Category: zerohedge

Submitted by Bilal Hafeez of Nomura

If someone had told you the following:

1. US growth would accelerate from 2.2% to 2.9%, while Japanese growth would plunge from 1.9% to 0.9%, Euro-area growth would fall from 2.4% to 1.9% and Chinese growth would fall from 6.9% to 6.6%
2. The Fed would hike four times from 1.5% to 2.5% to become the highest yielding currency in G10, while the ECB, BoJ and PBoC would be dovish
3. US stocks would fall 6%, but Euro-area stocks would fall 14%, Japanese stocks would fall 10% and Chinese stocks would fall 23%

How well do you think the dollar would do? Well, all of the above has happened in 2018 and the top performing currency in G10 has been…the Japanese yen. It has eked out a small gain in spot terms, though adjusting for carry it is down for the year. Meanwhile the euro is only down 4.5% in spot terms (down 7% adjusted for carry) and the Chinese yuan is down 5.5% (down 1.5% adjusted for carry). Not such a great dollar performance given (1) to (3).

Terminal decline

Now, after yesterday’s dovish Fed hike it looks like we are coming to the end of the Fed hiking cycle, US growth is already losing momentum and US stocks are falling more sharply. And even with a few more hikes, Fed policy rates would settle at their lowest level in history for the end of a hiking cycle. It’s even more surprising given how low the unemployment rate. This does not augur well for the dollar. We’ve laid out our dollar view for 2019 in an earlier publication, The punchline is that we are bearish on the dollar: US yields are simply not high enough to make up for the US’s growing twin deficits, and lack of foreign capital inflows.

Risk markets to split FX against dollar

The bigger swing variable is risk appetite at least for the composition of dollar weakness. So far this year, we have seen cascading risk aversion, which has resulted in risk market unwinds not being contagious. So while the EM sell-off and Italian weakness did see bouts of dollar strength, the recent US equity and credit weakness has not. In fact, over the past three months, the Turkish lira has delivered gains of over 25% including carry, while BRL, INR and IDR have delivered gains of around 5%.

Currently, our risk monitor is  showing risk aversion, though not in EM. Should we see broader and deeper risk aversion then the dollar could regain its footing against these higher risk currencies. However, our bias is for this not to happen in the coming months. But even it does, the dollar would still likely struggle against the euro and yen.

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In keeping with an annual tradition that has persisted since shortly after his election to the highest office in the Russian Federation, Russian President Vladimir Putin held his annual end-of-year marathon Q&A session Thursday in downtown Moscow. This year, the Kremlin said it has accredited more than 1,700 journalists to participate, according to ABC.

Kremlin spokesman Dmitry Peskov, who accompanies Putin on stage and calls on journalists, told media ahead of the event that Putin would focus on domestic issues, and also every “aggressive and hostile” international situation involving Russia – of which there are many. And during the press conference, Putin has, so far, delivered, commenting on every contemporary controversy, from the diplomatic incident between Russia and Ukraine, the killing of Jamal Khashoggi, the poisoning of Sergei Skripal, the US’s decision – made barely a day ago – to withdraw troops from Syria, the US’s intention to withdraw from the INF and the looming possibility of another round of sanctions, which are currently under consideration in the US Congress.

So far, the response that has attracted the most attention was a comment on the US’s impending withdrawal from the INF, a Soviet-era arms control treaty that limits the number of intermediate-range nuclear arms that can be deployed by both sides. Echoing past comments, Putin warned once again that the breakdown of the international arms control framework and lowering the threshold for the use of nuclear weapons might eventually lead to “a global nuclear catastrophe.”

By withdrawing from the ABM 17 years ago, the US forced Russia to develop new nuclear weapons like the hypersonic weapons about which the US GAO warned earlier this week. So, if the US does follow through with the INF withdrawal, “they should not squeak later” Putin said. “We know how to ensure our safety.”

Putin asserted that the number of news stories warning about the prospects for nuclear war have risen recently. Putin said that after the collapse of the Soviet Union, people thought the prospects for nuclear war had fallen. But in reality, they have remained roughly steady, according to RT.

“The danger of such developments coming true is being blurred or is going away, it is deemed impossible or unimportant,” Putin said. “Meanwhile, if, God forbid, something like that happens, it would see an entire civilization – or even the planet – perish.”

He added that the prospects for deploying ballistic missiles without nuclear warheads also persists. “This is horrible, it shouldn’t come to this. Nevertheless, an idea to use ballistic missiles armed with non-nuclear warheads still persists.”

Putin regretted that “the international arms-control system is effectively breaking down now.”

He also noted that “there are no talks” so far between the US and Russia to renew the New START arms control treaty which is due to expire in 2021.

“Not interested? Don’t need it? Well, alright then. We’ll survive with that, we will ensure our security. We know how to do that.”

Moving on to domestic issues, Putin responded to a question about the looming possibility of more US sanctions, saying the Russian economy has already adapted to the international sanctions regime – which first came into being after the annexation of Crimea – and that any further sanctions would be ineffective.

Instead, the sanctions have “backfired” on those imposing them, Putin said, according to the Financial Times.

“Additional measure to contain the Russian Federation make no sense. Our economy has been adjusting itself to these restrictions,” Mr Putin said. “It is detrimental to everyone, but our economy has adapted, it has adjusted itself to the sanctions.”

In an interesting question, one reporter asked if socialism could be restored in Russia.

A journalist attracted Putin’s attention with a placard saying “KGB and children.” The question is about social justice and nostalgia about USSR. “Can socialism be restored in Russia?” Putin doesn’t believe so. The Russian society has changed too much to turn back into what it was during Soviet Union.

Asked about President Trump’s decision to withdraw troops from Syria, Putin said US troops had been in the country illegally, and that the decision to withdraw them was “the right decision.”

“Donald’s right and I agree with him,” Putin said.

Moving on to the subject of Russia’s international finances, Putin confirmed that Russia has been reducing its holdings of US Treasurys (something we’ve pointed out in the past).

He also said he has no plans to ban the US dollar in Russia, and that he doesn’t know whether he will meet US President Trump in the near future (they had been planning another summit for early next year). Russia will be ready to normalize relations with the US when the the US is ready, Putin said.

Typically, Putin’s Q&A goes on for at least three hours, but with the broad number of issues that need to be addressed, it’s likely that this year’s press conference could continue for significantly longer.

Watch the event live below:

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Via DataTrekResearch.com,

“Today’s prices are wrong” is the central tenet of active portfolio management. Without that belief, no manager could justify his or her role in capital markets. Systematically identifying mis-priced assets is the first line of a PM’s job description.

At the same time, investors have grown accustomed to questioning the existence of rampant asset price inefficiencies. That has driven the growth of passive management, of course. But it has also made “what’s your investment edge?” the only question that matters when quizzing everyone from a junior hedge fund analyst to the most senior long-only manager.

Markets made a harsh assessment today: Fed Chair Jay Powell has no edge.To be fair, that judgment actually started in early October, when Powell offered his “far from neutral rates” comment. The S&P 500 is down 14% since then. Today’s 1.5% drop was just the equity market’s way of saying “you are missing important information”.

Six quick thoughts to expand on this, all based on Chair Powell’s answers to various questions during the post-meeting press conference:

#1. Not only did the Chair shrug off markets, he also discounted commentary from the Fed’s own business contacts. Powell mentioned that there is a “mood of angst” as he speaks to companies just now. But he brushed aside these sentiments, noting that they may not last. He also mentioned the difficulty of measuring business confidence with enough precision to incorporate it more robustly in Fed rate discussions.

#2. When questioned about still-quiescent inflation and the Fed’s consistent over-estimation of this half of their dual mandate, Powell could only say (essentially) “Well, we’re pretty close to 2%”. In the Fed’s latest Summary of Economic Projections (SEP) out today, the FOMC actually lowered its inflation expectations for next year to 1.9% from 2.0%. Against that lower comp, the Chair struggled to explain why the committee still thought 2 rate increases next year were appropriate.

#3. While Chair Powell stressed that the Fed looks at a variety of market indicators, he seemed unconvinced that recent simultaneous moves in US stocks and Treasury yields were telling a compelling story about recession probabilities. Market volatility can be transient, to be sure. The Chair said that the only valid signal will come if long term interest rates remain low, signaling a change in the bond market’s expectations for future growth and inflation. But since investors know monetary policy only works with a lag, they are rightly concerned it will be too late by then.

#4. The market’s key worry that the Fed is overly reliant on a specific (bullish) outlook got a boost from the Chair’s comments about the Fed’s balance sheet. The current $50 billion/month reduction will remain in place. In his view, that consistency helps the bond market digest the runoff. But it was another signal that the Fed thinks asset prices are too negative on the US economy.

#5. The committee’s SEP contributed to confusion about the Fed’s future rate path. This was a problem we highlighted in Sunday’s note: how does the Fed reduce their guidance on future rate hikes without causing undue concern about 2019 economic growth?

Their answer was to cut GDP growth expectations to 2.3% (from 2.5%) and inflation to that 1.9% estimate (from 2.0%). But those changes caused several reporters to ask why the Fed needed to raise rates at all, and the Chair didn’t have a great answer except to offer up the “data dependent” hedge and say there was a “fair degree of uncertainty” just now.

#6. There were more questions on the “neutral” (neither stimulative nor restrictive) rate of interest than any other topic, an intellectual quagmire with no clear answer. All the Chair could say was that after today the Fed Funds rate is at the lower end of the committee’s long run estimate. Markets found that to be slim comfort since the Fed has two more rate increases penciled in for next year.

Summing up with one charitable (and important) point about Chair Powell’s performance today: no Fed Chair can ever say “Winter is coming.”

He must take the other side of the current bearish trade in stocks and bonds. To do otherwise would only hasten an economic slowdown as companies and individuals followed the Fed’s lead. Regardless, markets were looking for more signals from Chair Powell that he hears their concerns. He is now in a tough spot. How investors view his leadership is now as data-dependent as the Fed’s future rate policy. He owns the bullish case now. He needs to be right.

One of the most clear-eyed bits of Chair Powell’s commentary today was when he recounted the mixed track record of the Fed’s “Dot Plot” – the Federal Open Market Committee’s best guesses of future rate policy. Looking at year-end expectations over the last 3 years, his point to take the “Dots” with a grain of salt is sound advice:

• At the end of 2015, the median “Dot” called for a Fed Funds rate of 1.375% at year-end 2016. 

  The actual rate at the end of 2016: 0.66%. Instead of raising rates by 100 basis points over 2016, the Fed only managed 25 bp.

• At the end of 2016, the median “Dot” for year-end 2017 was 1.375%.

  The actual rate at year-end 2017 was 1.42%, essentially the same as the FOMC’s median guess at the end of the prior year.

• At the end of 2017, the median “Dot” was 2.125%.

  Fed Funds will end the year at 2.25% – 2.50%, reflecting 1 more rate increase than the FOMC thought prudent at the end of 2017.

Powell’s mention of this record – overestimating 2016, correct in 2017, and underestimating 2018 – was meant to show that the Fed’s data dependency regarding rate policy is real. The year 2016 saw only 1.5% GDP growth, so the Fed remained on the sidelines and ignored their “Dots”. The next year was more in line with their expectations, and Fed policy went to plan. This year, the Fed responded to better growth with more rate hikes than anticipated at year-end 2017.

This got us to wondering about a related point: in aggregate, how “sure” was the FOMC about its forward year expectations in these years, and what does that say about their conviction level right now? We pulled the year-forward “Dots” from year-end 2015, 2016 and 2017, ran the standard deviations for the estimates, and found this:

• Their greatest uncertainty was 12 months ago. The standard deviation of the year-end 2017 “Dots” for 2018 was 0.39, or close to 2 rate increases of 25 bp apiece. Fair enough, given that the FOMC was trying to anticipate the economic effect of soon-to-be passed tax cuts.

• Both 2015 and 2016 showed higher levels of collective FOMC forecast confidence than 2017 at standard deviations of 0.33 and 0.32 respectively, or closer to just 1 rate decision of 25 bp. When measured against what really happened, however, it shows that more FOMC certainty is no assurance of accuracy.

• Today’s “Dots” for 2019 year-end have a standard deviation of 0.26, the lowest level of collective uncertainty in the last 4 years when it comes to the FOMC’s forward-year expectations of rate policy.

Bottom line: the FOMC sees the world very similarly to Chair Powell’s own bullish take and their median estimate of 2 rate increases in 2019 is a high conviction point of view. The spread between the various forward-year “Dots” is tighter than at any similar point over the prior 3 years. Markets think they are wrong, but the committee is showing very little doubt. It will likely take more than a few more negative data points or swooning markets into year-end to change their minds.

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The world’s oldest central bank delivered a holiday surprise for investors on Thursday when Sweden’s Riksbank raised its benchmark repo rate off the crisis-level -50 basis points to -25 basis points, its first rate hike in seven years. The decision sparked a rally in the Swedish krona, sending it almost 1% higher to trade at 10.26 to the euro, its biggest jump since early October. 

Despite a raft of weak inflation data that had led most analysts to push back their rate-hike expectations until February, the central bank decided to hike in order to “maintain credibility” after five years of forecasting rate hikes that never happened. Prior to the hike, the Riksbank advised that a hike could arrive either late this year or during its February meeting. Inflation expectations now appear “established” at around the Riksbank’s 2% target, which suggests that “the need for a highly expansionary monetary policy has decreased slightly,” the bank said in a statement. The bank’s board, which voted 5-1 to raise rates, said the next hike would probably come during the second half of 2019. However, the upside for the krona was probably limited by the fact that the bank lowered its interest-rate forecast for next year, lowering the repo rate forecast by 11bp by end-2019 and 18bp by end-2020.

A day before the release, investors were expecting a less than 10% probability of a hike, according to Capital Economics.

Nordea economist Torbjorn Isaksson told Bloomberg that the wording of the bank’s statement “strengthens our view that the next rate hike is a long way off.”  Svenska Handelsbanken Chief Economist Christina Nyman declared it a “very dovish hike.”

Swedish economic activity has been robust, the bank said in its statement, ignoring a raft of weak inflation and growth data. And despite worries about a decline in global trade thanks to the Trump trade war, the Riksbank said that “the employment rate is historically high, companies are reporting major shortages of labor and cost pressures are rising,” removing the need for such accommodative policy, though the bank said that policy “is still expansionary.”

Analysts from Goldman said the Riksbank’s hike was “in line with our base case” and projected that the next hike won’t arrive until Q3 next year, though they said risks to their forecast are “skewed to the downside:”

Today’s announcements were close in line with our base case expectations. A large downside risk existed from a postponement of the first hike to February, with the added uncertainty of further delay from this. With today’s decision we think the Riksbank will use the next six to nine months to assess if the domestic and global data are broadly developing in line with its base case forecast. If so, we think the Riksbank will hike in Q3 and raise the repo rate about twice or slightly more over the subsequent year. We do see risks to our modal forecast as skewed to the downside, reflecting that we also attach downside risk to our forecast of an ECB hike by late 2019. That said, we still view the market forwards as being on the low side.

As Bloomberg reminds us, one reason the Riksbank has probably been so hesitant to hike until now is that it is still getting over its last policy error, made during the European debt crisis, when it started hiking in 2011, only to do a U-turn that ultimately led it to the negative levels seen today. New York Times editorial board member Paul Krugman infamously declared that the hike was an example of “sadomonetarism.”

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Blain’s Morning Porridge submitted by Bill Blain

“Christian Men, be sure, while God’s gifts possessing, you who will bless the poor shall yourselves find blessing…”

The Fed did not deliver us Gold, Frankincense or Myrrh. 2018’s “mood of angst about growth” wasn’t improved as the Fed closed a bad year with a 25 bp hike y’day. Powell ignored Trump and mumbleswerved about: “significant uncertainty on the ultimate destination of any further rate increases..” The way he said it; 2 hikes next year sounded less hawkish rather than more dovish. Markets reacted in a predictable fashion: Badly! Biggest post FOMC nosedive in years.

This will be my last porridge of 2018. Merry Christmas! As we kiss the last few days of the “worst year in memory” goodbye! Will 2019 be as bad? Of course not… but.. Things are seldom as bad as you fear…. they can be…. much much worse.

This time last year I was calling for a stock market correction (rather than full crash) in Q1. It didn’t happen till November. I was a fairly lone Cassandra on the likely unintended consequences of QE of the great QE unwind on all asset classes – warning an outbreak of subjective realism would crush overly tight bond spreads and inflated equity as the buybacks ended. It’s half happened.

The full effects of the QE wind-down are only now being felt and made apparent. It’s an ongoing threat. The fact so many investors still don’t get it is why I remain a massive bull on off-market alternatives, divergent, uncorrelated real assets producing real cashflows. I warned about the dangers of US tax cuts being a short-term boost solving few long-term issues like a balance consumption/production economy.

On a more positive tack, 2019 looks more likely to be a market “recuperative” year because the last few months of pain we’re going in “eyes open”. Its beginning to feels like markets are awaking from the years of QE somnambulance, and are more aware of the risks and prepared for them. A large part of the necessary stock market correction has occurred. More downside is possible, as is a rally off perceived lows. Selective stock and bond agony may be on the cards. We’re all aware of how over-levered the corporate bond sectors are.

On the other hand, strip out the noise on China slowdown, trade wars, Europe and such, and the global economic numbers look OK-ish despite the fears of recession. One of the performing trades for 2018 has been long dollar. It’s apparently the latest “most crowded trade on Wall Street..” and you have to wonder for how much longer. Earlier this week someone else wrote: “The fact that the USD is considered a top trade at a time when the US economy is slowing and the Fed may be set to pause”… What the Fed said last night is they are watching for more signs of direction. Growth is not over yet. Anyway.. what else would you buy except dollars? Sterling? Euro? Yen? Nothing stands out.

What about predictions for next year?

More of the same I’m afraid. As the unwind continues, Financial Assets inflated by the free-money effects of QE are still finding new equilibrium valuations. Markets will remain volatile. Tech change and supply fundamentals will continue to shock us – look at oil prices for an example; turning a good year for oil and energy into a question market. Or look at how iPhone sales in India have fallen off a cliff as people buy cheaper phones that do the same – commoditisation!

The thing that scares me most is liquidity – the lack of it.

All I can promise is fun on the political side. Populism is my main concern as bad politics leads to policy mistakes. The failures of Trump, Brexit and Europe, et al, increase populist uncertainty, fueled by unhappy poorer poor who resent income inequality and the perception they are doing worse because its someone’s fault other people are doing better. (It has ever been thus..)

So, to cope with 2019 perhaps this would be the time to remind readers of some of the important “Blain’s Market Mantras” to consider through the year: (These are not all my trading mantras, but ones I think worth carving into your desks before Jan 1.)

1. The Market has but one objective: To inflict the maximum amount of pain on the maximum number of participants.
2. The Market always overreacts.
3. The Market has no memory – and neither do buyers
4. The moment to buy/sell an asset is some point before you first think about it.
5. Walking out first is better than crawling out last / The first cut is the cheapest
6. A bid is a bid is a bid! And you should hit it harder and faster than the proverbial red-headed step-child.
7. Investment Rules should strictly adhered to as they are always right – until they aren’t!
8. The incredible thing about the Euro is number of people who actually believe in it..
9. Investment rules and capital regulations lead to lazy investment allocations and unwise asset optimisation.
10. Buy companies and countries with positive politics and reform agendas. Sell counties using someone else’s currency, or companies where the management are wearing new shoes.
11. If a Country looks, feels, and smells bust.. it probably is.
12. Ratings are just someone else’s expensive opinion
13. Opinions are like bottoms. Everyone has one.

Armed with this list of dos and don’t you are now fully prepped for 2019. God help us all…

Have a great holiday season.. All the best to you and yours…

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Unlike Sweden’s Riskbank, which surprised this morning with its first rate hike in 7 years, a move that was expected by only 10 of 24 analysts polled by BBG, the Bank of England had nothing up its sleeve when its Monetary Policy Committee voted unanimously (9-0) to leave rates unchanged at 0.75% and warned that Brexit uncertainties had “intensified considerably” since its November meeting.

MPC voted unanimously to keep #BankRate at 0.75% pic.twitter.com/LZVXkchCIm

— Bank of England (@bankofengland) December 20, 2018

“The broader economic outlook will continue to depend significantly on the nature of EU withdrawal,” the minutes of the meeting said. “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”

With little idea whether the UK is going to leave the EU smoothly or crash out with no deal in March, the bank’s Monetary Policy Committee for the first time gave no indication of how recent data were shaping its thinking on monetary policy, the FT noted.  Instead, the central bank merely repeated what it had said at its November meeting — that if there was a smooth Brexit with a transition period, the economy was likely to need roughly one quarter point interest rate rise a year to keep inflation anchored to its target of 2 per cent. But turmoil since then puts that assessment in doubt.

As the FT notes, the MPC’s reticence in providing markets with any guidance was even starker because it noted that there had been significant changes in the UK and global economies since it last met to discuss interest rates in early November.

“Brexit uncertainties have intensified considerably since the committee’s last meeting,” the minutes of the meeting said. “The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth”.

The BoE said it now sees inflation slowing below the 2% target as soon as January after oil prices fell. Nevertheless, stronger-than-anticipated wage growth and weak productivity suggest that underlying inflation pressures are building.

The economic outlook has weakened since the bank’s last round of forecasts in November. While growth was 0.6% in the third quarter, the BOE expects 0.2% expansion at the end of the year and about the same in the first three months of 2019.

Prime Minister Theresa May is running down the clock before putting her withdrawal agreement to a vote in Parliament. If lawmakers reject the deal, the risk of leaving the EU without a transition period rises. A disorderly Brexit would put the BOE in crisis-fighting mode – the pound would fall, fanning inflation, while new trade barriers would put the brakes on growth. The MPC said that the current monetary policy stance is “appropriate” for now, though it expects greater-than-usual short-term volatility in U.K. data.

While the MPC was generally downbeat on the changes to the UK economy since its last meeting, it noted that conditions in the labour market had improved further and this was likely to generate stronger inflationary pressure in the medium term. “Annual growth in regular pay had risen to 3.3 per cent, stronger than anticipated in the November inflation report, and the committee judged that near-term risks were slightly to the upside,” the MPC minutes of the December meeting said.

Separately, the MPC warned on growing inflation pressures, saying that with continued low productivity growth, rising pay was likely to increase firms’ costs and put upward pressure on prices. And the committee judged that Philip Hammond’s the late October Budget had also injected further spending into the economy which was likely to raise output 0.3 per cent over three years, further boosting inflationary pressure. But the MPC declined to give any assessment how it balanced these contradictory forces. All the committee was willing to say was, “the MPC judged at this month’s meeting that the current stance of monetary policy was appropriate”.

In response to the widely expected announcement, there were no notable reactions in assets, with cable dipping modestly after rising by nearly 100 pips earlier largely as a result of the sharp drop in the dollar.

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In a series of notes discussed on CNBC by Joe Kernen, billionaire hedge fund manager David Tepper lays out where he stands on the market currently.

And it’s not bullish…

1. Powell basically told you the Fed put is dead.

2. Everyone is tight. Chinese money growth plummeting. ECB cutting the last of QE. And Fed still in tightening mode.

3. The net biggest issuance of Treasuries and worldwide fixed income is coming next year. Something is going to get crowded out. Bonds stocks etc.

4. Oh and there is this trade war question. I think we should be having a fight with China on different issues. But it is not conducive to confidence. Freezing some worldwide activity.

5. Cash is not so bad.

and finally, more ominously:

6. The Fed won’t care for another 400 S&P points

Is anyone ready for that?

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Markets whipsawed violently in the aftermath of the Fed’s “less dovish than expected” rate hike, with European stocks sliding to 2 year lows, and Japanese stock entering a bear market as crude oil tumbled after another mini flash crash after the European open as the dollar slumped.

US equity futures initially rose, then tumbled sliding to a new 2018 low around midnight dragged lower by Asian market fears, then once again rebounded around the time EUrope opened, and were trading mostly flat as US traders walked in.

Investors “think the Fed has completely misjudged the situation and now it’s just a matter of just trying to find an exit while you can,” said Kyle Rodda, a market analyst at IG Group in Melbourne. “We’re probably entering a stage now where markets have got it their head that we’re preparing for quite sustained downside going into 2019.”

The sell-off that began Wednesday after Powell disappointed markets with a rate hike and a promise to keep reversing quantitative easing after downplaying the implications of market volatility, gathered pace in Asia and Europe. Markets were mostly spooked by Powell’s comment that the process of unwinding QE is on “autopilot.”

“The Fed’s been a huge friend of the stock market and they are now a little bit of an enemy” and will probably become a worse enemy before this is all over, Bob Doll, Nuveen chief equity strategist and senior portfolio manager, said on Bloomberg Television.

The enemy was revealed in European trading, where more than three-quarters of Stoxx Europe 600 members declined, with the index sliding to the lowest level since December 2016. Major European Indices are in the red, continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging.

Earlier in the Asian session, Japanese stocks entered a bear market as the last policy statement of the year from the BOJ added to mounting investor concerns, sending the yen to its strongest since mid-September. The Topix index fell 2.5%, extending its decline after the BOJ kept its policy unchanged. Electronics makers and telecommunications stocks were the biggest drags on the benchmark gauge, which closed almost 21 percent below its January high.

Some investors thought the drop in Japanese stocks went too far. “This is an adjustment on the market from a strongly crowded position, especially on U.S. equities, to a more normal level,” said Frank Benzimra, head of Asia equity strategy at Societe Generale. “I’m surprised at the reaction of the Japanese market, which I find a bit excessive.”

USD/JPY fell below 112 for the first time since Oct.; the yen was supported amid concerns about slowing global growth after the Fed said it still intends to raise interest rates two more times next year; yields on super-long JGBs dropped to five-month lows after the Bank of Japan kept policy unchanged.

Elsewhere in currencies, the dollar fell broadly, with the BBDXY sliding back under 1,200 while treasuries held most of their steep gain from Wednesday.

Sweden’s krona rose against all Group-of-10 peers after a surprise interest rate hike by the Riksbank which raised its policy rate by 25 bps, as expected by 10 of 24 economists in a Bloomberg survey; the krona rose as much as 1% against the euro to a three-day high, before paring gains as traders digested a lowered rate projection.

In other central bank news overnight, the BoJ left monetary policy steady with short-term rate target at -0.1% and JGB yield target at around 0.0%; unchanged as expected. The Central Bank maintained pledge to buy JGBs in a flexible manner with holdings to increase at a pace of JPY 80tln per annum. Forward guidance was unchanged with BoJ stating it “will keep current extremely low rates for an extended period of time”. Board members Kataoka and Harada dissented on YCC as expected.

Also in Asia, the Hong Kong Monetary Authority raised rates by 25bps to 2.75% in lockstep with the Fed, as expected. HKMA stated that rising interest rates reflect normalization from a low-rate environment and more data in needed to determine if the local property market is in a downturn. Meanwhile, somewhat surprisingly the PBoC left interest and reverse repo rates unchanged, once again refusing to hike rates in lockstep with the Fed.

In another surprise move, the Swedish Riksbank raised rates for the first time in 7 years, to -0.25% vs. Exp. -0.5%. The bank’s forecast for the Repo rate indicates the next hike will likely occur in the second half of 2019. Deputy Governor Jansson dissented the rate hike, and did not support the repo-rate path in the monetary policy report. The Riksbank also sees the repo rate averaging 0.48% in Q4 2020, vs. Prev. 0.66% forecast and, 0.98% in Q4 2021, vs. Prev. 1.23% forecast. The bank noted that even though inflation has been lower than expected, conditions remain good for inflation to stay close to the inflation target going forward. The hike sent the SEK sharply higher against all of its peers.

After posting a modest rebound on Wednesday, oil once again tumbled, sliding more than 3 percent in New York. Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to
weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does
not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In
addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers
are awaiting orders from state oil Co NOC.

Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London
dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were
imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.

Expected data include jobless claims and November’s Leading Index. Accenture, Blackberry, Carnival, Walgreens Boots, and Nike are among companies reporting earnings

Market Snapshot

• S&P 500 futures little changed at 2,505.25
• STOXX Europe 600 down 1.2% to 337.29
• MXAP down 1.3% to 146.16
• MXAPJ down 0.9% to 474.60
• Nikkei down 2.8% to 20,392.58
• Topix down 2.5% to 1,517.16
• Hang Seng Index down 0.9% to 25,623.53
• Shanghai Composite down 0.5% to 2,536.27
• Sensex down 0.3% to 36,368.40
• Australia S&P/ASX 200 down 1.3% to 5,505.82
• Kospi down 0.9% to 2,060.12
• German 10Y yield fell 1.7 bps to 0.222%
• Euro up 0.8% to $1.1467
• Italian 10Y yield fell 16.3 bps to 2.413%
• Spanish 10Y yield rose 0.2 bps to 1.38%
• Brent futures down 2.8% to $55.64/bbl
• Gold spot up 1% to $1,255.60
• U.S. Dollar Index down 0.7% to 96.37

Top Overnight News from Bloomberg

• Fed Chairman Jerome Powell suggested he will be more cautious about raising rates next year after boosting them for the fourth time in 2018. “There’s significant uncertainty about both the path and the ultimate destination of any further rate increases,’’ he told a press conference
• The Bank of Japan left its stimulus settings unchanged at its final policy meeting of the year, with Governor Haruhiko Kuroda acknowledging that risks are tilted to the downside; Japanese stocks entered a bear market
• People’s Bank of China said it would supply lower-cost liquidity for as long as three years to banks willing to lend more to smaller companies, as policy makers roll out targeted measures aimed at shoring up the flagging economy
• New Zealand’s economy grew at half the pace economists predicted in the third quarter, suggesting inflation will remain subdued and raising the possibility the central bank may cut interest rates.
• Australia’s labor market softened a little in November in a setback for the Reserve Bank’s drive for higher wages and faster inflation
• Special Counsel Robert Mueller will be cautious about implicating President Donald Trump — or even a thinly disguised “Individual-1” — directly in criminal activity in legal filings he’s expected to issue in the next few months, according to people familiar with his investigation
• Soros Fund Management has reduced most of its macro wagers, moving away from the strategy that made George Soros a billionaire, according to people familiar with the changes

Asian equities drowned in a sea of red following the decline seen on Wall Street post-FOMC where the Dow, S&P 500 and Nasdaq all dived to fresh YTD lows and tech-giant Apple sunk over 3%. ASX 200 (-1.3%) was mostly pressured by the material sector as metals fell with the Fed-induced USD strength, similarly Nikkei 225 (-2.8%) retreated further below the 21,000 handle to levels last seen in September 2017 as its heavy mining sector slumped, while a firmer JPY further distressed the benchmark. Elsewhere, Shanghai Comp. (-0.5%) was weighed on by financial names (China Banks sector -2.3%) after the PBoC refrained from raising reverse repo rates following the FOMC and HKMA 25bps hikes. Meanwhile, Hang Seng (-1.0%) was pressured by the regional risk sentiment alongside weakness in the property and financial sectors, on the flip side, shares in Rusal provided the industrial sector with modest support after spiking higher in excess of 20% after the reports that US will terminated sanctions against the company.

Top Asian News

• China, Canada Said to Discuss Third Detainee’s Return, Post Says
• Asia Stock Carnage Deepens as Hopes Fizzle With Policy Updates
• Developer Jiayuan International Jumps By Record 25% in Hong Kong
• Bank Indonesia Pauses Rate Hikes as Fed Turns Cautious
• Emerging Markets Seen Coming Back From Dour 2018 Led by Brazil

Major European Indices are in the red [Euro Stoxx 50 -1.5%] continuing from the declines seen in Asia which were spurred by US equity markets hitting YTD lows in reaction to the FOMC rate target hike; with EUR strength weighing on European equity markets as the dollar declines. FTSE 100 (-0.4%) is the outperforming index despite being weighed on by poor performance in the mining and materials sectors with index heavyweights Anglo American (-3.1%), Rangold Resources (-2.6%) and Rio Tinto (-2.6%) in the red. Shell (-1.8%) is weighing on both the FTSE 100 and the AEX (-1.5%) which is the underperforming index, also impacted by semiconductor ASML (-3.3%) in the red after Apple’s poor performance yesterday. Sectors are firmly in the red, with the aforementioned materials sector lagging. Other notable movers include Wirecard (-3.7%) who are at the bottom of the DAX (-0.9%) following a article stating the Co only has a 5-10% share in German online transactions

Top European News

• U.K. Retailers Get Black Friday Boost as Sales Surge
• Bang & Olufsen Loses Quarter of Its Value on Lower Forecast
• Societe Generale to Take $123 Million Charge on Serbia Sale
• London Gatwick Airport Shut by Drone Scare Amid Holiday Rush
• After Brexit and Italy, Poland Shows Cost of Clashing With EU

In FX, the Dollar has recoiled sharply from initial recovery highs seen after the Fed delivered its latest 25 bp hike, but not quite the dovish future guidance that most seemed to be anticipating. However, 2019 dot plots were trimmed to 2 from 3, the neutral rate was shaved to 2.8% from 3% and the accompanying statement was tweaked to a degree in terms of the amount of further policy normalisation in the current cycle. Hence, on reflection the FOMC has shifted towards a more cautious stance, and this was
highlighted by Chair Powell in the post-meeting press conference, particularly with regard to subdued if not expressly declining  inflation pressure. The upshot, an unwind and part-reversal in the Usd and index through pre-FOMC lows around 96.200.

• SEK – In stark contrast to the Greenback’s relatively abrupt U turn, the Swedish Crown received a semi-surprise boost from the Riksbank that raised the repo rate by ¼ point against majority, albeit not unanimous by any means market expectations. Indeed, Eur/Sek has tested 10.2500 vs almost 10.3700 at one stage ahead of the contentious final policy meeting of the year, even  though the decision to hike was contested by one Board member and came with a shallower projected tightening path out to 2021.
• EUR – The single currency is heading gains vs the back-pedalling Usd and finally cleared recent highs just ahead of 1.1450 on its way to circa 1.1485 and mega option expiries/barriers at 1.1500 (5.6 bn) that also coincide with early November peaks
• CHF/GBP/JPY – All benefiting from the aforementioned Dollar demise, with the Franc breaching 0.9900 resistance and perhaps also aided by a widening Swiss trade surplus. Similarly, Cable has overcome a sticky level around 1.2650 to briefly peer above 1.2700 despite ongoing Brexit uncertainty and helped in part by a strong pre-Xmas UK retail sales update, but highly unlikely to derive any further purchase from the BoE that is unanimously seen standing pat. Meanwhile, broad risk-off sentiment/positioning and even flatter yield curves have sparked strong demand for the Jpy that has now rallied through 112.00 to just over 111.70,  even though Japanese monetary authorities are monitoring the situation and BoJ Governor Kuroda maintains the option of further easing if needed following an unchanged final policy meeting of the year.
• AUD/NZD/CAD – The Aud is markedly outperforming vs its fellow non-US Dollars, albeit within a significantly lower range vs its US counterpart around 0.7100, as the Kiwi is undermined by much weaker than forecast Q3 GDP overnight and ANZ’s dovish call for a 25 bp RBNZ rate cut. Nzd/Usd is languishing below 0.6800 and the Aud/Nzd cross is back over 1.0500 accordingly. Elsewhere, sliding crude prices and the Canadian-Chinese diplomatic situation continues to weigh heavily on the Loonie, but the Cad has rebounded from 1.3500+ lows to circa 1.3450.
• EM – Regional currencies now all in the ascendency vs the Usd and regaining lost ground after the initial Fed fall-out and rout in risk assets.

In commodities, Brent (-3.4%) and WTI (-3.5%) have continued to decline as concerns over slowing global growth and supply concerns continue to weigh on price; taking out USD 56 and USD 47 a barrel respectively. IEA’s Birol exerting additional pressure by stating that he does not expect a sharp oil price increase in the short term, and he expects serious US oil production growth to continue until 2025. In addition the El Sharara oil field is to reopen following the Libyan PM’s visit, although production has not yet restarted as workers are awaiting orders from state oil Co NOC. Gold is firmly in the green benefitting from safe haven flows following the weaker dollar post-FOMC. Aluminium prices in London dropped to a 16-month low after aluminium producer Rusal confirmed that the US intends to lift sanctions on the Co which were imposed in April. Separately, China’s aluminium firms are to meet to discuss falling prices and lower demand for the metal.

US Event Calendar

• 8:30am: Philadelphia Fed Business Outlook, est. 15, prior 12.9
• 8:30am: Initial Jobless Claims, est. 215,000, prior 206,000; Continuing Claims, est. 1.66m, prior 1.66m
• 9:45am: Bloomberg Consumer Comfort, prior 59.4; Bloomberg Economic Expectations, prior 56
• 10am: Leading Index, est. 0.0%, prior 0.1%

 

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In a scary preview of the disruptions that could soon become commonplace in our technology-infused future, London’s Gatwick airport has been shut down for more than 13 hours due to mysterious drones flying “over the perimeter fence and into where the runway operates from”. Hundreds of flights have been cancelled, leaving tens of thousands of travelers stranded in the airport’s “freezing” terminals during the holiday rush, according to reports in the BBC and the Guardian.

According to the Guardian, which is providing live coverage of the ongoing disruption, Chris Woodroofe, the airport’s chief operating officer, apologized to passengers and explained during a Sky News interview that the drones would not be shot down because of the risks posed by stray bullets. Police are asking the public’s help in finding the drone operators.

Police have been searching the perimeter of the airport to find the operators of the drones – who could face up to five years in prison if apprehended. The incident has kickstarted a conversation in the UK about imposing tighter regulations on drone operators (and stiffer penalties for anybody operating drones without the proper authorization).

“As I stand here, there is a drone on my airfield as we speak,” Woodroofe said.

While two drones had terrorized the runway for most of Wednesday evening. The BBC reported that 110,000 passengers had been expected to use the airport on Thursday, traveling on 760 flights. Gatwick had been expecting a record number of passengers during the holiday travel season.

1/2 Thurs 09.15: All flights to and from Gatwick are suspended due to ongoing drone activity activity around the airport. Unfortunately, there are significant delays and cancellations to all flights today.

— Gatwick Airport LGW (@Gatwick_Airport) December 20, 2018

2/2 Please do not travel to the airport without checking the status of your flight with your airline first. We apologise to everyone affected, but the safety of all our passengers and staff is our no.1 priority.

— Gatwick Airport LGW (@Gatwick_Airport) December 20, 2018

The runway was briefly reopened at about 3 am London Time (10 pm ET), but was swiftly closed when the drones returned. the airport said, but forced to close again about 45 minutes later amid “a further sighting of drones”.

Flight from Kiev to #Gatwick was due to land last night at 21.45. We landed in Birmingham airport. Now almost 4am, still on the plane, no food or updates from our crew. Not allowed to disembark. Bodies sleeping on every seat and across the floors. 🇬🇧🙏❤️✈️ #GatwickAirport pic.twitter.com/nBrPquEGFM

— Christopher Lister (@Listy_cl) December 20, 2018

The closure – now in its 13th hour – has been extended until at least noon London time (7 am ET).

UPDATE London Gatwick closure now extended till 12.00 UTC https://t.co/mA8kWbsU0D

— AIRLIVE (@airlivenet) December 20, 2018

The government has criticized the drone operators as acting ‘”incredibly irresponsibly”:

Aviation Minister Baroness Sugg: “These drones have been flown illegally and the operators, who have acted incredibly irresponsibly, could face up to five years in jail.” https://t.co/D1buFJyIOL

— Dept for Transport (@transportgovuk) December 20, 2018

Gatwick, which is London’s second-busiest airport after Heathrow, is advising passengers not to travel to the airport without checking with their airline first. Though the motives of the drone operators remain shrouded in mystery, Sussex Police have said “There is absolutely nothing to suggest that this is terrorism-related.”

Ten thousand passengers have suffered flight chaos after the runway at Gatwick Airport was closed due to drones being flown nearby pic.twitter.com/Lt2k9jz21d

— Press Association (@PA) December 20, 2018

It is illegal to fly a drone within one kilometer of an airport. Incoming planes are being diverted to other UK airports, including Heathrow, and some have been rerouted as far away as Amsterdam and Paris.

Incidents involving drones have been increasing:

One passenger who spoke with the BBC and the Guardian described a chaotic scene in the terminal, where pregnant women were seen sleeping on the floor.

Andri Kyprianou, from Cyprus, who had been visiting London, said: “There were pregnant women, one of them was sleeping on the floor.

There were people with small babies in here overnight, we saw disabled people on chairs. There were young children sleeping on the floor.”

The cancellations have sown widespread confusion among passengers, who are struggling to figure out whether their flights have been rescheduled or moved to different airports.

Arthur Serbejs, 22, and Domante Balciuniate, 21, factory workers from Hastings, sat on the floor by a prayer room, approaching their 16th hour of waiting for a flight to Barcelona.

“We came about 6pm yesterday, and we’re going to be here until like 7pm,” Serbejs said. “At 9pm yesterday we were on the plane for four hours – they turned the lights off and everything like it was going to take off.”

“But we were still sitting there,” Balciunate added. Serbejs said he had fallen asleep while the plane sat on the apron, hoping to wake up in Spain, “and I woke up and we hadn’t moved.”

Eventually they were taken off the flight, and offered a hotel in Brighton, which they declined as they live close by. They were told they would get an email with a ticked for another flat, but none came. “We stood in line for three hours for a 30 second conversation saying ‘your flight has already been transferred hours ago,’ but we didn’t know about it,” Serbejs said.

“It’s crazy, it’s my worst airport experience.”

Several techniques have been devised for safely disabling rogue drones, including this surprisingly low-tech solution, devised by Dutch police:

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Authored by Tom Luongo,

Turkish-US relations are terrible and deteriorating by the day despite bromides to the contrary. Actions speak louder than words. And that has been all President Trump seems capable of anymore, words not actions.

Since the beginning of l’affair Khashoggi Turkey has been extracting concession after concession from the US as the Trump administration tries to salvage its soon-to-be-unveiled Middle East peace plan.

The latest concession may be the biggest. There’s a report out now that the Trump administration is readying the extradition of cleric Fethulah Gulen, who President Erdogan believes was behind the coup attempt against him in July of 2016.

The US has protected Gulen well beyond any reasonable measure for someone not in their pay so Erdogan’s claims ring true enough. I’ve always thought he was a US intelligence asset and that the US was the ones truly behind the coup attempt.

And since the Trump administration has been desperate to get the Turks to stop leaking details of the Khashoggi murder, Erdogan has pretty much had a free hand to conduct business as he’s seen fit for the past two-plus months.

Whether the US ever returns Gulen to Ankara or not is actually irrelevant; keeping it a sore spot open is its biggest value while Turkey prepares an assault against US-backed YPG forces in Manbij, Syria.

It helps raise Turkey’s position with the other countries involved in the Astana peace process for Syria while keeping Trump, his foreign policy mental midgets and Saudi Arabia on their collective back foot.

Turkey has grown increasingly restless about the US’s lack of movement in turning Manbij over to them. And have now unleashed attacks on Kurdish forces in Northern Iraq to hamper them further.

All of this is making the US presence in eastern Syria more untenable over time while the Saudis struggle with falling oil prices and no longer want to pay the bill for the US’s proxy war.

Don’t kid yourself, the US is struggling to keep its financial pressure up on Iran.

If these things weren’t enough Turkish Prime Minister Mevlut Cavusoglu said recently that Ankara was now willing to work with Syrian President Bashar al-Assad if he survives “democratic and credible” elections. This is rich coming from Turkey, but whatever.

The importance of this statement, however, cannot be overstated. Turkey was one of the major partners in the mission to destroy Syria. And now they have joined with Russia, Iran and China in negotiating the peace process.

They have gone from “Assad must go!” to “Assad can stay.” It is an admission that the US plan for balkanization of Syria will eventually fail and that their best bet is putting maximum pressure on the US to give up its regional plans.

Russia, of course, stands behind Turkey in this and themselves are now upping the costs on the US and the Israelis. Because, it is now Russian policy to assist Syrian Arab Army forces in proportional retaliation against Israeli aggression in Syrian territory, according to Elijah Magnier.

No longer will the Russians stand aside and allow Israel a free hand over bombing what it says are Hezbollah and Iranian targets within Syria. The SAA will now strike back with a proportional response.

An airport for an airport, as it were.

What started as a State Department operation to install a puppet government and sow chaos in Syria under Hillary Clinton then became one to drain Russian and Iranian resources by wasting their time under John Kerry.

Today, that US/Israeli/Saudi strategy has been turned on its head.

It is now the US and the Saudis that are feeling the pinch of yet another quagmire without end. Moreover, the Israeli security situation is now worse than it was before all of this started in the first place. This necessitates an even more unhinged response from Washington which it cannot defend to the American people as to why we need to stay in Syria forever.

None of this is what President Trump campaigned on. None of this is what candidate and citizen Trump argued for.

The real war of attrition was never about physical resources and money. It was always about time. The Iranians and Russians have played for time. Time brought out the truth about the Syrian invasion. It exposed the real causes of the conflict.

The hope now for the US is that financial pressure will get Iran to knuckle under. But, look at what is happening. Oil prices are in freefall as the global economy slows down thanks to debt saturation, a rising dollar and increasing opposition in the West to neoliberalism and globalism.

Trump whines about this because it upsets his mercantilist plans to corner the energy markets while weaponizing the use of the dollar.

EU technocrats who fancy themselves the inheritors of a waning US empire, bristle under Trump’s plans. They will build an alternative payment vehicle to buy goods and services from sanctioned entities. This is about much more than Iranian oil.

So, while Trump, Bolton, Mnuchin and Pompeo, the Four Horsemen of the Foreign Policy Apocalypse, think they are winning this war on commerce, all they are doing is falling into the very trap Putin, Xi and Rouhani have set for them.

Again, they playing for time. The dollar is the US’s strength and also its Achilles’ heel. And if you are playing for time it is to build alternative channels for trade oil, gas and whatever else the US deems against its interests without need for dollars.

Trump’s energy dominance plan is as transparent as his narcissism. More likely the sanctions exemptions for buying Iranian oil will be extended in May because he can’t have a global crisis be his fault as he prepares for re-election in 2020.

But, that’s exactly what he’s setting up.

So, now back to Syria.

Those who were set up to be scapegoats – namely Qatar and Turkey – washed their hands of the operation quickly, made deals with Russian President Vladimir Putin and charted their own independent paths. By the time the truth about US involvement in Syria was exposed they were long gone and only the real perpetrators left holding onto poor positions and worse arguments.

All Trump can do now is openly admit that we’re there on behalf of Israel and Saudi Arabia to get Iran. That’s it. He can sell that to part of his base. But, not enough of them to win re-election.

His peace plan is DOA. It died along with the 15 Russian airmen on that IL-20 back in August. I’ll be surprised if it is ever actually announced. That one event set us on this path. It permanently poisoned Russian/Israeli relations as Netanyahu overplayed his hand assisting NATO in a needless provocation which nearly sparked a wider war.

Reports are the Putin doesn’t return his phone calls and now dictates to Bibi what happens next. This also tells me Putin now has control over his Israeli fifth columnists within the Kremlin otherwise this order would never have been issued and made public.

Now Netanyahu is hemmed in on all sides and the Saudis are political pawns between the warring factions of the US government – Trump who wants an Arab NATO and the Deep State that wants him on a platter. Their benefactor, Trump, is in an increasingly untenable position who will soon be forced to choose between hot war and impeachment.

Meanwhile, Iran, Turkey and Russia will continue to bleed out the US forces in Syria while sanctions prove to be increasingly less effective. Simultaneously, the Astana process moves forward with all groups trying to reach out to each other around the sclerotic reach of the US and put an end to this shameful period of US foreign policy insanity.

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