In spite of China’s carrier program remaining a state secret, and with no official confirmation of its extent, new satellite images published by Reuters reveal that China’s first full-sized aircraft carrier is being built at the Jiangnan shipyard outside Shanghai.
Upon completion it would be China’s third carrier, which Pentagon officials said last week was being worked on as the US military attempts to accurately assess the PLA’s capabilities (People’s Liberation Army). Last Fall state media confirmed the program, but Tuesday is the first time images have been made available to confirm it is indeed making rapid progress.
Prior file photo China’s first domestically developed aircraft carrier undergoing sea trials, in Liaoning Province, in May. Image source: Reuters/Nikkei Asia Review
The satellite images are from April, and were produced and analyzed the Center for Strategic and International Studies (CSIS) in Washington. Reuters observes the images “reveal considerable recent activity during the last six months on a large vessel” .
The project is seen as part of President Xi’s recent years’ push to usher in a period of modernization of China’s military, which has worried Asian rivals and Washington alike, potentially challenging US naval dominance in East Asian seas, which has lately been met with a series of confrontations and tensions with the PLA Navy in places like the Taiwan Strait and South China Sea.
Source: Reuters/CSIS ChinaPower
The Reuters report summarized the CSIS analysis of the new satellite images as follows:
The CSIS images show a bow section that appears to end with a flat 30-metre (98-foot) front and a separate hull section 41 meters wide, with gantry cranes looming overhead.
That suggests a vessel, which China has dubbed Type 002, somewhat smaller than 100,000-tonne U.S. carriers but larger than France’s 42,500-tonne Charles de Gaulle, analysts say.
Fabrication halls the size of several soccer pitches have been built nearby, and work appears to be continuing on a floodable basin, possibly to float the finished hull into the nearby Yangtze River estuary.
All of its observable features are “consistent with what is expected for the People’s Liberation Army Navy’s third aircraft carrier,” according to the CSIS analysis.
The report, however, says at this point its still unclear whether it will be nuclear-powered, given that China currently has no surface ships with nuclear propulsion — a potential monumental step — though it does maintain ten nuclear-powered submarines.
Regardless, given that China’s first two carriers are small, carrying only 25 aircraft, a full size aircraft carrier could radically alter the strategic balance in East Asia and further bridge the gap between the PLA Navy and US Navy’s capabilities in the region.
Singapore-based regional security analyst Ian Storey made the following crucial observation as part of the Reuters report:
“Once completed, it will outclass any warship from any Asian country, including India and Japan,” said Storey, of the ISEAS Yusof Ishak Institute. “It is yet another indication that China has emerged as Asia’s paramount naval power.”
Chinese officials have recently made public comments which suggest China’s ambitious are set at developing at least six carriers in the coming years and decades, compares to the United States’ 11 that it operates.
via ZeroHedge News http://bit.ly/2DVvguK Tyler Durden
A study by realtor.com ranks the Chicago region’s housing market slowest of 100 U.S. metro areas for 2019. That stat could be fixed, or made worse.
A report released Nov. 27 by realtor.com forecasts the Chicago-Naperville-Elgin Metropolitan Area will experience the worst housing market slowdown among 100 of the nation’s metropolitan areas in 2019.
As mortgage rates are slowly creeping up to 5.5 percent, home sales are expected to slow nationwide. However, the slowdown is anticipated to be nearly four times worse in Chicago than in the rest of the nation.
Illinois homeowners are subject to the highest overall tax burden in the country, including the second highest property taxes in the nation. They’re also weathering the largest permanent income tax hike in state history. As these costs rise, the value of homeownership in the Land of Lincoln falls relative to other areas, reducing demand for housing.
Furthermore, as median home prices are expected to appreciate by 2.2 percent throughout the nation, the typical Chicago area home will likely lose nearly 2 percent of its total value in 2019, according to the realtor.com forecast.
The combination of steeply declining home sales and values lands the Chicagoland housing market at the bottom for 2019.
Why is housing demand declining faster in Chicago?
Chicago’s disturbing housing market performance comes as no surprise. Illinois is one of only three states where single family homes became a worse investment relative to before the housing bubble.
The poor health of the state’s – and Chicago’s – real estate market is due to a variety of factors.
Outmigration
For starters, the Illinois population has been declining for four consecutive years, second only to West Virginia. The Chicago metro area was the only one of the 10 largest metro areas to experience population decline last year. While births still outpace deaths in Illinois and Chicago, the population has been declining due to persistent outmigration.
The shrinking population isn’t due to snowbirds retiring to warm-weather states such as Florida. The primary driver of the state’s population decline is from prime working-age Illinoisans (25-54 years old) moving away. Not only is Illinois hemorrhaging its current workforce, hindering the growth in home prices and sales, but population losses are also compromising its future workforce as these working-age adults move away with their children. As the decline in Illinois’ youngest population cohorts – those most likely to be buying homes – are more severe than in the rest of the nation, the weak Illinois housing market can be expected to continue.
Property taxes
For decades, Illinois property taxes have skyrocketed compared to home values, growing 43 percent faster than home values statewide and 76 percent faster than home values in Cook County.
The dramatic rise in property taxes has resulted in Illinoisans now paying the second-highest rates in the nation.
In some cases residents accept increased property taxes where they anticipate the funds will finance local services that will improve the quality of their neighborhoods and result in home price appreciation. However, this has not been the case in Illinois: For the past 20 years, fewer than 50 cents of every additional dollar paid in property taxes has gone to delivery of current services.
When additional government spending is wasted, and does not go toward the delivery of current services or improved services — all else being equal — higher property taxes do not increase the desirability of a neighborhood. This lack of improvement for additional tax dollars can cause housing prices to fall.
Income taxes
In 2017, Illinoisans were hit with the largest permanent income tax hike in state history, raising the income tax to 4.95 percent from 3.75 percent. While this 32 percent increase in the state’s individual income tax burden would be damaging enough on its own, the fact that neighboring states have been reducing income taxes since the end of the recession makes Illinois an even less inviting place to buy a house.
The most recent tax hike, just like the 2011 tax hike, can be expected to have severely negative consequences for investment within the state, resulting in fewer jobs and a smaller economy. In fact, some of these effects are already being felt as Illinois’ private-sector job creation ranks among the worst in the nation in the year since the income tax hike.
Employment growth and housing price growth are strongly correlated. Recent economic research highlights links between regional labor and housing markets. In their article, “The Recent Evolution of Local U.S. Labor Markets,” authors Maximiliano Dvorkin and Hannah Shell examined the recession and recovery by reviewing the correlation between county-level unemployment rates and changes in housing prices. U.S. counties with larger decreases in housing prices experienced larger increases in the unemployment rate.
This means declining home price appreciation could have negative spillover effects on the rest of Illinois’ economy. Illinois’ weaker housing market recovery is consistent with the state’s much weaker employment growth and weaker economic growth when compared to the rest of the country.
2019 could be worse than projected
While recent public policy has certainly hindered the health of the state’s housing market, the situation could be worse than projected in 2019.
Gov.-elect J.B. Pritzker made passage of a progressive income tax a key pillar of his campaign. While promoted as a tax break for the middle-class, the states Pritzker suggested as models for this tax change would all impose higher income taxes on the typical Illinois family. Moreover, the most recent progressive tax proposal filed in the Illinois General Assembly would have raised taxes on those earning more than $17,300.
Even if Pritzker’s progressive tax proposal were not about generating new revenue to fund campaign promises of higher spending, a progressive income tax would be worsefor the state’s economy than Illinois’ constitutionally protected flat income tax.
Changing the forecast
If Pritzker wants to improve the forecast for Chicagoland – and Illinois as a whole – the state needs lasting, meaningful reforms to government cost drivers.
First, Illinois homeowners need real, sustained property tax relief. Currently, homeowners face the second-highest property tax burden in the nation, largely because of an unsustainable public pension system that is at least $130 billion in debt.
If Illinois and its local governments were able to reform their unaffordable pension systems, the state could contribute more money toward classroom spending and reduce its overall spending. Communities could provide property tax relief to make their housing more attractive.
Second, Illinoisans need a state government that spends within its means and doesn’t raise income taxes while other states cut theirs.
The Illinois Policy Institute proposed a path to balancing the budget that requires no tax increases. One key policy solution the Institute offered for fiscal year 2019 is a spending cap, which would limit the growth in government spending to the 10-year average growth rate of the state economy. Tying government spending to economic growth protects taxpayers from future tax hikes. Democratic and Republican lawmakers proposed spending caps as constitutional amendments in the Illinois Senate and House of Representatives this year.
Without property and income tax relief, housing in Illinois will continue to be less attractive, Illinois’ population will likely continue its decline, and the Chicago-area housing market will continue to be among the worst in the nation.
via ZeroHedge News http://bit.ly/2YiXtDR Tyler Durden
Some might describe it as one of the most successful prop trading bets since the crisis.
Goldman Sachs is on track to earn as much as a 12,000% return on an extremely prescient $5 million investment in Uber Technologies made back in 2011, just a year after the company started offering rides via a mobile app. However, the roughly $600 million windfall (assuming Uber debuts near the top of its recently lowered trading range) is only cold consolation for Goldman’s top tech bankers, who recently suffered a stinging defeat at the hands of their arch-rival Morgan Stanley when the lost out on the honor of being the lead underwriter in the upcoming offering.
In a story published on Monday, Bloomberg chronicled how Goldman became the first major bank to actively court Uber’s business, beginning with the venture-fund investment back in 2011, before watching Uber’s loyalties shift as Gary Cohn – Uber’s biggest advocate from within Goldman – departed to serve in the Trump Administration, and Uber co-founder and CEO Travis Kalanick was ousted by his own board after a series of embarrassing PR scandals that nearly upended the firm’s business.
Gary Cohn
It also puts the longtime rivals in an unusual position: Goldman now finds itself rooting for Morgan Stanley. It’s a rare example of where the two banks’ interests are perfectly aligned.
Cohn, who has largely kept away from the limelight since his star turn as one of Michael Wolfe’s key sources in ‘Fire and Fury;’ seized on the opportunity to regale Bloomberg‘s reporters with stories about the tremendous foresight he exercised in marshaling Goldman toward the deal. To hear Cohn tell it, his persuasiveness managed to overcome the skeptics inside Goldman, including, according to some anonymous sources quoted in the story (though Cohn reportedly wouldn’t name names), CEO David Solomon.
Though in the spirit of giving credit where credit is due, BBG acknowledged that Solomon championed the creation of the internal fund that financed the deal, which consisted entirely of the bank’s own money.
In the years after the financial crisis, Solomon – then Goldman’s co-head of investment banking, and now the firm’s chief executive officer – championed the creation of a fund that drove the investment in Uber, according to Gregg Lemkau, who led the tech, media and telecom group at the time and now leads the firm’s investment banking division.
The fund held a dedicated pool of the bank’s own capital for dealmakers to deploy in promising startups. The idea: Plow the money into fledgling companies and hope their growth simultaneously brings in profits and burnishes the Wall Street firm’s credentials for investment banking mandates.
Goldman’s involvement with Uber started when one of the firm’s top tech bankers first met with Kalanick at a pub in Dublin. That banker, Scott Stanford, soon became a trusted counsel to Kalanick.
“David had the foresight to develop an investing platform for his bankers,” said Scott Stanford, a former Goldman Sachs banker who brought Uber to the attention of his bosses. “It’s a win-win for everyone.” Stanford is now with the venture-capital firm ACME (formerly Sherpa Capital), another early backer of Uber.
It was over meat pies and beers in a Dublin pub that Stanford first met Uber founder Travis Kalanick. At the time, Stanford was leading Goldman Sachs’s internet investment-banking practice and had previously secured investments in other companies, such as Facebook Inc. and LinkedIn Corp., from other corners of the bank.
Before long, he had become a trusted counsel to Uber. When the ride-hailing company launched a fundraising round in 2011, Stanford pushed for Goldman to chip in some money.
When it came time to pitch the investment to Goldman’s top executives, CFO David Viniar became convinced when he heard his college-age daughter raving to him about the app.
At Goldman, where rule-by-committee is the norm, there were a few unsure of putting the firm’s capital behind such an unproven company. Serendipity helped. One executive, former Chief Financial Officer David Viniar, told colleagues that the first he heard of Uber was from his daughter days before the investment came up for approval. She raved about a new app that brings cabs to your doorstep.
The investment was green-lit and bankers set about figuring out how to get closer to the company. Cohn was quick to build a rapport with Kalanick, taking a liking to the brash and pugnacious founder of the ride-hailing startup during frequent trips to Silicon Valley.
Other Goldman bankers on the ground like George Lee also courted the company, making sure Kalanick was at some of the firm’s marquee events, such as an annual confab for tech startups in Las Vegas.
A few years later, when Uber was again casting about for financing, Goldman put up another $1.6 billion mostly raised from the firm’s private banking clients.
One former banker, Gautam Gupta, eventually moved over to Uber and rose to become the company’s CFO. Around the same time, Cohn sought to “bear hug” the relationship – ensuring that Goldman would forever become the bankers of choice for Uber.
By 2015, Uber was growing rapidly but needed more cash to fund its unprofitable operations, so Cohn spearheaded a $1.6 billion deal that was largely marketed to his firm’s private-wealth clients. Meanwhile, Gautam Gupta, an up-and-coming Goldman banker, had moved to Uber and in the span of a few years climbed to CFO.
It was starting to look like Goldman had set out a virtual no trespassing sign for rivals. Among members of Kalanick’s inner circle, it was understood that when the company eventually went public, Goldman Sachs would bag the top role, according to people with knowledge of the situation.
“That would have been my view,” Cohn said. “I had a very, very strong relationship with that management team. I bear-hugged the relationship.”
Alas, this wouldn’t last. After Trump’s election, Morgan Stanley started making inroads by offering Uber aggressive financing terms.
Yet a sequence of events starting around 2016 began to change that.
When Uber canvassed a group of banks for new borrowings, it was Morgan Stanley that came back with the most aggressive terms. At the time, much of Wall Street was grappling with diktats imposed by federal regulators on lending to risky companies.
Morgan Stanley proceeded anyway. Some bankers were frustrated with the rigid guidelines but decided to take the hit in favor of cultivating a promising client, people said. When authorities sent missives asking them to stay away, executives found more discreet ways to keep helping Uber — like switching their role on debt deals to adviser instead of the lead arranger.
Then two other developments weakened Goldman’s grip: Weeks after the 2016 presidential election, Cohn left to join Donald Trump’s White House. The next year, Uber’s top management was swept out, following allegations of boorish behavior and toxic workplace culture.
Morgan Stanley kept edging into more conversations, private placements and debt deals. Michael Grimes, a top Morgan Stanley banker, even moonlighted as an Uber driver. And as one of Wall Street’s top underwriters of technology IPOs, Morgan Stanley was a safe pick for Uber’s board once it was ready to proceed with a sale.
Then an exodus of key Goldman employees allowed Morgan to steal the relationship out from under Goldman, a maneuver that culminated with Morgan being named “lead left” during the upcoming IPO, which is expected to go live on Friday.
We expect the bank’s analysts to follow up with a ‘buy’ rating not long after.
via ZeroHedge News http://bit.ly/2H3TLYG Tyler Durden
Over the weekend, President Trump decided to reignite the “trade war” with China with two incendiary tweets. Via WSJ:
“In a pair of Twitter messages Sunday, Mr. Trump wrote he planned to raise levies on $200 billion in Chinese imports to 25% starting Friday, from 10% currently. He also wrote he would impose 25% tariffs ‘shortly’ on $325 billion in Chinese goods that haven’t yet been taxed.
‘The Trade Deal with China continues, but too slowly, as they attempt to renegotiate,’ the president tweeted. ‘No!’”
This is an interesting turn of events and shows how President Trump has used the markets to his favor.
In January of 2018, the Fed was hiking rates and beginning to reduce their balance sheet but markets were ramping higher on the back of freshly passed tax reform. As Trump’s approval ratings were hitting highs, he launched the “trade war” with China. (Which we said at the time was likely to have unintended consequences and would kill the effect of tax reform.)
“While many have believed a ‘trade war’ will be resolved without consequence, there are two very important points that most of mainstream analysis is overlooking. For investors, a trade war would likely negatively impact earnings and profitability while slowing economic growth through higher costs.”
But even more important is the impact to forward guidance by corporations.
Nonetheless, with markets and confidence at record highs, Trump had room to play “hard ball” with China on trade.
However, by the end of 2018, with markets down 20% from their peak, Trump’s “running room” had been exhausted. He then applied pressure to the Federal Reserve to back off their policy tightening and the White House begin a regular media blitz that a “trade deal” would soon be completed.
These actions led to the sharp rebound over the last 4-months to regain highs, caused a surge in Trump’s approval ratings, and improved consumer confidence. In other words, we are now back to exactly the same point where we were the last time Trump started a “trade war.” More importantly, today, like then, market participants are at record long equity exposure and record net short on volatility.
With the table reset, President Trump now has “room to operate” heading into the 2020 election cycle.
The problem, is that China knows time is short for the President and subsequently there is “no rush” to conclude a “trade deal” for several reasons:
China is playing a very long game. Short-term economic pain can be met with ever-increasing levels of government stimulus. The U.S. has no such mechanism currently, but explains why both Trump and Vice-President Pence have been suggesting the Fed restarts QE and cuts rates by 1%.
The pressure is on the Trump Administration to conclude a “deal,” not on China. Trump needs a deal done before the 2020 election cycle AND he needs the markets and economy to be strong. If the markets and economy weaken because of tariffs, which are a tax on domestic consumers and corporate profits, as they did in 2018, the risk off electoral losses rise. China knows this and are willing to “wait it out” to get a better deal.
As I have stated before, China is not going to jeopardize its 50 to 100-year economic growth plan on a current President who will be out of office within the next 5-years at most. It is unlikely, the next President will take the same hard line approach on China that President Trump has, so agreeing to something that is unlikely to be supported in the future is unlikely. It is also why many parts of the trade deal already negotiated don’t take effect until after Trump is out of office when those agreements are unlikely to be enforced.
Even with that said, the markets rallied from the opening lows on Monday in “hopes” that this is actually just part of Trump’s “Art of the Deal” and China will quickly acquiesce to demands. I wouldn’t be so sure that is case.
The “good news” is that Monday’s “recovery rally” should embolden President Trump to take an even tougher stand with China, at least temporarily. The risk remains a failure to secure a trade agreement, even if it is more “show” than anything else.
Importantly, this is all coming at a time when the “Seasonal Sell Signal”has been triggered.
Sell In May
Let’s start with a basic assumption.
I am going to give you an opportunity to make an investment where 70% of the time you will win, but by the same token, 30% of the time you will lose.
It’s a “no-brainer,” right? But, you invest and immediately lose.
In fact, you lose the next two times, as well.
Unfortunately, you just happened to get all three instances, out of ten, where you lost money. Does it make the investment any less attractive? No.
However, when in comes to the analysis of “Sell In May,” most often the analysis typically uses too short of a time-frame as the look back period to support the “bullish case.” For example, Mark DeCambre recently touched on this issue in an article on this topic.
“‘Sell in May and go away,’ — a widely followed axiom, based on the average historical underperformance of stock markets in the six months starting from May to the end of October, compared against returns in the November-to-April stretch — on average has held true, but it’s had a spotty record over the past several years.”
That is a true statement. But, does it make paying attention to seasonality any less valuable? Let’s take Dr. Robert Shiller’s monthly data back to 1900 to run some analysis. The table below, which provides the basis for the rest of this missive, is the monthly return data from 1900-present.
Using the data above, let’s take a look at what we might expect for the month of May
Historically, May is the 4th WORST performing month for stocks with an average return of just 0.29%. However, it is the 3rd worst performing month on a median return basis of just 0.52%.
(Interesting note: As you will notice in the table above and chart below, average returns are heavily skewed by outlier events. For example, while October is the “worst month” because of major crashes like 1929 with an average return of -0.29%, the median return is actually a positive 0.39%. Such makes it just the 2nd worst performing month of the year beating out February [the worst].)
May and June tend to be some of weakest months of the year along with September. This is where the old adage of “Sell In May” is derived from. Of course, while not every summer period has been a dud, history does show that being invested during summer months is a “hit or miss” bet at best.
Like October, May’s monthly average is skewed higher by 32.5% jump in 1933. However, in more recent years returns have been primarily contained, with only a couple of exceptions, within a +/- 5% return band as shown below.
The chart below depicts the number of positive and negative returns for the market by month. With a ratio of 54 losing months to 66 positive ones, there is a 46% chance that May will yield a negative return.
The chart below puts this analysis into context by showing the gain of $10,000 invested since 1957 in the S&P 500 index during the seasonally strong period (November through April) as opposed to the seasonally weak period (May through October).
A Correction IS Coming
Based on the historical evidence it would certainly seem prudent to “bail” on the markets, right? No, at least not yet.
The problem with statistical analysis is that we are measuring the historical odds of an event occurring in the near future. Like playing a hand of poker, the odds of drawing to an inside straight are astronomically high. However, it doesn’t mean that it can’t happen.
Currently, the study of current price action suggests that the markets haven’t done anything drastically wrong as of yet. However, that doesn’t mean it won’t. As I discussed this past weekend:
“While the market did hold inside of its consolidation pattern, we are still lower than the previous peak suggesting we wait until next week for clarity. However, a bit of caution to overly aggressive equity exposure is certainly warranted.I say this for a couple of reasons.
The market has had a stellar run since the beginning of the year and while earnings season is giving a “bid” to stocks currently, both current and forecast earnings continue to weaken.
We are at the end of the seasonally strong period for stocks and given the outsized run since the beginning of the year a decent mid-year correction is not only normal, but should be anticipated.”
With the markets on “buy signals” deference should be given to the bulls currently. More importantly, the bullish trend, on both a daily and weekly basis, remains intact which keeps our portfolio allocations on the long side for now.
However, a correction is coming. This is why we took profits in some positions which have had outsized returns this year, rebalanced portfolio risk, and continue to carry a higher level of cash than normal.
“The important point to take away from this data is that “mean reverting” events are commonplace within the context of annual market movements.
Currently, investors have become extremely complacent with the rally from the beginning of the year and are quick extrapolating current gains through the end of 2019.
As shown in the chart below this is a dangerous bet. In every given year there are drawdowns which have historically wiped out some, most, or all of the previous gains. While the market has ended the year, more often than not, the declines have often shaken out many an investor along the way.”
Let’s take a look at what happened the last time the market started out the year up 13% in 2012.
Here are some other years:
2007
2010
2011
Do you really think this market will continue its run higher unabated?
It is a rare occasion the markets don’t have a significant intra-year correction. But it is a rarer event not to have a correction in a year where extreme deviations from long-term moving averages occurs early in the year. Currently, the market is nearly 6% above its 200-dma. As noted, such deviations from the norm tend not to last long and “reversions to the mean” occur with regularity.
With the market pushing overbought, extended, and bullish extremes, a correction to resolve this condition is quite likely. The only question is the cause, depth, and duration of that corrective process. Again, this is why we discussed taking profits and rebalancing risk in our portfolios last week.
I am not suggesting you do anything, but it is just something to consider when the media tells you to ignore history and suggests “this time may be different.”
That is usually just about the time when it isn’t.
via ZeroHedge News http://bit.ly/304YGQS Tyler Durden
The Turkish lira continued its collapse this morning as investors interpreted Turkey’s decision to redo Istanbul’s municipal vote as yet another manifestation of President Recep Tayyip Erdogan’s influence over independent institutions.
As Bloomberg notes, the decision drew instant condemnation from the opposition and some European officials.
The European Union called for Turkey’s election body to explain its reasons for the re-run “without delay”.
“Ensuring a free, fair and transparent election process is essential to any democracy and is at the heart of the European Union’s relations with Turkey,” the EU’s diplomatic chief, Federica Mogherini, said in a statement.
Germany’s Foreign Minister Heiko Maas said the decision was “not transparent, and incomprehensible to us”.
The French government also said the Turkish authorities needed to show “respect for democratic principles, pluralism, fairness [and] transparency” in the new poll.
It also raised investor concern that the nation’s recession-mired economy now faces an extended period of political turmoil.
“Turkey has had fair and free elections since 1950,” Soner Cagaptay, the director of the Turkish Research Program at the Washington Institute for Near East Policy, said on Twitter.
The “decision to reverse the March 31 Istanbul mayoral race, in which the governing party lost, is the book end of a historic era. Until now, it was one man, one vote, from now on it is: vote until the governing party wins.”
Protests have erupted across Istanbul over Erdogan’s decision to re-run the election…
The reaction is clear, sell Lira first…
Finally, to those daring to short the Lira (and Turkish stocks), strongman Erdogan has a message:
“Whatever we did to the terrorists threatening our borders, we will do the same” to those who are trying to sabotage our economy.
Be careful what you write analysts.
via ZeroHedge News http://bit.ly/2JmrPRn Tyler Durden
The European Commission slashed previously hope-filled economic growth forecasts for the region this morning.
Most notably, the Euro-area GDP growth forecast for 2019 cut to 1.2% from 1.3% prior with Germany slashed to 0.5% from 1.1%.
“As initial deadlines for U.S.-China trade negotiations and Brexit have passed without resolution, various uncertainties continue to loom large,” the European Commission said in its quarterly report. “An escalation of trade tensions could prove to be a major shock.”
The cut prompted buying in bonds (with Bund and Treasury yields sliding)…
The euro weakened as officials in Brussels warned that the downside risks to the region’s outlook remain “prominent.’’
And sent stocks to the lows of the day…
Additionally, and not helping matters much, Eurogroup President Mario Centeno said at a Bloomberg event in Brussels on Tuesday that:
“I hope that the next crisis is not of the same sort as the last one.”
Did the crisis ever actually end? Or were Draghi’s band-aids just masking the symptoms?
via ZeroHedge News http://bit.ly/2Lo4BwS Tyler Durden
As tensions with Iran reach a boiling point and Washington looks ready to walk away from trade talks with China, Secretary of State Mike Pompeo apparently wanted to make sure the US’s European ‘allies’ know their place.
According to Bloomberg, Pompeo scrapped plans for a Tuesday meeting with German Chancellor Angela Merkel and Foreign Minister Heiko Maas, citing unspecified “pressing issues.”
“Unfortunately, we must reschedule the Berlin meetings due to pressing issues. We look forward to rescheduling this important set of meetings. The Secretary looks forward to being in Berlin soon,” according to a statement from the State Department that was relayed to the American embassy.
Merkel issued a brief statement saying the joint appearance had been cancelled because of the “cancellation by the US side.”
Pompeo was in the region to attend talks in Finland, where he warned China and Russia against pursuing “aggressive” actions in the Arctic, while resisting a diplomatic push by other countries in the region to take steps to curb climate change. He also met with his Russian counterpart, Foreign Minister Sergei Lavrov.
Those speculating about the reason for the cancellation have a veritable buffet of US gripes to choose from. These include: Germany’s decision to balk at banning Huawei from its 5G network, US criticisms of the Nord Stream 2 gas pipeline, and Trump’s persistent NATO bashing, which has largely focused on Germany’s not spending enough on defense.
Juergen Hardt, a lawmaker in Merkel’s Christian Democratic Union, insisted that Pompeo’s cancellation wasn’t a snub.
Though he added that “it’s a pity that this meeting isn’t taking place.”
via ZeroHedge News http://bit.ly/2H8ef2K Tyler Durden
There was renewed turbulence in global markets overnight, which however eased modestly following Monday’s rollercoaster, after the late Tuesday shock confirmation by USTR Lighthizer that the US would indeed hike tariffs at midnight on Friday even as China’s top trade negotiator Liu He confirmed he was headed to the US for what may prove to be a futile trip. And, like yesterday, stocks in Europe and Asia dropped alongside U.S. equity-index futures as a slew of trade headlines continued to roil traders around the globe. The dollar edged higher and Treasury yields were steady, while Turkey’s lira plunged as concerns about its politics erupted again.
“Reality is setting in that they are not going to get the master deal, the grand deal that they are hoping for and there’s a lot of work to be done,” Oliver Pursche, Bruderman Asset Management’s chief market strategist, told Bloomberg TV. “Our best guess is that these tariffs will be implemented on Friday, but will then be reversed relatively quickly.’’
Europe’s Stoxx 600 Index fell to a five-week low as declines for banks and oil producers outweighed gains for real-estate companies; the index slumped to session lows just after 7am ET, falling as much as 0.6% with energy shares among the worst performing industry groups as crude extended losses. The SXEP was down 1.2%, tracking oil lower as Saudi Arabia was reported to supply extra crude to its customers in Asia. Banks also dragged Stoxx 600 lower, with SX7P down for a 2nd day. As a result of the recent selling in Europe, the Stoxx 600 upward channel has now been broken, and more downside is to be expected.
Futures on the S&P 500 index retreated even as China confirmed its vice premier would attend trade talks in Washington this week; the report sparked a brief 15 point spike earlier in the session which however was quickly faded.
To be sure, the drop could be worse, but many investors continue to hope that the tariff threats are a negotiating tactic, especially as Beijing confirmed its top negotiator, Vice Premier Liu He, would go to Washington on Thursday and Friday as planned.
“We expect the situation to de-escalate as the issue seems solvable and Liu He, China’s lead negotiator, is continuing with his plans to travel to Washington D.C. for talks this week,” said Oxford Economics economist Louis Kuijs. “Nonetheless, the probability of renewed escalation of the U.S.-China trade war has risen substantially, which would be a drag on their respective economies, especially on China.”
Earlier in the session, Asian stocks edged lower, led by industrial and technology firms, after slumping on trade tensions Monday. MSCI’s broadest global and Asian indexes had largely held their ground overnight, though Japan’s Nikkei did take a delayed 1.5 percent hit, having been closed for over a week. Markets in the region were mixed, with China advancing and Japan and South Korea retreating. The Topix fell 1.1% as Japanese traders returned from a long holiday break. Murata Manufacturing Co. and Komatsu Ltd. were among the biggest drags. The Shanghai Composite Index rose 0.7%, driven by Foshan Haitian Flavouring & Food Co. and Shanghai International Airport Co. The S&P BSE Sensex Index fluctuated, with a rally in Housing Development Finance Co. countering Reliance Industries Ltd.’s decline. Read more about stocks in Japan here, China here and India here. Asia Picks Up the Pieces After Trade Sell-off: Taking Stock
In FX, the euro erased an advance after German factory orders rebounded less than economists’ forecasts in March; bonds in the region rose.
Earlier, Australia’s dollar jumped and government bonds fell after the central bank kept its benchmark interest rate at a record-low 1.50% for the 30th consecutive meeting. RBA Governor Philip Lowe says in statement Tuesday that “The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognized that there was still spare capacity in the economy and that a further improvement in the labor market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labor market at its upcoming meetings.” According to the RBA , falling property prices — Sydney down 14.5% from 2017 peak — are prompting households to rein in spending as consumption accounts for nearly 60% of GDP. Reflecting that, economic growth slowed to an annualized 1% in the second half of last year from almost 4% in the first six months.
Also overnight, the Swedish krona was caught in choppy trade following contrasting headlines from the minutes of a Riksbank review.
Over in China, the yuan had recouped most of its early losses against the dollar by the end of trading there as investors largely digested the situation. The offshore yuan clawed as high as 6.7628 per dollar at one point, trimming the intraday loss to 6 pips from the previous late night close of 6.7622.
However, the highlight of the overnight session was once again the Turkish lira, which was back under heavy fire after the country’s elections board ruled to scrap and re-run Istanbul elections. It slid 1.5% past the 6.15 per dollar which also sent government bonds tumbling.
“The rule of law is under scrutiny by markets,” UniCredit EM FX strategist Kiran Kowshik said. “It is also clear that Turkish reserves are depleted and there are questions about whether Turkey can weather its immediate challenges without an external anchor like the IMF.”
In overnight central bank news, Fed’s Kaplan (Non-Voter. Dove) said he would currently stand pat and doesn’t see a need to lower rates to address inflation, while he added that he doesn’t have a bias for the direction of the next rate move. Furthermore, Kaplan said he has been trying to flag issue of risky corporate debt which could be a burden on the economy in a downturn and is concerned global growth is decelerating.
In the commodity market, oil futures traded steady to higher on Tuesday as U.S. sanctions on crude exporters Iran and Venezuela kept supply concerns alive, while the Trump administration dispatched warships to the Middle East in a warning to Iran.
Today we get the JOLTS and consumer credit data, while Allergan, Emerson Electric, Ferrari, Sprint, and Lyft are among companies reporting earnings.
Market Snapshot
S&P 500 futures down 0.4% to 2,922.25
STOXX Europe 600 down 0.3% to 385.68
MXAP down 0.1% to 160.85
MXAPJ up 0.3% to 531.93
Nikkei down 1.5% to 21,923.72
Topix down 1.1% to 1,599.84
Hang Seng Index up 0.5% to 29,363.02
Shanghai Composite up 0.7% to 2,926.39
Sensex down 0.04% to 38,583.72
Australia S&P/ASX 200 up 0.2% to 6,295.68
Kospi down 0.9% to 2,176.99
German 10Y yield fell 1.7 bps to -0.011%
Euro up 0.01% to $1.1200
Italian 10Y yield rose 1.8 bps to 2.208%
Spanish 10Y yield fell 2.3 bps to 0.961%
Brent futures down 0.9% to $70.57/bbl
Gold spot little changed at $1,281.23
U.S. Dollar Index little changed at 97.53
Top Overnight News from Bloomberg
China’s top trade negotiator Liu He will visit the U.S. this week for trade talks, in a sign its leadership is battling to keep negotiations on track after President Donald Trump ratcheted up pressure with plans to raise tariffs on Chinese goods Friday
The Federal Reserve is further amplifying its warnings about the perils of risky corporate debt, saying in a Monday report that the market grew 20 percent last year and that lending standards continue to slip.
German factory orders rose for the first time in three months in March, though the increase was smaller than economists forecast and marks only a partial recovery from a recent slump.
President Donald Trump’s top trade negotiator said the U.S. plans to raise tariffs on Chinese goods on Friday, accusing Beijing of backpedaling on commitments it made during negotiations
Chinese stocks saw muted gains after Monday’s $487 billion rout. The Shanghai Composite Index added 0.3 percent at the midday break after losing 5.6 percent Monday
U.S. interest rates are “in the right place” and don’t need to be lowered, although weak inflation merits close watching, according to Robert Kaplan, president and CEO of the Federal Reserve Bank of Dallas
Turkey ordered a re-run of mayoral elections in Istanbul, overturning a rare defeat for President Recep Tayyip Erdogan and threatening long-term damage to the country’s democracy and economy
Iran signaled Monday that it may scale back some commitments made as part of the 2015 nuclear deal in response to tightening U.S. sanctions, a move that could escalate tensions after the Trump administration deployed an aircraft carrier to the Gulf
Iron ore rallied after Brazilian mining giant Vale SA’s operations were hit by fresh disruption, with a local court reversing a decision that had allowed operations at a key mine to resume and the company scaling back expectations for 2019 sales volumes
Treasury Secretary Steven Mnuchin refused to release President Donald Trump’s personal and business tax returns, setting up what could become one of the biggest legal showdowns between the president and a Congress seeking to investigate him.
Asian equities traded mixed as sentiment remained at the whim of the ongoing US-China trade uncertainty with Nikkei 225 (-1.5%) and KOSPI (-0.9%) the underperformers on return from holiday closures as they got their first opportunity to react to US President Trump’s tariff threat. Nonetheless, there was no lack of success stories in Japan with Sony among the biggest gainers after having waited through a 10-day closure to finally benefit from a return to profit in Q4 and with SoftBank boosted as it considers an IPO for its USD 100bln Vision Fund. ASX 200 (+0.2%) was positive with the index led by strength in mining names and after mostly encouraging Trade Balance and Retail Sales data, while some participants were also hopeful for a rate cut by the RBA although this failed to materialize and subsequently saw the index give back some of the gains. Hang Seng (+0.5%) and Shanghai Comp. (+0.7%) nursed some of the prior day’s sell-off in which the mainland bourse had dropped nearly 6% due to the heightened trade tensions. Furthermore, the recovery also followed a substantial rebound on Wall St after reports that the China delegation will still travel to Washington D.C. provided a glimmer of hope, although this was later clouded after-hours as US Treasury Secretary Mnuchin and Trade Representative Lighthizer confirmed a deterioration in negotiations and that tariffs will be increased if there is no agreement by Friday. Finally, 10yr JGBs were higher as the risk-averse tone in Tokyo spurred demand government bonds and with the BoJ also present in the market for JPY 940bln of JGBs.
Top Asian News
Lira Bears Out in Force as Vote Re-Run Ramps Up Political Risk; Credit Agricole Sees Lira Weakness Leading to Tighter Policy
China Stocks See Muted Gains From Monday’s $487 Billion Rout
Saudi Aramco Said to Give Extra Oil to Crude-Hungry Asian Buyers
Malaysia Joins Asia Easing Cycle With Quarter-Point Rate Cut
Major European indices are broadly in the red, and after drifted lower as the day has advanced [Euro Stoxx 50 -0.6%] in spite of risk sentiment receiving a boost prior to the cash open when China announced that Vice Premier Liu He is to attend trade talks in the US on the 9th & 10th of May. The FTSE 100 (-0.2%) is mildly lagging its peers as UK markets return from a bank holiday, and as such are reacting to the US-China trade updates; although, downside in the index is limited by the likes of Vodafone (+1.4%) and AstraZeneca (+1.5%) in the green after making a deal with Telefonica Deutschland (+2.2%) and announcing that their Phase 3 Calquence study achieved its primary endpoints respectively. Sectors are similarly mixed with energy names down in tandem with the oil complex, and notably the auto sector is once again in the red dragged down by heavyweight BMW (-1.0%) post-earnings. Following the Co. posted Q1 EBIT significantly lower than the prior levels and that the Co. have set aside EUR 1.4bln for anti-trust provisions after the Co. were previously warned of a significant charge resulting from an EU probe into collusion over delaying the implementation of cleaner-emissions cars. Other notable movers this morning include, AB Inbev (-0.1%) who at first fell around 1% at the open due to a slight miss on Q1 revenues and stating that short term dividend growth will be impacted deleveraging commitments. However, Co’s shares subsequently retraced much of this downside after stating that they are considering the IPO of their Asia-Pacific unit in Hong Kong, which could reportedly value the business at up to USD 40-70bln. In contrast, Infineon (-0.3%) initially moved higher by around 1.3% but gave up much of this surge as the Co. initially posted a beat on Q2 revenues but did emphasise that the market environment remains competitive.
Top European News
UniCredit Is Preparing for Possible Exit From FinecoBank
Vodafone Seeks EU Nod for German Deal With Telefonica Pledge
German Factory Orders Rebound Less Than Forecast After Slump
Niel Agrees to $3 Billion of Phone Tower Sales to Cellnex
In FX, Aud/Usd is firmly back above 0.7000, albeit off overnight recovery highs circa 0.7050, while Aud/Nzd remains nearer the top of its range (1.0640+) having reclaimed 1.0600 status from a low of 1.0575 ahead of the eagerly awaited RBA policy meeting. In sum, the OCR was maintained at 1.5% and the accompanying statement struck a less dovish tone than most were anticipating as rate expectations were finely balanced between 51% for on hold and the remainder predicting a 25 bp ease. However, the Bank reiterated that strength in the labour market outweighed weakness in wages and inflation, supporting the decision to stand pat again and monitor data/economic developments (domestic and external). Conversely, Nzd/Usd has drifted back down towards 0.6600 as the spotlight switches to the RBNZ amidst even greater expectations that an ease is in the offing – see the Ransquawk headline feed for a more detailed preview.
SEK/NOK – The next best performing G10 currencies as the Swedish Krona rebounds from recent lows vs the Euro through 10.7000 on a broad stabilisation in risk sentiment and despite Riksbank minutes reaffirming the more dovish shift at the last policy meeting. Similarly, the Nok has pared losses to trade back above 9.7500 against the Eur and the backdrop of steadier oil prices.
EM – The Cnh is consolidating off Monday’s lows around 6.7750 vs 6.8000+ in wake of reports that China’s Vice Premier Lui will attend the next round of trade talks in Washington and the perception if not reality that his presence improves the chances that an agreement will be reached in time to avoid the 25% tariffs on a further Usd200 bn goods threatened by US President Trump over the weekend. However, this has not done much to lift the gloom for the Try as the Istanbul rerun is not due until June 23 and as such the uncertain domestic political scene will remain for another 1 1/2 months at least. The Lira has consolidated off a 6.2000 base vs the Dollar, but Turkish assets are still underperforming and looking vulnerable.
GBP/EUR/JPY/CAD – All relatively flat vs. the buck as news-flow somewhat slowed in EU trade, albeit Brexit remains in the background with Labour leader Corbyn not partaking to today’s cross-party talks, whilst PM May is speculated to receive her departure date before the 1922 committee. Sky News’ Rigby did however note that prospects have increased for a cross-party deal, citing a Cabinet source. Cable largely was unreactive to a technical speech by Cunliffe on post-Brexit financial stability. GBP/USD remains below the 1.3100 handle (having fallen below its 50 DMA around the figure), with the next technical at its 100 HMA at 1.3077. Elsewhere, the single currency remains just around the 1.1200 level, with the European Commission Spring Forecast pushed back to around 11:30BST due to an earlier speech by the Commission’s President. The focus of the release will be Italy as press reported that the EC may warn of widening Italian budget deficit to 2.6% of GDP, above the government’s forecast of 2.4%. Moving on, the Loonie straddles just below 1.3500 vs. the Greenback ahead of Ivey PMIs later. Elsewhere, JPY remains sub-111 vs. the Buck, holding onto most of its post-Trump risk premia ahead of further trade talks this week with Vice Premier Liu He now attending, signalling high-level talks. USD/JPY remains flat around 110.50 with around 1.3bln in option expiries around 110.00-40.
In commodities, Brent (-0.6%) and WTI (-0.4%) prices are somewhat subdued, but have been relatively steady and are currently trading within a very narrow USD 1/bbl range this morning. News flow for the complex has been relatively light, with prices largely moving in-line with the US-China driven sentiment. However, there were reports that Israel has provided the White House with intelligence regarding a potential Iranian plot to target US interest in the Gulf. Looking ahead, we have the API weekly inventory report with expectations for crude inventories to increase by 2.5mln barrels; additionally, the EIA are releasing their Short Term Energy Outlook, where they previously forecast that the US crude oil production is to average 12.4mln BPD in 2019 and 13.1mln BOD in 2020. For reference, EIA weekly crude production stood at 12.3mln BPD in last week’s release. Gold (U/C) prices are largely unchanged on the day, with the safe haven selling off slightly following China stating that Vice Premier Liu He is to attend trade talks in the US. With the yellow metal still holding firm above the USD 1280/oz level, currently around USD 1281/oz. Elsewhere, Vale state that the Brucutu mining complex has stopped operations due to a court decision; follows on from a prior lower court decision which had stated that mining activities could resume.
US Event Calendar
10am: JOLTS Job Openings, est. 7,350, prior 7,087
3pm: Consumer Credit, est. $16.0b, prior $15.2b
DB’s Jim Reid concludes the overnight wrap
Since we last spoke, I’ve lugged about 200 boxes up and down stairs, spend most waking hours unpacking them or stopping three young children and a dog from doing so, had 4 water leaks (including one sewage leak into our new larder cupboard and thus ruining it and the food of course!), co-habited daily with about 50 builders/decorators/plasterers/plumbers/electricians/landscapers, etc., which wasn’t part of the plan, watched four new episodes of Game Of Thrones (anyone see the Starbucks cup accidentally left in a scene in this week’s?), have thrown a cushion at Lionel Messi on the TV, cursed Man City, had lots of medicinal de-stressing glasses of wine, and for the first time on holidays in my career have hardly looked at financial markets. Yesterday was a bank holiday in the UK and little Maisie was really upset as there was no builders in the house for the first day since moving in two weeks ago. She was really worried about them and was a bit tearful when we said that they wouldn’t always be living with us. Well I don’t think they will be always living here but a glance at the new house suggests that it might be a while yet!
So back at work and after going on holiday before Easter believing that the US/China trade deal was more a matter of when not if, clearly since Sunday all this has changed. Inevitably market action yesterday was dominated by the dramatic trade headlines, initially sparked by President Trump’s Sunday tweet threatening an escalation in tariffs against China. Equity markets sold off across the world, though sentiment improved throughout the US session, helping stocks close off their lows. The S&P 500, NASDAQ, and DOW had opened -1.61%, -1.78%, and -2.23% lower, respectively, but ultimately rallied to end the session only -0.44%, -0.50%, and -0.25% lower. That partially reflected improving news flow that suggested trade talks will continue this week with the Chinese delegation still flying to Washington, as opposed to being cancelled as initially feared.
The real carnage was in Asia yesterday, where the Shanghai Composite fell -5.58% for its worst day since February 2016. This morning it is recouping a small amount of those declines (+0.32%). The Hang Seng is also up +0.16% a touch after falling -2.90% yesterday while the Nikkei (-1.18%) and Kospi (-1.08%) are both down as they have re-opened after holidays. China’s onshore yuan is down -0.18% this morning to 6.7781. In terms of data releases, Japan’s final April manufacturing PMI came in at 50.2 vs. a preliminary reading of 49.5 and last month’s 49.2
Overnight trade headlines have continued to pour in with the US Treasury Secretary Mnuchin saying that China sent through a new draft of an agreement over the weekend that included them pulling back on language in the text on a number of issues, which had the “potential to change the deal very dramatically.” He added that “we are not willing to go back on documents that have been negotiated in the past.” USTR Robert Lighthizer though said last night that the trade talks will continue and a Chinese delegation will visit Washington on Thursday and Friday. He also confirmed that the tariff hike will proceed this Friday, though he did not say if or when the additional tranche would be applied. He also said, in a confirmation of earlier unconfirmed reports, that President Trump announced the tariffs in response to the Chinese team’s apparent backtracking on prior commitments, specifically regarding their promise to change Chinese law as part of the trade deal in order to better protect foreign investors and intellectual property holders. On the other side, China’s Global Times reported in its editorial today that China is “well prepared for other potential outcomes” of its trade talks with the US, “including a temporary breakdown in talks,” while adding that even if the negotiations break down and Washington comprehensively raises tariffs, that does not mean the door to talks is closed.
The situation is still fluid, but DB’s economists have outlined their views on the likely course of events and possible macro and market implications in a series of notes published yesterday. First, our China team outlined their views here . They think China is unlikely to back down, as recent experience suggests: 1) the cost of the tariffs is borne by US consumers, 2) China’s economy has stabilised and therefore lowers the risks of a harsher impact, and 3) previously, the US administration has responded to market sell-offs by moderating their tone. The rest of our Asia macro team outlined the associated implications for the rest of the region here . If the trade war escalates, they expect currencies across the region to weaken versus the dollar. Lastly, our US economics team published their views here . They think that, on balance, tariffs could certainly be raised this week as threatened, but they are unlikely to be followed by further major escalation. They note that the impact of a broader row would have significant implications, however.
Back to yesterday and the sectors most exposed to China led losses in developed markets, with US semiconductor stocks down -1.72% and indices of materials firms down -1.38% and -1.19% in the US and Europe. Volatility surged, with the VIX index rising as much as +5.93pts, which would’ve been its biggest spike since December, but it ultimately retraced to end only +2.44pts higher at a fairly contained level of 15.31pts.
Safe havens rallied, with treasury and bund yields falling -2.9bps and -1.9bps. Those moves might have been somewhat cushioned by healthy economic data in Europe, where the composite PMI for April was revised up 0.2pts to 51.5. The improvement was driven by upgrades in Germany and France, as Spain and Italy saw marked deterioration. The FTSE MIB lagged, falling -1.63%, while the IBEX fell -0.84%, in line with the STOXX 600, which fell -0.88%. Yields on BTPs rose +1.8bps while the other major bond markets in Europe all rallied. The Turkish lira fell -1.93% after Turkey’s national election commission ordered a re-run of mayoral elections in Istanbul, overturning a rare defeat for President Erdogan.
After the Fed drove market action last week, there was some attention paid to Philadelphia Fed President Harker’s speech yesterday, but he ended up reiterating Powell’s prior comments in a pretty uneventful way. He said that the softer inflation appears transitory and that he continues to envision one more hike this year, at most. Elsewhere, the Fed’s Kaplan (non-voter) said overnight that the US interest rates are “in the right place” and don’t need to be lowered, although weak inflation merits close watching. On revival of trade tensions he said that the US-China trade war isn’t having a major impact on the US economic growth, though he warned that businesses are being forced to reconsider supply chain and logistics operations with some of them seeking alternative arrangements in South-East Asia and Mexico instead.
As mentioned above, we had final European services and composite PMIs yesterday, which were a shade better than expected. The Euro Area composite print was revised up +0.2pts to 51.5 while the services reading was up +0.3pts to 52.8. Germany’s and France’s composite readings were up +0.1pts each to 52.2 and 50.1, respectively. Italy’s and Spain’s composite prints came in below expectations, however, at 49.5 and 52.9, down -2.0pts and -2.5pts, respectively, from March. That tips Italy’s reading back into contractionary territory for the fifth time in the last seven months.
Other data yesterday included the Euro Area’s Sentix investor confidence survey, which rose to 5.3 from -0.3. That’s the first positive reading since November. Retail sales were also flat on the month in March, versus expectations for a -0.1% mom decline, and the prior month was revised +0.1pp higher. In the US, there were no major data releases, but the Fed did release its Senior Loan Officer Survey, which showed easing credit standards for mortgage loans as well as corporate and industrial loans. Credit card standards tightened a bit, but on net it was a positive report.
Turning to a recap of last week and rest of the week ahead now given that the UK was out yesterday. The highlight on Friday was the US jobs report, which showed yet another example of robust growth but tepid inflation pressure. Bond yields fell and equity markets rallied, with most US indexes returning to near their levels of Wednesday afternoon before the Fed-inspired swoon. On the week, the S&P 500 and NASDAQ finished +0.20% and +0.22% higher (+0.96% and +1.58% Friday), while the DOW fell -0.14% (+0.75% Friday) on some poor earnings reports. Cyclical sectors led gains, with the NYFANG index up +2.30% (+1.88% Friday) and bank stocks rallying +1.41% (+0.68% Friday). In Europe, the STOXX 600 retreated -0.16% on the week (+0.39% Friday) and the DAX outperformed, up +0.79% (+0.55% Friday). Treasuries ultimately ended up +2.7bps (-1.6bps Friday) while bunds rose +4.7bps (-0.5bps Friday). Despite a brief move near 16 earlier in the week, the VIX retraced to return to sub-13 levels, ending the week +0.2pts (-1.5pts Friday). The dollar retreated -0.54% (-0.37% Friday) as the euro strengthened +0.48% (+0.29% Friday). Emerging markets held up well, with currencies gaining a slight +0.04% (+0.50% Friday) and equities up +0.77% (+1.19% Friday).
via ZeroHedge News http://bit.ly/2PSYEGJ Tyler Durden
After seizing hundreds of millions of assets tied to the 1MDB embezzlement scandal, the DoJ is finally starting to return some of the money to the Malaysian people – though the roughly $200 million that has been handed over pales in comparison to the $4.5 billion that the DoJ believes was stolen from public development fund by associates of former Malaysian Prime Minister Najib Razak.
According to the Financial Times and Bloomberg, the monies were returned under the auspices of a DoJ program called the Kleptocracy Asset Recovery Initiative. Malaysian AG Tommy Thomas said that the first tranche of money returned was $57 million forfeited by Red Granite Pictures, the production studio that helped produce the Martin Scorsese film “Wolf of Wall Street”, starring Leonardo DiCaprio.
WSJ has extensively reported how fugitive Malaysian financier Jho Low, the alleged mastermind of the scheme, used money stolen from 1MDB to help finance the movie; he also purchased a yacht, real estate and millions of dollars worth of jewelry, including diamonds given by Low to supermodel Miranda Kerr.
The US will “soon” turn over the next tranche – some $139 million seized after the sale of stake in NYC’s Park Lane Hotel, which had allegedly been bought using 1MDB money. Almost all of the money seized by DoJ will be returned, minus $3 million in ‘investigation costs’ that will be subtracted from the total.
As authorities from Singapore to Switzerland investigate crimes stemming from the looting of 1MDB, the US has filed forfeiture complaints to seize $1.7 billion in assets allegedly purchased with ill-gotten gains from 1MDB.
“1MDB asset recovery efforts across the globe are still ongoing, and Malaysia is optimistic of recovering further monies in the coming months,” Thomas said.
The announcement of the DoJ’s decision to begin turning over the funds comes just one day after Roger Ng, one of two Goldman Sachs bankers indicted in the scandal, pleaded not guilty in a Brooklyn federal court to charges of bribery and money laundering after being extradited from Malaysia.
A court in Singapore has also ordered the seizure of $50 million allegedly stemming from 1MDB that will eventually be credited to a 1MDB recovery account; in total, Malaysia has recovered some $322 million in 1MDB assets since the investigation began.
via ZeroHedge News http://bit.ly/2JmzKhx Tyler Durden
I’ve just spent a cold and blustery bank holiday weekend sailing. Almost as blustery as the threats of trade-war talk rattling stock markets. Almost as cold as the mood around them. This week’s markets are likely to be all about how China reacts and Trump twits. The next few days are going to be critical.
Will they, or will they not send, a team to the US, and if the Chinese don’t go, how conciliatory/aggressive will Trump be to keep a trade deal together? It’s going to make for fascinating soap opera! I suspect markets will remain “jittery” on China engagement/dis-engagement risks over the coming weeks.
The Trump Twitterstorm, and the subsequent down/up ructions in stocks, demonstrate 2 contradictory market forces: how reactive to immediate news markets are, and how quickly they discount news. At present, it seems impossible to wean global markets driven by boundless optimism off the opioid of insanely low interest rates. (Who has learnt the lesson of 10-years of QE nonsense? Low interest rates = low returns and do little for the real economy – they simply encourage investors to seek higher returns by buying financial risk!)
The weekend was a classic example of contradictory behaviour: markets stalled on Trump’s threat of 25% tariff hikes on $200bln of trade, and imminent trade war with China. Everyone had thought a trade agreement was a done deal. Oh dear, what a shame, never mind. Then the market quickly bought the story the trade talks will continue… The market still assumes the talks are a done deal. Maybe they are – but a small chance remains they aren’t! My worry is complacency reigns.
The tariff threats just before face-to-face meetings are just another typical page from Trump’s China Playbook – keep destabilising them, “ambushing” with new and contradictory demands, and eventually playing a conciliatory card. It’s not particularly sophisticated, it smacks of a bully, and it’s a high-risk strategy – possibly causing the Chinese to walk away, and certainly building a long-term loss of confidence (a point I’ll come back to.)
There are two sides to this game:
Trump has less time on his side than he pretends. He needs an agreement asap to confirm his “Mastery of the Deal” and success to US Agribusiness and farmers ahead of the election. He’s betting the numbers – like last week’s jobs release – will continue to show the American economy thriving. Sure, he’d like to further pump prime it with interest rate cuts and spending, who would not, but see the comment above about insanely low rates.
While the Chinese can threaten tariffs on US agribusiness, it is wrestling with a swine flu that’s already decimated its primary source of protein. (Actually, that is a bad word to use – decimate means reduce by 10% – we could be looking at 50% of the pig herd lost. This article gives some background.) Meanwhile, Xi is less secure in power than his political posturing suggests – his anti-corruption crusade has hurt many key figures. It’s still possible an outbreak of unrest trigged by shuttered factories, or a subsequent further fall in house prices, or related unrest, could see his political wings clipped and his likely displacement.
Xi and China need a quick rehabilitation to protect the China Dream. It’s now well understood the long-term implications of one-child families have triggered a demographic backlash: the threat the economy gets old before it gets rich, the imbalance between male and female, income inequality, and vulnerability of the economy in terms of its reliance on debt to fuel exports and the transition of the economy to consumption. These are deep and serious problems – but they are not insurmountable or beyond the ability of China to solve – they do not mean China is on the very of meltdown. Far from it – its now a mature economy.
It’s also facing rising backlash on the Belt and Road project – it could be fake news, but the number of stories about unhappy “client” states wanting to renegotiate infrastructure deals is rising, and despite its spending on Military might and economic power, China has limited economic “reach” compared to the US. Again, problems, and costly ones, but not terminal.
How will the Chinese react the Trump tweets – will Liu He still visit Washington with his team? How much “face” will they lose if they do? I’m told the Chinese are furious as the way the deal discussions have been trampled on – and it’s entirely possible they will sulk. On the other hand, Washington leaks say China was trying to renage on earlier enforcement and IP protections – arguing these were already in place which has upset Washington’s extreme right-trade factions. There is not a simple solution.
Yet, the market is betting there is going to be a solution, expecting Trump will now prove conciliatory after spanking the naughty Chinese over the weekend. I’m not so sure – it’s possible the Chinese may decide the issue of long-term trust with Trump is incurable, and accept short-term trade pain and a trade war. Fabian.
As noted: the next few days are going to be critical.
via ZeroHedge News http://bit.ly/2H6TLY7 Tyler Durden
