reid concludes the overnight wrap

It’ll be a quieter week to be in the US as the post payrolls period is always on the lighter side data wise but this week we’ll have plenty of newsflow on the US tax plan and we’ll likely wake up to new Mr Trump headlines most mornings as his Asian tour is now in full flow.

Today will kick start the process for markups of the tax bill and the House is expected to vote on a final draft towards the end of the week. At the same time, the Senate will release its own version of the bill, which could differ significantly from the House’s. In our economist’s view, the sticking points remain the same: the capping of the mortgage interest deduction and proposed repeal of the state and local tax deduction. Already, the National Association of Homebuilders and the National Federation of Independent Business have voiced opposition to the House bill, which is noteworthy given their relatively conservative leanings. So work still to be done. DB are hosting a conference call today (Kelly, Hooper & Slok) at 8am EST on what to expect from this and from new Fed Chair Powell. Details at the very end. For the full week ahead and easy to read cut-out and keep of all events click on “Next   week… this week”. The day by day week ahead is copied at the end today.

On Saturday night, Saudi Arabia’s King Salman announced a sweeping anticorruption drive and ordered the arrest of Prince Alwaleed bin Talal, ten other senior members of the royal family, four cabinet ministers and former top officials. Bloomberg noted initial public reaction within the country may be positive with many sharing a video clip showing the Crown Prince Mohammed bin Salman noting no one is above the law. It is too early to know the follow on implications, but note that Prince Alwaleed is the world’s 50th richest person with worth of $19bln and has stakes in Citigroup, Twitter and JD.com. His investment firm Kingdom Holding Co’s share price dropped 7.6% on Sunday.

Over in Japan, President Trump told a group of business leaders that “for the last many decades, Japan has been winning (on trade). You do know that…right now our trade with Japan is not fair and it isn’t open”, and that Japanese car makers should “try building your cars in the US instead of shipping them over”. Elsewhere, he reiterated that his decision to withdrawal from the Tran-pacific partnership free trade agreement will be “ultimately proven right”, and that he sees easing trade restrictions in other ways, although did not elaborate.

Turning to Catalonia which had a new twist over the weekend. Back on Friday, a Spanish judge issued an arrest warrant for ousted Catalan President Puigdemont and four others currently living in Belgium, noting they promoted “violent force” and incited “insurrection”. Then on Sunday, Puigdemont voluntarily turned himself in to Belgium police, saying “I won’t flee justice….but to real justice”, noting that Spanish courts “can’t guarantee a fair and independent sentence that will be free of the enormous weight and influence of politics”. Later on Monday morning, a Belgium judge has released Puigdemont, but he is required to reappear before a court in Brussels within 15 days, which will potentially decide to carry out an extradition process or not. Interestingly, Puidgemont’s PdeCAT party has put his name forward as a candidate for the upcoming regional election to be held on 21 December, while the Spanish Government spokesman Mendez de Vigo said “any politician can run in the election unless he / she has been convicted of a crime”. Elsewhere, according to a new poll by La Vanguardia, it shows the Catalan secessionist coalition could win the new election with 66-69 seats, but this may not be enough to secure a clear majority in the regional assembly as 68 seats are required. The Spanish IBEX fell 0.96% and 10y yields fell 0.4bp last Friday.

Now onto China, after issuing a verbal warning of a “Minsky moment” two weeks ago, China’s central bank Governor Zhou published an article on the bank’s website over the weekend, noting that while the overall health of the financial system is good, risks are accumulating with some that are “hidden, complex, sudden, contagious and hazardous” and that “high leverage is the ultimate origin of macro financial vulnerability”. His comments could add to the concerns that regulators may intensify the deleveraging drive in China. Elsewhere, as per Bloomberg he also noted: i) China’s financial regulation lags international standards…ii) China should increase direct financing and expand the bond market, reduce intervention in the equity market and reform the IPO system, iii) China should let the market play a decisive role in the allocation of financial resources and iv) China should improve the coordination among financial regulators. Interesting stuff!

This morning in Asia, markets are trading slightly lower. The Hang Seng has pared back losses to be down 0.59%, partly impacted by Governor Zhou’s comments on leverage and softness in property developer stocks.  Elsewhere,the Nikkei is marginally higher (+0.08%) while the Kospi (-0.34%) and ASX 200 (-0.10%) are down slightly as we type. 

Away from the markets and onto central banker’s commentaries. BOE Governor Carney noted that the BOE is working on the assumption that Brexit transition will be eventually smooth, but when asked if Brexit was much worse than expected, could it prevent the BOE from cutting rates even when growth is slowing, he noted “that’s an extreme possibility but it’s a possibility”, although “we’ll supply as much support as we can during this course of adjustment”. Elsewhere on Brexit, the Confederation of British Industry President Drechsler noted “I’m reminded of a prime-time soap opera (re Brexit), with a different episode each week…” and appeal for a “single, clear strategy” for transition as Brexit is “only 508 days away, but for many businesses, their alarm clock are set even earlier than that”.

With Fed Governor Powell’s nomination as the next Fed Chair now official, our US economists take a closer look at the key implications of what this could mean for the markets, including: i) continuity of monetary policy, ii) reasonably high degree of continuity in terms of leadership style, and iii) changes to the Fed’s communication policy, potentially to be more brief and to the point. For more details, refer to link.

Staying in the US, a new poll by ABC News & Washington Post showed President Trump’s approval rating is now 37%, the lowest since 1946 for any president at this point in their first term based on polling data. Approximately 55%  +14ppt since April) say the President is not delivering on major campaign promises. Perhaps this will add impetus to deliver the tax reforms by Christmas as per President Trump’s plans.

Over the weekend, there were also more rhetoric on the tax plan via Sunday talk shows. Republican senator Lankford noted that he can’t support the party’s tax bill “if the measures balloons the debt (too much)”. Elsewhere, VP Mike Pence said the “right type of tax cuts” such as immediate cut to corporate tax rates could lead to GDP growth of 3.5%-4%, which is a claim also backed up by House Majority Whip Steve Scalise. Finally, House speaker Ryan said the Republicans have learned from past experience, so the House and Senate will better coordinate and move together, so the difference from the two version of the tax bills should be small.

Now quickly recapping markets performance on Friday. US equities strengthened further (S&P +0.31%; Dow +0.10%; Nasdaq +0.74%) to fresh record highs, supported by Apple which guided to higher than expected salesfor the  upcoming December quarter (shares +2.6%). Within the S&P, modest gains in IT and health care sectors were partly offset by losses from financials and materials names. European markets were broadly higher with both the Stoxx 600 & DAX up 0.28%, while the FTSE rose marginally (+0.07%) and Spain’s IBEX underperformed (-0.96%). The risk on bias contributed to the VIX falling 8.0% to a new all-time low of 9.14.

Over in government bonds, yields were little changed with UST 10y down 1.3bp following the miss on headline non-farm payrolls. Core European bond yields were marginally lower, with Bunds and OATs down 0.9bp and 0.7bp respectively, while Gilts were broadly flat. Turning to currency, the US dollar index and Sterling gained 0.27% and 0.14% respectively, while the Euro fell 0.43%. In commodities, WTI oil rose 2.02% to $55.64/bbl and back towards its YTD high.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, the macro data was a bit mixed. The headline change in October nonfarm payrolls was lower than expected at 261k (vs. 313k), but is more in line if factoring in the upward revision of 51k to the prior month’s reading. The labour market remains solid with the October unemployment rate down to 4.1% (vs. 4.2% expected) – the lowest since December 2000. However, labour force participation rate has declined to a six-month low of 62.7% and the average hourly earnings growth was weak, flat for the month (vs. 0.2% expected) and 2.4% yoy (vs. 2.7% expected). Last month’s spike could have been more storm related than previously thought.

The October ISM non-manufacturing composite was above expectations at 60.1 (vs. 58.5 expected) – the highest since August 2005 and the September factory orders also beat at 1.4% mom (vs. 1.2% expected). Moving along, the final reading for September durable goods orders was unrevised at 2% mom but core capital goods orders was revised 0.4ppt higher to 1.7% mom. Elsewhere, the trade deficit for September was broadly in line at -$43.5bln (vs. -$43.2bln expected). The October Markit PMI composite was slightly lower than last month at 55.2 (vs. 55.7 previous) while the services PMI was softer than expected at 55.3 (vs. 55.9 expected). Finally, following the recent data updates, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth has fallen back to 3.3% saar, broadly similar to the NY Fed’s Nowcast estimate of 3.2% saar.

The UK’s October Markit PMI for composite was above consensus at 55.8 (vs. 53.8 expected) and the services PMI was also higher at 55.6 (vs. 53.3 expected) – the highest since April 2017.

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Overnight, following the recent Saudi turmoil, prices in the crude complex jumped to the highest levels in over two years, amid speculation that Saudi Arabia is more likely to back output curbs following this weekend’s crackdown by Crown Prince Mohammed bin Salman. “It creates some hope that the current policy by the Saudis will be continued after March,” said ABN Amro senior energy economist Hans van Cleef. “We’re still in the longer-term upswing, the uptrend is still intact”, and indeed Dec. WTI rose +31c to $55.95/bbl after earlier touching $56.28, the highest since July 2015, while Jan. Brent was also up +35c to $62.42, after rising to $62.90, highest since June 2015

And yet not everyone believes that the recent chaos in Saudi Arabia is a bullish catalyst for oil: taking his usual contrarian stance, Bloomberg commentator and ex-Lehman trader Mark Cudmore writes that what happened is “largely irrelevant” for oil prices and the resultant oil price spike has “the look of a classic head fake and may mark the final push higher before a correction.”

Attacking the key point underscored by oil bulls, Cudmore says that “an extension of OPEC supply cuts is fully expected by the market, and the weekend changed nothing on that front” meanwhile “oil prices are still dominated by the overhang of potential supply that can come online so easily from U.S. shale fields. The rig count may have been dropping recently, but it remains 62% above the level of a year ago. And, crucially, U.S. production is near the highest in more than two years, according to the Energy Information Administration.”

Furthermore, Cudmore is confident that what is taking place with oil is “narrative drift” and goalseeking to justify a bullish bias as “there’s been a preponderance of bullish oil notes during the past week. Drawdowns in global inventories are getting investors excited, especially since crude trades at the highest levels in more than two years. But stockpiles are still very large historically and it’s the elevated price which makes oil look so vulnerable.” Meanwhile, positions are at an extreme, with “long positions are the most stretched since March according to Friday’s CFTC data” while “Less talked about news from the weekend was Mexico announcing the largest onshore oil discovery in 15 years. That’s only going to impact supply in the long-term, but it may remind traders that the overall macro dynamics of the oil market haven’t changed — not least from some domestic political news in Saudi Arabia.”

In short: Cudmore is happy to take this opportunity to reset short positions not only because the current oil price spike will send US production into overdrive but because “demand growth will continue to be undermined by innovation in other energy fields, while technology keeps reducing the cost of extraction and production. Those factors are both very long-term but a potentially misunderstood news- driven spike may be a good time to focus on them again.”

Incidentally, Cudmore’s note is precisely what the WSJ discussed overnight in “Saudi Crackdown Doesn’t Guarantee Aramco IPO – Or Higher Oil“

Mark Cudmore’s full note below:

Oil Prices May Be in the Process of Topping Out: Macro View

 

Crude prices jumped at the open Monday on largely irrelevant news from Saudi Arabia. It’s got the look of a classic head fake and may mark the final push higher before a correction. 

 

The purge in Saudi Arabia is more of a domestic story. Crown Prince Mohammed bin Salman was already perceived to be driving the country’s oil policy, so consolidation of his power shouldn’t result in any strategic shift.

 

An extension of OPEC supply cuts is fully expected by the market, and the weekend changed nothing on that front.

 

Oil prices are still dominated by the overhang of potential supply that can come online so easily from U.S. shale fields. The rig count may have been dropping recently, but it remains 62% above the level of a year ago. And, crucially, U.S. production is near the highest in more than two years, according to the Energy Information Administration.

 

There’s been a preponderance of bullish oil notes during the past week. Drawdowns in global inventories are getting investors excited, especially since crude trades at the highest levels in more than two years. But stockpiles are still very large historically and it’s the elevated price which makes oil look so vulnerable.

 

Long positions are the most stretched since March according to Friday’s CFTC data.

 

Less talked about news from the weekend was Mexico announcing the largest onshore oil discovery in 15 years. That’s only going to impact supply in the long-term, but it may remind traders that the overall macro dynamics of the oil market haven’t changed — not least from some domestic political news in Saudi Arabia.

 

Demand growth will continue to be undermined by innovation in other energy fields, while technology keeps reducing the cost of extraction and production. Those factors are both very long-term but a potentially misunderstood news- driven spike may be a good time to focus on them again.

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