Oil Fundamentals Could Cause Oil Prices To Fall, Fast!

Submitted by Artrhur Bermann via OilPrice.com,

Oil prices should fall, possibly hard, in coming weeks. That is because fundamentals do not support the present price.

Prices should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. A return to the grim reality of over-supply and the weakness of the world economy could push prices well into the $20s.


A Production Freeze Will Not Reduce The Supply Surplus

An OPEC-plus-Russia production cut would be a great step toward re-establishing oil-market balance. I believe that will happen later in 2016 but is not on the table today.

In late February, Saudi oil minister Ali Al-Naimi stated categorically, “There is no sense in wasting our time in seeking production cuts. That will not happen.”

Instead, Russia and Saudi Arabia have apparently agreed to a production freeze. This is meaningless theater but it helped lift oil prices 37 percent from just more than $26 in mid-February to almost $36 per barrel last week. That is a lot of added revenue for Saudi Arabia and Russia but it will do nothing to balance the over-supplied world oil market.

The problem is that neither Saudi Arabia nor Russia has greatly increased production since the oil-price collapse began in 2014 (Figure 1). A freeze by those countries, therefore, will only ensure that the supply surplus will not get worse because of them. It is, moreover, doubtful that Saudi Arabia or Russia have the spare capacity to increase production much beyond present levels making the proposal of a freeze cynical rather than helpful.

(Click to enlarge)

Figure 1. Incremental liquids production since January 2014 by the United States plus Canada, Iraq, Saudi Arabia and Russia. Source: EIA & Labyrinth Consulting Services, Inc. (click image to enlarge)

Saudi Arabia and Russia are two of the world’s largest oil-producing countries. Yet in January 2016, Saudi liquids output was only ~110,000 bpd more than in January 2014 and Russia was actually producing ~50,000 bpd less than in January 2014. The present world production surplus is more than 2 mmbpd.

By contrast, the U.S. plus Canada are producing ~1.9 mmbpd more than in January 2014 and Iraq’s crude oil production has increased ~1.7 mmbpd. Also, Iran has potential to increase its production by as much as ~1 mmbpd during 2016. Yet, none of these countries have agreed to the production freeze. Iran, in fact, called the idea “ridiculous.”

Growing Storage Means Lower Oil Prices

U.S. crude oil stocks increased by a remarkable 10.4 mmb in the week ending February 26, the largest addition since early April 2015. That brought inventories to an astonishing 162 mmb more than the 2010-2014 average and 74 mmb above the bloated levels of 2015 (Figure 2).

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Figure 2. U.S. crude oil stocks. Source: EIA and Labyrinth Consulting Services, Inc. (click image to enlarge)

The correlation between U.S. crude oil stocks and world oil prices is strong. Tank farms at Cushing, Oklahoma (PADD 2) and storage facilities in the Gulf Coast region (PADD 3) account for almost 70 percent of total U.S. storage and are critical in WTI price formation. When storage exceeds about 80 percent of capacity, oil prices generally fall hard. Current Cushing storage is at 91 percent of capacity, the Gulf Coast is at 87 percent and combined, they are at a whopping 88 percent of capacity (Figure 3).

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Figure 3. Cushing and Gulf Coast crude oil storage. Source: EIA and Labyrinth Consulting Services, Inc. (click image to enlarge)

Prices have fallen hard in step with growing storage throughout 2015 and early 2016. Since talk of a production freeze first surfaced, however, intoxicated investors have ignored storage builds and traders are testing new thresholds before they fall again.

The truth is that prices will not increase sustainably until storage volumes fall, and that cannot happen until U.S. production declines by about 1 mmbpd.

Despite extreme reductions in rig count and catastrophic financial losses by E&P companies, production decline has been painfully slow. The latest data from EIA indicates that February 2016 production will fall approximately 100,000 bpd compared to January (Figure 4).

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Figure 4. U.S. crude oil production and forecast. Source: EIA STEO, EIA This Week In Petroleum, and Labyrinth Consulting Services, Inc. (click image to enlarge)

That is an improvement over the average 60,000 bpd monthly decline since the April 2015 peak. It is not enough, however, to make a difference in storage and storage controls price.

EIA and IEA will publish updates this week on the world oil market balance and I doubt that the news will be very good. IEA indicated last month that the world over-supply had increased almost 750,000 bpd in the 4th quarter of 2015 compared with the previous quarter. EIA data corroborated those findings and showed that the surplus in January 2016 had increased 650,000 bpd from December 2015.

Oil Prices and The Value of the Dollar

Why, then, have oil prices increased? Partly, it is because of hope for an OPEC production freeze and that sentiment is expressed in the OVX crude oil-price volatility index (Figure 5).

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Figure 5. Crude oil volatility index (OVX) and WTI price. Source: EIA, CBOE and Labyrinth Consulting Services, Inc. (click image to enlarge)

The OVX reflects how investors feel about where oil prices are going. It is sometimes called the “fear index.” That suggests that investors are feeling pretty good and less fearful about the oil markets than in the last quarter of 2015 when oil prices fell 47 percent. Since mid-February, prices have increased 37 percent.

But there is more to it than just hope and that may be found in the strength of the U.S. dollar. The negative correlation between the value of the dollar and world oil prices is well-established. The oil-price increase in February was accompanied by a decrease in the trade-weighted value of the dollar (Figure 6).

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Figure 6. U.S. Dollar value vs. WTI NYMEX futures price. Source: EIA, U.S. Federal Reserve Bank and Labyrinth Consulting Services, Inc. (click to enlarge)

Now, that trend has reversed. The U.S. jobs report last week was positive so continued strength of the dollar is reasonable for a while. Assuming the usual correlation, that means that oil prices should fall.

Oil Prices Should Fall Hard

It is a sign of how bad things have gotten in oil markets that we feel optimistic about $35 oil prices. It should also be a warning that the over-supply that got us here has not gone away.

Oil storage volumes continue to grow and that is the surest indication that production has not declined enough yet to make a difference. It is impossible to imagine oil prices rising much beyond present levels until storage starts to fall. In fact, it is difficult to understand $35 per barrel prices based on any measure of oil-market fundamentals.

The OPEC-plus-Russia production freeze is a cynical joke designed to increase their short-term revenues without doing anything about production levels. An output cut would make a difference but a freeze on current Saudi and Russian production levels means nothing. It apparently made some investors feel better but it didn’t do anything for me. Iran got this one right by calling it ridiculous.

No terrible economic news has surfaced in recent weeks but that does not change the profound weakness of a global economy that is burdened with debt and weak demand. The announcement last week by the People’s Bank of China that it sees room for more quantitative easing may have comforted stock markets but it only added to my anxiety about reduced oil consumption and future downward shocks in oil prices.

I hope that oil prices increase but cannot find any substantive reason why they should do anything but fall. As market balance reality re-emerges in investor consciousness and the false euphoria of a production freeze recedes, prices should correct to around $30. A little bad economic or political news could send prices much lower.

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An Anti-HFT Success Story: European Exchange Bans Frontrunning Algos, Grows Dramatically

If anyone is still confused why the most predatory, parasitic, and in many case criminal, of HFT actors are so vehemently opposed to IEX’s HFT-limiting exchange application, here is the reason. 

According to Bloomberg, Europe’s Aquis Exchange has doubled its share of public European stock trading since Feb. 8, when it banned what it considers a problematic high-frequency-trading strategy. Aquis says it doesn’t have a beef with HFT firms, it just wants to limit proprietary traders to passively providing price quotes. In other words, it wants to ban HFT firms which are parasitic orderflow frontrunners not market makers, and take zero risk which is about 99% of them. 

Bloomberg also notes that one firm that is still permitted on Aquis is HFT powerhouse Virtu: “We have the same goal as the end investor – we both want to minimize market impact,” said Doug Cifu, the chief executive of Virtu Financial Inc., an electronic trading company that’s providing more liquidity on Aquis. And why shouldn’t it – now that it has enough scale it can merely step back and watch as the frontrunning HFT strategies cannibalize each other.

Meanwhile investors, all of whom have by now learned how HFTs manipulate and rig markets, will run away from any venue that still permits HFTs, and go to alternatives such as Aquis and, if its application is granted, IEX (which it won’t be because NY Fed’s favorite hedge fund Citadel is vocally opposed to IEX which means so is the SEC). This can be seen in the chart showing Aquis’share of European stock trading below.

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A Warning For The Bulls: Gartman Flops To “Net Bullish” 24 Hours Day After “Reducing Longs”

There was some confusion why the S&P 500 just had to close in the green yesterday. The answer was simple: as we reported first thing yesterday morning just two days after “world renowned” CNBC contributor Dennis Gartman said he was “covering shorts” because he was “stunningly, shockingly, stupidly wrong” he flopped and was reducing his longs. Ergo, green close. It also meant that there was virtually unlimited upside before the market. We are, however, delighted to announce that just one day after being spooked on the bearish side, the Gartman Letter author is now back to “very, very marginally net long of equities in our retirement fund here at TGL.”

This coming from the gentleman who yesterday said that “we are obviously not about to change our position here, having been long of gold in EUR and Yen denominated terms for years in the case of the later and for nearly a year in the case of the former, putting to bed, we hope, the reports amongst the blogs that we change our tune rather often. Clearly we do not.”

If you are not smiling yet, you will be after this brief recap of Gartman’s most recent virtual retirement money “calls”:

Friday, February 26: Gartman covers his shorts, turns bullish.

We have been short one unit of equities in rather global terms, by being short one third of a unit of US equities; one third of a unit of the EUR STOXX 50 and one third of a unit of the Nikkei. The trade started off properly and almost immediately we were profitable; however we are now almost at a small loss on the trade… We wish to cover the position immediately upon receipt of this commentary, taking a very small profit and refraining from taking a loss and living to fight another day and in the end succeed.

Tuesday, March 1: Gartman is “selling the market short again.”

We are selling the markets short once again, having been short recently and having covered that short only a “short” while ago. But we are sellers once again this morning, noting that as the global markets have rallied they have done so on lesser volume on balance. Volume should follow the trend and the trend and volume are pointing lower, not higher.

Wednesday, March 2: Gartman says “we were stunningly, shockingly, stupidly wrong” as he covers shorts, goes long… again.

In our retirement funds here at TGL we moved swiftly to cover our short positions and we moved just as swiftly to buy what we could, when we could and where we could. We covered our derivatives positions and we urge everyone to do the same… immediately. We held on to our long positions in tanker stocks and we actually bought some of the oldest of the old guard dividend paying stocks mid-day just  because the market was loudly telling us that we had no choice but to do so.

Monday, March 7: two days after “covering shorts”, Gartman is “reducing longs.”

At this point, it would be ill advised to suddenly turn bullish of equities but instead at this point it might even be rational and reasonable to consider reducing long positions and become more and more neutral of equities…. we are “short” of a small but important position in derivatives that has reduced our net long exposure to the markets to something only modestly long. Likely we shall be adding to our derivatives positions while reducing our long positions today in order to bring our “net” exposure to something far smaller than it is.

And finally today, March 8, he is “net long.”

We are ambivalent as to the direction of stock prices at this point, and our ambivalence is reflected in the fact that we are very, very marginally net long of equities in our retirement fund here at TGL, having made only the smallest of changes to our position.

He may be “net long”, but he is concerned and dismayed by the lack of volume: “The rally in equities continues to cause us concern if for”no other reason than the volume on the upside remains tepid at best. Note then the chart at the lower left of p.1 of the Dow Industrials upon which we’ve noted the general trend of volume traded with the volume rising as the market falls and with volume falling as the market rises. This we find disconcerting. Indeed this everyone should find disconcerting and we are dismayed that no one other than we find this problematic.”

The obligatory rhetorical question follows: “Characteristically in recent months, lower openings have”given way to stronger closes here in the US, but what if this time it’s different? What if this time the lower opening is followed by even greater weakness?”

* * *

We bring all this up just in case there is any confusion if the market closes red today.

However, the worst news is that after Gartman ran away from gold some $30 lower less than a wee ago…

… we ran to cover our US dollar denominated gold position mid-day and we shall argue strongly that those still long of gold in US dollar terms, as noted above, should do the same.

… he has done what every other momo-chaser would do: he is about to go long again.

There is some formidable resistance to further strength in gold at the $1270-$1280 level, but what is impressive in our eyes is the fact that as gold in US dollar terms has consolidated at or just below that resistance, the support intra-day has been quietly, but consistently rising. A movement today at any time upward through $1275 would be technically impressive, and we shall keep a very close watch upon that level, intent upon adding to our positions  should that take effect.

Wait, did he say “adding to our positions”? Would that be the positions he “ran to cover” on March 2? Of course, it goes without saying that anyone who wishes to close out their long gold position at this point, is excused.

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Iran Shows Off “The Power of Velayat”, Test Fires More Ballistic Missiles

Back in October, when Iran test-fired a next-generation, surface-to-surface ballistic missile dubbed “Emad,” Defense Minister Hossein Dehghan said the following about the future of Iran’s vaunted missile program: “We don’t ask anyone’s permission to enhance our defense power or missile capability and will firmly pursue our defense plans, particularly in the field of missiles.”

The launch infuriated US lawmakers who voted against the Iran nuclear accord and was promptly trotted out by Obama’s political opponents as further evidence that the President has adopted an unacceptably conciliatory position vis-a-vis what amounts to a belligerent pariah state.

Senator Bob Corker, the chairman of the Senate Foreign Relations Committee, for instance, said in December that Tehran “knows neither this administration nor the UN Security Council is likely to take any action.”

And Corker was right. Well, sort of. A few weeks after Corker made that comment a flurry of activity between the US and Iran lit up the wires. The IRGC fired rockets in close proximity to an American aircraft carrier in the Strait of Hormuz, the US readied fresh sanctions on Iranian individuals and companies in connection with the ballistic missile program, and the Ayatollah pulled an epic publicity stunt on the eve of Obama’s final state-of-the-union address when the IRGC kidnapped US sailors only to return them, along with long-held hostages, the following morning.

It’s against that rather fraught backdrop that Iran has once again test-fired ballistic missiles.

Iran’s Islamic Revolutionary Guards Corps (IRGC) test-fired several ballistic missiles from silos across the country on Tuesday defying recent U.S. sanctions on its missile program,” Reuters reports.

The weapons were apparently medium-range Qiam-1s and struck targets some 700 km away.

“Our main enemies are imposing new sanctions on Iran to weaken our missile capabilities… But they should know that the children of the Iranian nation in the Revolutionary Guards and other armed forces refuse to bow to their excessive demands,” Brigadier General Amir Ali Hajizadeh, commander of the IRGC’s aerospace arm said, in a statement.

The latest tests, dubbed “The Power of Velayat” (a nod to the Republic’s religious doctrine), are “intended to show Iran’s deterrent power and also the Islamic Republic’s ability to confront any threat against the (Islamic) Revolution, the state and the sovereignty of the country,” the IRGC added.

For those curious, here’s what “deterrent power” looks like (note how amusingly calm the reporter remains when the projectile comes flyiing out of the ground behind him): 

There you have it. “Deterrence.” 

For reference, the Quiam-1 (“Uprising” in Persian) is based on the Shabab-2.  By mid-2010, Iran was estimated to have between 200 and 300 Shahab-1 and Shahab-2 missiles capable of reaching targets in neighboring countries.

There was no immediate response from Israel or other “concerned” nations, but we imagine Obama will soon tell us how launching ballistic missiles doesn’t violate sanctions on…er… ballistic missiles.

*  *  *

For those who missed it, here’s a video tour of one of Iran’s many underground missile silos:

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Following Breadth Thrust, Will Stocks Launch Higher – Or Flame Out?

Via Dana Lyons' Tumblr,

Last week’s stock market breadth was extraordinarily positive; similar signals historically have seen the market either launch higher or flame out, depending on the prevailing climate.

A lot of market talk lately has been focused on the recent improvement in the stock market’s breadth (we wrote about one unusual such display last Friday). This has stock market bulls excited, of course, because when coming off of a low of some significance, this sort of “thrust” in breadth has, at times, launched the market on substantial longer-term rallies. Well, looking at the weekly statistics, we note another uncommonly positive occurrence of strength last week: NYSE issues across the exchange averaged a gain of more than 1% per day.




This is just the 19th such occurrence since 1998. Since the market had already rallied for 2 and a half weeks, some of the short-term “launchiness” behind this signal has likely been removed. What about the longer-term? We looked at the topic following the previous signal last October. We found these events to be either extremely explosive for stocks, or complete duds, depending on the market cycle at the time. While October’s signal led to further short-term upside, stocks are now lower than they were 5 months ago. So while the jury may still be out on that signal, it has been more of a dud thus far.

What of the current instance? Well, in the short-term, anything can happen. In the longer-term, it will largely depend upon whether stocks are in a cyclical bull or bear market. Of course, we won’t know for sure what type of market cycle we’re in currently for some time, so the answer is TBD. However, readers may be aware that our view is that the stock market has likely entered a cyclical bear market. Therefore, the longer-term prospects for this signal may be less than stellar.

Outside of that, we do not have much more to add to our October 13, 2015 post, so we will re-print it here:

“Breadth thrust” has been the buzz phrase on Wall Street over the past few days. This term describes a condition in which the stock market displays an inordinate level of positive breadth over the course of several days to several weeks. Such events have typically originated from a deeply oversold condition in the market and have often (though, not always) marked the springboard for substantial intermediate-term rallies.


Many market participants have been citing one such example called the “Zweig Breadth Thrust”, named after the indicator’s founder, Martin Zweig. However, a breadth thrust can be defined in countless different ways. One unique form of breadth thrust that we have tracked pertains to a statistic that measures the average daily percentage price move of all stocks on a particular exchange. For decades, this particular statistic has been supplied by an organization named Quotron, and distributed in Barron’s each week (I swear we are the only ones that look at this statistic and that they continue to publish it just for us…but maybe there are other users out there!).


Quotron’s version of the statistic for NYSE stocks, called “QCHA”, did something rare last week. The average QCHA from Monday, October 5 through Friday, October 9 was 1.08%. That means that stocks on the NYSE rose an average of more than 1% per day last week. As our Chart Of The Day points out, this was just the 18th time in the last 17 years that this occurred.


So has the theory of the breadth thrust leading to a rally been borne out according to this measure? Yes and no. Much like the research we posted last Thursday on VIX drops from above 37 to below 20, this breadth thrust signal has led to results that are quite binary.


As the chart illustrates, a good deal of these signals (12 to be exact), occurred, not surprisingly, during the hyper-volatile period from late-2008 into mid-2009. 4 of those signals occurred between October 2008 and January 2009. These signals were, of course, followed by a continued cascade lower in stock prices. The other 8 occurred as the stock market was emerging from the March 2009 low. Thus, they played the part of the “breadth thrust as rally springboard” to a T.


4 other occurrences took place in October 1998 and October 2011, just as stocks began their recoveries (springboard?) from near-20% declines. The remaining event happened in February 2008. This came following the first significant selloff within the cyclical bear market that began in late 2007. This signal was a dismal failure as stocks resumed their decline immediately afterward.


So of the 17 prior weeks that saw the average NYSE stock climb at least 1% per day for a week, 12 marked a traditional breadth thrust that provided a springboard for significant further intermediate-term gains. The other 5 marked the opposite: an immediate collapse in prices.


So what is the deal here? We’ll go back to what we wrote on Thursday regarding the all-or-nothing VIX signals. The delineating factor separating the two binary outcomes is the cyclical market environment that exists at the time of the signal. During cyclical (i.e., measured in years) bull markets, these breadth thrusts signify the end of market weakness and the beginning of a frenzied return to a “risk-on” environment. That is, a springboard to a rally.


During a cyclical bear market, a breadth thrust may be a sharp bounce in stocks that merely leaves the market in an overbought status at resistance. If there is no “risk-on” frenzy to build upon the breadth thrust and carry stocks further, they become vulnerable to the next leg lower within the bear market.


Unfortunately, this study only looks back to 1998 (we do have the data going back to 1970 somewhere in our archives, but I could not immediately locate it.) However, it is still long enough to get a taste of the significance of these breadth thrusts in which NYSE stocks rise an average of more than 1% per day during the course of a week. We know that these breadth thrusts have occurred as stocks kick-started rallies off of most of the major lows in recent times. However, we also know that the signal is not foolproof, having failed immediately and miserably on several occasions.


The key once again to determining which is the likely outcome in our present situation is to correctly identify the current cyclical market environment.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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“I’ll Go Full Power If There’s No Agreement” – Kuwait Breaks OPEC Production Freeze

Back in late February, when crude prices had just hit a 13 year low, one catalyst unleashed a furious short-covering rally: a WSJ report which cited a delayed SkyNews interview with the UAE energy minister, according to which OPEC would freeze, if not cut production. Since then we learned, courtesy of the Saudi oil minister Al-Naimi himself, that the Saudis will never reduce output, however, in a utterly meaningless gesture, Saudi Arabia and Russia agreed to “freeze” production at levels which are already at maximum capacity and under one condition: that all other OPEC members join the freeze, with the possible exception of Iran which may be allowed to produce until it hits its pre-embargo export levels.

Of course, even said “freeze” is nothing but a stalling tactic employed by an OPEC member (Saudi Arabia), to give the impression that OPEC still exists as a production-throttling cartel when OPEC ceased to exist in that capacity in November 2014. Everything since then has been one surreal redux of “Weekend at Bernies” where everyone pretends not to notice the corpse in the room.

However, while many had pretended to at least play along with the charade, today a core OPEC member effectively broke ranks when Kuwait said it would only agree to an output freeze if all major producers take part including Iran.

According to Reuters, Kuwait’s oil minister said on Tuesday that his country’s participation in an output freeze would require all major oil producers, including Iran, to be on board.

“I’ll go full power if there’s no agreement. Every barrel I produce I’ll sell,” Anas al-Saleh told reporters in Kuwait City. And since Iran has made it very, very clear it will not join the production freeze at its current mothballed output, and will need at least 9-12 months before it regains its pre-embargo capacity levels, one can forget about a production freeze well into 2017 if not for ever since by then at least one if not more OPEC members will be bankrupt (they know who they are: they are the source of those “ALL CAPS” flashing read headlines every day).

Putting Kuwait’s production in context, Kuwait – the small Gulf state Saddam invaded 25 years ago – is currently producing 3 million barrels of oil per day. Incidentally, this is precisely how much the oil market is oversupplied each and every day, and why in addition to PADD1, 2 and 3 being almost full, and excess oil now being stored in ships, pipelines and trains, and re-exported to Europe, quite soon empty swimming pools will be full with the “black gold” as the algos continue to refuse to pay any attention to the constantly deteriorating fundamentals.

Kuwait’s announcement followed a report by Goldman overnight in which, as we reported, Jeff Currie said that “commodity rally is not sustainable” and it is time to sell crude.

“While these dynamics (rising prices) could run further, they simply are not sustainable in the current environment,” the analysts wrote. “Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating, as it did last spring.”

Perhaps, but not just yet: in addition to China’s abysmal exports we also learned that in February China’s crude imports soared 19.1% to 31.80 million tonnes, or about 8 million barrels per day, an all time high, suggesting China – like the US – is filling every available container including its SPR at a time when precise are relatively low even if organic demand continues to deteriorate.

As Reuters writes, “despite strong oil demand, questions about the sustainability of growing consumption weighed on markets after China’s overall exports tumbled by a quarter in February.”

China’s February vehicle sales, a key driver for gasoline demand, were down 3.7 percent year on year, data from the country’s Passenger Car Association showed.“This is really a poor start for trade this year,” said Zhang Yongjun, senior economist at the China Centre for International Economic Exchanges.

However, judging by the latest bounce in crude in the last hour of trading, the only thing that still matters is who does the daily “short squeeze” rip higher. By the looks of things, at least one major trader already got the tap on the shoulder.

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The Strange Story Of The Goldman Banker Subpoenaed In Malaysian Slush Fund Probe

By late January, Tim Leissner was irritated.

Irritated that Goldman wouldn’t support his move to Los Angeles to be with his famous wife Kimora Lee, irritated that the firm wouldn’t let him give an internship to the son of a shadowy, as-yet-unnamed go-between in a deal to finance a controlling stake in an Indonesian copper mine, and especially irritated that the bank seemed to be looking a lot harder at the deals he was working on in Southeast Asia in the wake of the 1MDB scandal.

And why shouldn’t he be frustrated? After all, Leissner built Goldman’s SE Asia operation. Who is the executive committee to tell him he can’t pass out internships as bribes on the way to financing Indonesian copper mines? And as far as 1MDB goes, Leissner didn’t recall anyone in New York complaining when the bank raked in hundreds of millions in underwriting fees for the deals that helped finance Najib’s slush fund (for more on the origins of the 1MDB scandal you can read herehere, and here).

“It’s not my fault Najib messed the whole thing up,” Leissner must have been thinking.

(Leissner and Kimora)

Be that as it may, Goldman had seen enough by the start of 2016.

Leissner, once the crown banker jewel in the Squid’s Asian tentacle, had become a liability. Investigations into 1MDB were underway in the U.S., Singapore, Switzerland, Hong Kong and Abu Dhabi. Someone, somewhere, was going to get to the bottom of how this disastrously indebted “development bank” got itself into dire straits and at the end of the rabbit hole there’s going to a giant Vampire Squid.

So what did Goldman do? Well, they cooked up an excuse to cut a critical loose end.

“Goldman placed Tim Leissner, the firm’s Southeast Asia chairman, on leave after a review of his email found that he had allegedly sent an unauthorized reference letter on behalf of an individual to another financial firm in 2015,” WSJ wrote this morning. “The letter also included statements that Goldman believes to be inaccurate.”

That review led to Leissner’s previously reported “mystery” leave. As we wrote at the time, “whether or not Leissner’s leave and decision to high tail it out of Singapore has anything to do with the 1MDB scandal is an open question, but the timing certainly looks curious.” Although no one knew it then, Leissner had already resigned by the time news of his “vacation” hit the wires.

“The email review also came as Goldman [questioned] a potentially lucrative mining deal in Indonesia being led by Mr. Leissner because of the involvement of someone in the deal who the bank believed could hurt the firm’s reputation,” WSJ goes on to detail. “Bank investigators found that Mr. Leissner had offered an internship to a child of the individual.”

Ultimately, Goldman backed out of the deal. Leissner was incensed. At $50 million, it would have been the biggest deal for Goldman in the region since the 1MDB bond offerings.  

It seems fairly obvious that Goldman saw the writing on the wall here and simply ordered the firm’s investigators to scour Leissner’s e-mail for an excuse to fire him ahead of revelations about 1MDB. Now, some possibly make-believe person of questionable repute and a possibly make-believe internship Leissner was set to give this anonymous individual’s son will be trotted out as the reason the most important banker in SE Asia just had to go.

You know, because Goldman wouldn’t want to damage its sterling reputation.

“?After leaving Goldman, Mr. Leissner took on an advisory role with Wildcat Capital Management, the family office of private-equity giant David Bonderman” with whose TPG Capital Leissner is close, WSJ says, in closing. “A person familiar with the matter said Mr. Leissner was no longer an adviser to his firm. It is unclear why he ended his relationship with the family office.”

Yes, it’s “unclear why he ended his relationship with the family office,” but one possibility is that Wildcat didn’t want anything to do with the looming 1MBD investigation by US authorities. As WSJ also reported early this morning, US investigators have subpoenaed Leissner in connection with the ongoing FBI and DoJ probe.

So, sorry Tim. The world is a collection of “fair weather fans,” so to speak. You find out who your real friends are when the chips are down and for you, Lloyd Blankfein apparently isn’t one of them.

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Frontrunning: March 8

  • Global Stocks Drop on Renewed Concerns About China (WSJ)
  • Iron Ore’s Rally Stalls as Goldman to Citigroup Forecast Retreat (BBG)
  • EU and Turkey close to groundbreaking migrant deal (FT)
  • Carney’s `Brexit’ Stance Under Fire as BOE Accused of Bias (BBG)
  • Oil edges lower after Kuwait dents hopes for output freeze (Reuters)
  • OECD Leading Indicators Point to Slowing Global Growth (WSJ)
  • Treasuries Rally as Japan Yields Extend Record Low on Safety Bid (BBG)
  • Germany’s Schäuble Sees No Need For Immediate Decision on Greece Payments (WSJ)
  • Justin Trudeau: The Canadian Coming for Dinner (BBG)
  • The Problem With the World’s Most Obvious Trade (WSJ)
  • Millennials Spending Power Has Hilton Weighing a ‘Hostel-Like’ Brand (BBG)
  • Sharapova fails drug test, Nike suspends ties (Reuters)
  • U.S. Restricts Sales to ZTE, Saying It Breached Sanctions (NYT)
  • Americans Really Don’t Like Immigration, New Survey Finds (BBG)
  • Shake Shack Drops as Slowing Growth Threatens Brand Cachet (BBG)
  • German Industrial Production Surges by Most Since 2009 (BBG)


Overnight Media Digest


– Tennis star Maria Sharapova announced on Monday that she failed a drug test at this year’s Australian Open for a medication she had been taking for 10 years, that was recently banned by the World Anti-Doping Agency. (http://on.wsj.com/1puVydR)

– Donald Trump’s march toward the Republican presidential nomination faces new tests on Tuesday in Michigan and Mississippi, states where rivals John Kasich and Ted Cruz are betting their regional appeal will serve as an antidote to Trump’s outsider campaign. (http://on.wsj.com/1puSYVa)

– The Obama administration announced Monday that it will release casualty totals of people killed in U.S. counter-terrorism strikes abroad, in an effort to bring greater transparency to one of the most controversial aspects of the ‘war on terrorism’. (http://on.wsj.com/1puT4Mi)

– Seven families in Flint, Michigan, sued Michigan Governor Rick Snyder and other state officials on Monday, alleging that they failed to take measures to protect the city’s drinking water and then downplayed the severity of the lead contamination. (http://on.wsj.com/1puUx5t)

– Verizon Communications Inc will pay $1.35 million to settle an investigation with federal regulators over the wireless carrier’s use of so-called supercookies, pieces of software that tracked its customers’ online usage. (http://on.wsj.com/1puUMxg)

– The Justice Department on Monday asked a federal judge to reverse an earlier ruling and order Apple Inc to help extract data from an iPhone – part of a hotly contested legal dispute between Washington and Silicon Valley over issues of privacy and security. (http://on.wsj.com/1puUOVY)

– The U.S. Supreme Court on Monday reinstated a lesbian woman’s adoption of her former partner’s biological children, rebuking the Alabama Supreme Court for invalidating the woman’s parental rights. (http://on.wsj.com/1puUqXr)

– Outstanding consumer credit, a measure of non-real estate debt, rose by a seasonally adjusted $10.54 billion in January from the prior month, the U.S. Federal Reserve said Monday. The 3.58 percent seasonally adjusted annual growth rate was the slowest growth pace since March 2013; in dollar terms, it was the smallest increase since November 2013. (http://on.wsj.com/1puUXIX)



* A poll conducted by the Electoral Reform Society has found that only one-in-six people felt well-informed about the upcoming Brexit referendum. The British voters don’t feel well informed and are asking for more businesses to talk on the issue.

* The Bank of England will offer an additional three indexed long-term repo (ILTR) operations in the weeks around Britain’s June 23 referendum on membership of the European Union, it said on Monday.

* A unknown investor has built up about five percent stake in fashion company Burberry which has prompted the brand to ask for help from its financial advisers for defence against any potential takeover bid.

* Mapletree Investments, the property arm of Singapore’s state investment fund Temasek, has acquired a portfolio of UK student accommodation for 417 million pounds ($594.43 million), fending off competition of bidders from the US, Russia and the Middle East.



– Chinese phone maker ZTE Corp will be blocked from buying any technology from U.S. companies without a special license as the company was found to have violated American sanctions against Iran by selling U.S-made goods to the country. (http://nyti.ms/21UOIPS)

– Wall Street bonuses are down for the second straight year, and recent market volatility and cutbacks suggest that 2016 is shaping up to be a difficult year, according to the New York State comptroller. (http://nyti.ms/21UPlsI)

– Hedge fund Visium Asset Management told investors on Monday that it is being investigated by the U.S. Justice Department and the Securities and Exchange Commission. (http://nyti.ms/21UPmwS)

– New rules from British regulators can act as a guide for how to hold senior managers accountable when their companies violate regulatory requirements. (http://nyti.ms/21UR1mi)




** The Canadian government’s plans to address rail safety in the upcoming federal budget are coming under heightened scrutiny amid new revelations about the Lac-Mégantic rail disaster, which killed 47 people in 2013, but could have been prevented by a simple 10-second safety procedure.(http://bit.ly/1QzJAID)

** Surging crude prices pushed Canadian oil and gas stocks to three-month highs on Monday, but investors bitten for more than a year by short-lived gains are wary of calling an end to the downturn.(http://bit.ly/1p4n3tW)

** A senior United Nations official is calling on Canada to reach out to the Nigerian government and offer logistical and intelligence services to help find more than 200 Nigerian schoolgirls abducted by Boko Haram nearly two years ago.(http://bit.ly/1RPIMzI)


** Malaysia’s Petronas is frustrated that Prime Minister Justin Trudeau’s climate-change priorities are introducing new uncertainty for its proposed C$36 billion ($27 billion) Pacific NorthWest LNG project in northern British Columbia and has threatened to walk away if it doesn’t get federal approval by March 31, according to a source close to the project.(http://bit.ly/1QzKcOg)

** Companies are wiggling out of money-losing contracts to buy electricity from coal-fired power plants in Alberta as a result of the province’s new climate change policies, leaving a provincial agency to honor the agreements. TransCanada Corp , a company best known for building pipelines but that also has a power business, cited a recent change in Alberta’s climate laws in order to terminate contracts to buy coal-fired electric power from Atco Ltd and TransAlta Corp .(http://bit.ly/1UPjc0n)


The Times

EDF finance chief resigns over Hinkley Point

The financial director of Électricité de France has resigned over a disagreement about the French utility’s plans to build the Hinkley Point nuclear power plant in Britain. (http://thetim.es/1LaNsRf)

Search for the mystery investor in Burberry

Burberry Group Plc is trying to find out the identity of a mystery investor who has built up a stake of about 5 per cent in the luxury retail group. The British brand, known for its check scarves and trenchcoats, is understood to have asked HSBC, which is listed as the custodian for the position, to disclose the identity of the investor. (http://thetim.es/1TFTGvF)

The Guardian

Stagecoach loses court case over 11 mln stg tax avoidance scheme

A complex tax avoidance scheme being used by transport group Stagecoach Group Plc to wipe 11 mln pounds off its tax bill has been defeated in the tax courts. In a 56-page ruling, a judge, Gordon Reid QC, found that the scheme, devised with the help of tax experts at KPMG, fell foul of tax avoidance legislation. The scheme involved shifting money between companies within the Stagecoach group to create a large loss in one of them without a corresponding gain in any other. (http://bit.ly/1X6Ohvi)

The Telegraph

BHS sends shockwaves through high street with warning it could collapse owing 1.3 bln stg

BHS has warned its creditors that they stand to lose as much as 1.3 bln pounds if they do not agree to a drastic turnaround plan this month. (http://bit.ly/1X8bT2E)

Microsoft plans to close UK games studio Lionhead

Microsoft Corp is planning to close the UK video games developer that helped establish its Xbox console as a major player in the gaming world, putting almost 100 jobs at risk. (http://bit.ly/21TYbXZ)

Barclays hires nine M&A executives to bolster investment bank

Barclays Plc has hired top mergers and acquisitions banker Carlo Calabria and eight of his colleagues from CMC Capital to bolster its investment bank. Calabria will become chairman of M&A in Europe, the Middle East and Africa at the bank. (http://bit.ly/1puHTTY)

Sky News

Heathrow Lands Ex-Treasury Minister Deighton

The owner of Britain’s biggest airport will seek to bolster its chances of adding new runway capacity on Tuesday when it names the former Treasury minister Lord Deighton as its new chairman. (http://bit.ly/1pbNlLI)

Bank Of England’s Cash Plan For EU Referendum

The Bank of England is putting in place precautions to ensure sterling markets keep working smoothly around the time of the EU referendum by giving lenders access to extra cash. (http://bit.ly/1TFSSqr)


via Zero Hedge http://ift.tt/1W5Ly4S Tyler Durden

Bears Exit Hibernation As Rally Fizzles On Dismal Chinese Trade Data; Commodities Slide; Gold Higher

Those algos who scrambled to paint yesterday’s closing tape with that last second VIX slam sending the S&P back over 2,000, forgot one thing – the same thing that China also ignored – central bankers can not print trade, something we have repeated since 2011. The world got a harsh reminder of this last night when China reported the third largest drop in exports in history, which crashed by over 25%, the third biggest drop on record, and no, it was not just the base effect from last February’s spike, as otherwise the combined January-February data would offset each other, instead it was a joint disaster, meaning one can’t blame the Lunar New Year either.  In short, one can’t really blame anything aside from the real culprit: despite all the lipstick that has been put on it, global trade is grinding to a halt.

This, together with fresh record low (and mostly negative) yields along Japan’s JGB curve, brought the risk off sentiment out of hibernation, and have sent the USDJPY sliding in overnight trading, and dragging European stocks and U.S. equity futures down with it.

Furthermore, after Goldman doubled-down on its bearish call on commodities, the sector has taken a deep breather after yesterday’s surge, and while crude oil has dipped by about 1%,iIron-ore futures on the Singapore Exchange fell 8.8% after yesterday’s record 19% jump on Monday. Citigroup Inc. said it’s still bearish as supply and demand fundamentals remain weak, while Axiom Capital Management Inc. said the price surge was probably just a “blip.”

Promptly bearish commentators came out of the woodwork, first in Asia…

“If they can’t get stocks right, how are they going to get the trickier puzzle of SOE reform right?” Michael Every, the head of financial markets research at Rabobank Group in Hong Kong, who correctly predicted the tumble in Chinese equities told Bloomberg. “The government’s attempts have been a total failure, leading to a huge drop in confidence among investors.”

… and then in Europe:

“We are still in the process where we’re trying to find the bottom and I don’t think we are there yet,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. “There had been, with the recent rebound, some optimism that we were out of the woods. The Chinese trade data is a reminder that the path for the business cycle ahead is pretty rocky and bumpy.”

As a result, global equities’ five-day winning streak has, as of this moment, come to a halt. Japanese government bonds surged in a haven-asset rally that also lifted the yen, gold and Treasuries.

In summary, the Stoxx Europe 600 Index extended its decline from a five-week high as investors sold equities that had led the recent rebound, while Brent crude slid after closing on Monday above $40 a barrel for the first time this year. Industrial metals sank and iron ore fell as Goldman Sachs Group Inc. predicted gains in commodities would falter. A jump in Japanese bonds that sent yields to record lows helped boost Treasuries and European debt. The yen strengthened against all of its 31 major peers and gold climbed to a 13-month high.

However one bearish commodity which never went into hibernation and which has been rising even alongside stocks, has been gold, and as the following Bloomberg chart shows, “gold rally belies confidence in stocks” having outperformed global equities.

Perhaps “gold vigilantes” are the new bond vigilantes?

* * *

Where global markets stand now:

  • S&P 500 futures down 0.8% to 1985
  • Stoxx 600 down 1.4% to 336
  • FTSE 100 down 0.8% to 6130
  • DAX down 1.4% to 9642
  • German 10Yr yield down 6bps to 0.17%
  • Italian 10Yr yield down 3bps to 1.43%
  • Spanish 10Yr yield down 2bps to 1.57%
  • S&P GSCI Index up less than 0.1% to 324.4
  • MSCI Asia Pacific down 0.7% to 125
  • Nikkei 225 down 0.8% to 16783
  • Hang Seng down 0.7% to 20012
  • Shanghai Composite up 0.1% to 2901
  • S&P/ASX 200 down 0.7% to 5108
  • US 10-yr yield down 7bps to 1.84%
  • Dollar Index down 0.04% to 97.03
  • WTI Crude futures down 0.8% to $37.60
  • Brent Futures down 0.6% to $40.60
  • Gold spot up 0.7% to $1,276
  • Silver spot up 0.1% to $15.66

Top Globa News

  • Michael Bloomberg Says He Won’t Run for President in 2016: Decided against running out of concern that his entry could benefit Republican front-runner Donald Trump
  • Wells Fargo Said to Join Swaps Revival as Funds Clamor to Hedge: Bank plans to trade derivatives known as single-name credit default swaps with clients as soon as next quarter.
  • Vale, Fortescue Game-Changing Deal to Shake Up Big Iron Ore: Pact includes plans to develop joint ventures to create about ~80mt-100mt per year of blended product.
  • Pimco Says Time to Buy Riskier Debt as U.S. to Avoid Recession: Pimco says high-quality company debt, junk bonds, bank loans offer a better risk-adjusted alternative.
  • Goldman Says Commodity Rally a False Start, Will Fizzle: rally in commodities from iron ore to gold will falter; forecasts copper, aluminum prices will slide as much as 20% over next year.
  • Nike Suspends Ties With Sharapova After She Fails Drug Test: Co. suspended ties with after she failed a drug test at the Australian Open.

Looking at regional equity markets, we start in Asia where stocks traded negative with sentiment dampened following a contraction in Japanese GDP figures (Japanese GDP SA (Q4 F) Q/Q -0.30% vs. Exp. -0.40% vs Prey. -0.40%) and weak Chinese Trade data. Nikkei 225 (-0.76%) was pressured following soft Japanese GDP which showed the economy contracted by an annualised 1.1 %, while JPY strength also added to the downbeat tone.ASX 200 (-0.53%) failed to sustain the commodity-led gains amid profit-taking in the sector and weakness in financials. The Shanghai Comp (+0.1%) initially traded lower after weak Chinese trade data in which exports declined wider than expected, while some analysts also noted disappointment regarding a lack of significant measures announced at the NPC so far. However, losses were pared heading into the European open. 10yr JGBs rose as the risk-averse tone underpinned demand while today also saw a strong 30yr JGB auction where the b/c printed at its highest since May 2014 as participants hunt for positive yields. Recapping China’s trade data, the February Trade Balance came in at CNY M/M 209.50B vs. Exp. 341.00B (Prey. 406.20B)

  • Exports (CNY) (Feb) Y/Y -20.60% vs. Exp. -11.30% (Prey. -6.60%)
  • Imports (CNY) (Feb) Y/Y -8.00% vs. Exp. -11.70% (Prey. -14.40%)

In Europe, sentiment this morning has been guided lower by downbeat data from overnight, with Japanese GDP and Chinese trade balance readings failing to inspire confidence in financial markets . As such, European equities trade firmly in negative territory (Euro Stoxx: -1.3%), with the materials sector the most significantly impacted by China concerns. As such, the usual culprits of Anglo American, BHP Billiton, Glencore are among the worst performers, while Burberry are among the best performers after the FT reported that the Co. are looking for help to defend against a potential takeover. In line with the softness seen in equities, Bunds have seen strength so far today, with the June’16 contract strengthening by over 50 ticks to rise back above 163.00. Analysts at IFR suggest model driven accounts are lifting both Bunds and Gilts, while Japanese buying of core/mid-tier markets is evident in 10Y OATs.

Top European News

  • Burberry Surges on Speculation Trenchcoat Maker May Attract Bid: Co. asked advisers at Robey Warshaw to help prepare for bid after mystery investor built up ~5% stake: FT.
  • German Industrial Production Surges by Most Since 2009: Production, adjusted for seasonal swings, climbed 3.3% m/m.
  • RWE Posts Loss at U.K. Business After Customer Defections: U.K. unit is to cut 2,400 jobs as it reported FY loss after billing system failures, departure of >350,000 utility customers.
  • Apple’s Clash With FBI Risks Piercing Trust in EU Privacy Shield: EU privacy regulators promised to give their verdict next month on so-called privacy shield deal.
  • EU Nears Migrant Cap Deal as Turkey Raises Its Asking Price: Turkish PM called on EU to double its financial aid to Turkey to EU6b.

In FX, after some volatile moves in NY and Tokyo, the early European session has been much more contained in FX, though notable is the heavy tone in spot and cross JPY, while the AUD now looks to be on the back foot after some decent data led strength of late. USD/JPY lows have so far reached just shy of 112.70, but so far, all recovery attempts have come up against decent offers through 113.00. AUD/USD stopped shy of .7500 yesterday, and now looks under threat of testing the lows from yesterday to dent a potential move to recent .7700+ projections. The USD index is pretty stable as a result, with EUR looking buoyant against the greenback, with further potential seen on the upside despite anticipated policy action from the ECB; the crosses also recovering off recent lows. GBP is looking heavy also, with the upper 1.4200’s well offered in Cable. WTI/Oil gains capped, turning USD/CAD back onto the 1.3300’s.

China’s yuan climbed 0.17 percent as the central bank raised its daily reference rate for the currency following Monday data that showed a slide in the nation’s foreign-exchange reserves moderated in February. The currencies of raw-material producing nations slumped, led by South Africa’s rand dropping more than 1 percent. New Zealand’s dollar fell 0.7 percent, while Australia’s slid 0.5 percent.

The yen gained for a second day. Bank of Japan Governor Haruhiko Kuroda told parliament on Monday he doesn’t think additional stimulus is needed at the present time. “The yen is gaining partly because Kuroda is denying imminent further easing,” said Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo. “That’s effectively telling speculative players to go ahead and buy the yen.”

In commodities, oil prices pulled back from yesterday’s best levels with WTI back below USD 38/bbl level amid weak Chinese trade data. Gold retreated from near 13-month highs to trade flat and copper prices were also pressured from weak China data, while Dalian iron ore futures continued its upward trend to hit limit up at the open following yesterday’s largest gain in spot iron ore prices on record.

In commodities, Iron-ore futures on the Singapore Exchange fell 8.8 percent, after a record 19 percent jump on Monday. Citigroup Inc. said it’s still bearish as supply and demand fundamentals remain weak, while Axiom Capital Management Inc. said the price surge was probably just a “blip.” Copper fell 1 percent in London, trimming this month’s advance to 5.4 percent. Nickel slid 2.8 percent, retreating from its highest close since November. Goldman Sachs reiterated its view that the drivers for last year’s slump in industrial metals prices remain intact, predicting drops of as much as 20 percent for copper and aluminum over the next 12 months.

Gold last week entered a bull market — commonly defined as a 20 percent advance from the most recent low — and platinum and palladium followed suit on Monday. Platinum rose 0.2 percent on Tuesday, while palladium dropped 1.8 percent. Brent crude slipped 0.5 percent in London to 40.65 a barrel, after surging 5.5 percent on Monday. It has advanced more than 40 percent since slumping to a 12-year low in January amid speculation a proposal by major producers to freeze production will trim a global glut. Data on Wednesday is forecast to show U.S. stockpiles increased last week to the highest level since 1930.

On today’s thin US calendar we have last month’s NFIB small business optimism survey reading as only release of note, which moments ago printed at 92.9, below January’s 93.9 and below the expected rebound to 94.0.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European bourses take the lead from their Asian counterparts as soft Japanese GDP and Chinese trade data dictates the state of play
  • In FX, JPY has been a beneficiary of the risk-averse tone with USD/JPY breaking back below 113.00 while commodity currencies face selling pressure
  • Looking ahead, highlights include US API data, BoE’s Weale and US 3yr Note Auction
  • Treasuries higher in overnight trading, global equities sell off after China’s exports tumbled 25.4%, the biggest decline since May 2009; week’s auctions begin with $24b 3Y notes, WI 1.065% vs 0.844% in Feb., was lowest 3Y auction stop since 0.802% in March 2014.
    Mark Carney was accused of jeopardizing the Bank of England’s credibility in the EU debate as pro-“Brexit” lawmaker Jacob Rees-Mogg said the central bank’s report on the topic supported the government’s position of remaining part of the bloc
  • An increase in investment and higher domestic spending helped propel the euro-area to its 11th successive quarter of growth as overall the economy grew 0.3% in the fourth quarter
  • German industrial production in January climbed 3.3% from the prior month, the most in more than six years, in a sign that strong domestic demand may be helping to underpin output even as external trade cools
  • European Union leaders edged toward an agreement with Turkey to halt the inflow of migrants, with the Turkish government jacking up the price for serving as the EU’s defensive barrier
  • Cyprus FM Georgiades said he’s confident in his country’s ability to access the bond market, after the government won the blessing of its European partners and the IMF to exit a three-year-old aid program with no safety net
  • Michael Bloomberg, the billionaire former three-term mayor of New York, said he’s decided against entering the 2016 presidential race. Bloomberg is the founder and majority owner of Bloomberg News parent Bloomberg LP
  • $11.52b IG corporates priced yesterday; MTD volume $53.345b, YTD $347.595b
  • No HY priced yesterday, $3.65b priced last week, $16.33b YTD
  • Sovereign 10Y bond yields mostly lower led by Greece (-39bp); European, Asian markets lower; U.S. equity-index futures drop. WTI crude oil, copper fall, gold rallies

US Event Calendar

  • 6:00am: US NFIB Small Business Optimism Falls to 92.9; Est. 94, Last 93.9
  • 11:30am: U.S. to sell $60b 4W bills
  • 1:00pm: U.S. to sell $24b 3Y notes

DB’s Jim Reid concludes the overnight wrap

I was a bit confused about yesterday. Markets were seemingly weak early on due to perceived disappointment about the scale of China’s fiscal impetus discussed over the weekend at the NPC even though our own Zhiwei Zhang thought it was in line with expectations. However in parallel Iron Ore was catapulted 18.59% higher (the largest single day gain with daily data going back to 2009) on hopes that the weekend showed China’s willingness to boost economic growth. Go figure.

In fact, Iron Ore has been one of the most impressive performing commodities this year and with yesterday’s move is now up 46% YTD so far as well as a massive 66% from the record lows made back on December 11th last year. Much of the commentary suggested yesterday’s move reflected to some degree a replenishing of Chinese steel mills supplies ahead of the ramping up of the summer construction season, as well as aggressive moves in Steel prices in expectation of demand recovery triggered by property policies and also abundant liquidity in the system. While similar commentary still remains cautious on the sustainability of such gains for now, further news overnight of a possible joint-venture of sorts between two of the biggest four producers, Fortescue and Vale, is keeping the market squarely in the spotlight for now.

Not to be outdone, Oil markets also continued their strong surge of late yesterday. WTI and Brent rallied +5.51% and +5.48% respectively with the former closing back in on $38/bbl and the latter ending the day back above $40/bbl for first time since December 9th. Sentiment was boosted after the news of another drop in the number of operating rigs last month while expectations continue to build ahead of a potential meeting between OPEC and non-OPEC producers later this month. In fact, the latest move has now seen WTI move into positive YTD territory (+2.21%) for the first time this year with Brent (+9.55%) already well through that level.

In fact, it’s now proving harder to find a commodity which isn’t posting positive YTD returns. Copper (+6.27%), Aluminium (+6.14%), Nickel (+6.41%) and Zinc (+12.52%) are all up for the year helped by the big rally this month, while even more impressive have been moves in precious metals with the well documented move for Gold (+19.50%) this year in particular eye-catching. Silver (+13.00%) is also up strongly while Platinum (+11.85%) and Palladium (+2.38%) have now entered bull markets. The laggards to the rally have come in agriculture with the likes of Corn, Wheat, Sugar and Cotton down single digits still. In any case, some staggering moves considering the extent of the selloff earlier this year.

So, despite that bumper day across commodity markets yesterday, declines across tech and consumer names tempered any hope for a material equity market rally. That said, the S&P 500 (+0.09%) did manage to nudge into positive territory by the close of play, bringing its run of consecutive daily gains to five now and matching the run made in October last year. Prior to this, a rough day for Italian Banks saw European equities edge lower however, with the Stoxx 600 closing -0.25% and Italian equity market down -1.20%, while credit markets on both sides of the pond enjoyed a marginally better day.
Glancing at our screens this morning, despite the commodity rally yesterday it’s been a rough start across most bourses in Asia with some softer than expected trade numbers out of China having their say. With regards to the data, China’s exports (in US Dollar terms) declined a much greater than expected -25.4% yoy (vs. -14.5% expected) in February, down from -11.2% in January and only slightly less than the record contraction back in May 2009 (of -26.4%). Imports also tumbled more than expected (-13.8% yoy vs. -12.0% expected) although that contraction was less than that seen in January. All told the data has seen the trade surplus shrink to $32.6bn from $63.3bn. The data in CNY terms shows a similar pattern with exports down -20.6% yoy (vs. -11.3% expected) and to a record low.

Bourses in China were already trading with a soft tone with the Shanghai Comp tumbling as low as -3.37% prior to the data, although it has rebounded into the midday break, albeit still down -1.55% on the day. The CSI 300 is -1.69%, while the Hang Seng is -0.74%, Kospi -0.68% and ASX -0.68%. In Japan the Nikkei is down -0.51% despite the second read of Japan’s Q4 GDP print being revised up unexpectedly by one-tenth to -0.3% qoq. Oil markets have receded a percent or so, while US equity futures are down half a percent.

Moving on. Yesterday’s Fedspeak offered two very differing opinions ahead of next week’s FOMC meeting. Fed Vice-Chair Fischer played down the suggestion that the link between strong employment and inflation was broken, saying that although the link has never been very strong, ‘it exists and we may well at present be seeing the first stirrings of an increase in the inflation rate’. Meanwhile, speaking at a separate conference in Washington, Fed Governor Brainard opined that ‘I am heartened by the continued strong progress on employment and the resilience of American consumers, which stand against a considerably more challenging global backdrop’. That said, she also warned that ‘we should not take the strength in the US labour market and consumption for granted’ and that ‘sources of robust demand around the globe are few, and sources of weakness relatively greater’. Brainard also cautioned that ‘tighter financial conditions and softer inflation expectations may pose risks to the downside for inflation and domestic activity’ and that ‘from a risk-management perspective, this argues for patience as the outlook becomes clearer’.

Away from the Fedspeak, yesterday’s economic dataflow was fairly quiet. In the US we saw the February labour market conditions index fall 1.6pts last month to a below market -2.4 (vs. +1.0 expected) which is in stark contrast to Friday’s employment report. In fact the reading was the lowest since June 2009 and the first back-to-back monthly drop since 2012. Post the closing bell we learned that US consumer credit in January rose by the least since May 2012 ($10.54bn vs. $17bn expected), with revolving credit (which includes credit cards) recording the first decline since February 2015. In Europe the main data of note was out of Germany where factory orders declined by less than expected in January (-0.1% mom vs. -0.3% expected). The Euro area Sentix investor confidence reading printed down 0.5pts this month at 5.5 and nearly 3pts below expectations.

Just before we look at the day ahead, a quick update on the migrant crisis talks in Brussels where a proposal is being debated between Turkey and the EU in which Turkey will accept the re-admission of migrants in exchange for further financial aid, visa-liberalisation for Turkish citizens and also a recommencing of EU accession talks. As per the BBC, the EU is demanding that Turkey take back migrants who fail to qualify for asylum and in return Turkey is demanding the EU to accept one Syrian refugee for every migrant taken back. Talks are set to resume ahead of the migration summit on 17th-18th March.

Looking at the day ahead, this morning in Europe we’ll be kicking off in Germany where the January industrial production data is due, shortly followed by French trade data. Later this morning we’ll receive the second reading on Q4 GDP for the Euro area (no change expected to the initial +0.3% qoq estimate) along with a breakdown of the components. The calendar is fairly thin again in the US this afternoon with last month’s NFIB small business optimism survey reading the only release of note. The BoE’s Carney and Cunliffe testifying to UK lawmakers (at 9.15am GMT) on Britain’s referendum on EU membership is worth keeping an eye on too.

via Zero Hedge http://ift.tt/21YXNnD Tyler Durden

“The Commodity Rally Is Not Sustainable” – Goldman Is Now Waiting For The Next Move Lower

As noted yesterday morning, “Goldman does it again” when just hours after Goldman said the “bearish cash for iron ore was intact,” the commodity recorded its biggest surge in history crushing anyone short, and soaring 20% across the globe. That however has not dented Goldman’s conviction that the commodity rally is overdone (we actually agree with Goldman for once) and just hours ago the head of commodities at Goldman Jeffrey Currie doubled down on Goldman’s bearish commodities call saying  “market views on reflation, realignment and re-levering have driven a premature surge in commodity prices that we believe is not sustainable.

Indeed the fundamentals – especially in oil – remain dire, with land storage especially in PADD2/Cushing about to overflow as we have been showing for the past 2 months, and yet the sentiment has shifted the most in years. As Currie puts it: “Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring.”

It is this premature excitement that according to Goldman, will be catalyst that leads to the next leg lower in commodities, as the price surge gone far too soon and long before the much needed rebalancing and excess production was taken out:

Last year commodity prices were driven lower by deflation, divergence and deleveraging which were reinforcing through a negative feedback loop. Deflationary pressures from excess commodity supply reinforced divergence in US growth and a stronger US dollar which in turn exacerbated EM funding costs and the need for EMs to de-lever though lower investment and hence commodity demand. While we believe that these dynamics likely ran their course last year resulting in signs of rebalancing, the force of their reversal has created a new trend in market positioning that could run further. However, the longer they run, the more destabilizing they become to the nascent rebalancing they are trying to price.

In other words, the short squeeze will lead to higher prices, which leads to more production, leading to another surge in excess supply, which leads to another showdown between fundamentals and technicals/positioning until fundamentals win, violently at that, which then sends commodity prices to their next support level lower.

As noted above, for once we agree with Currie.

Here are the key excerpts from his note “The Three R’s (Reflation, Realignment and Re-leveraging) are not sustainable”

The reversal started last month with ‘green shoots’ of rebalancing. Deflation turned into reflation with evidence of long-awaited oil supply curtailments in both the US and other non-OPEC producers which supported energy prices. Divergence lost out to realignment with increased fears about US economic growth. This together with strength of EU manufacturing data over the same period and a pickup in China credit data in January led the market to question the idea that the US is fundamentally outperforming its peers. These worries are reflected in the recent weakness of the US dollar and strength in the gold price. And recent policy announcements in China combined with the pickup in Chinese credit raised the prospects of leverage-driven investment demand as a focus on de-leveraging faded.


While these dynamics could run further, they simply are not sustainable in the current environment, in our view. Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring. The most recent macro data coming out of the US reinforces US growth divergence. Increases in core CPI, strong employment growth and a rebound in manufacturing, pushed the US MAP score – a metric for how much macro data surprises – up significantly to nearly positive for the first time in 2016. Most importantly, our US economics team continues to expect solid consumer spending growth of 2.5% to 3.0% in 2016. Finally, credit growth in China remains too high relative to GDP growth underscoring the need for de-leveraging.


While we still believe oil will likely rebalance this year and create a deficit market by year end, ‘green shoots’ of a deficit alone are not sufficient for a new sustainable bull market. Only a real physical deficit can create a sustainable rally which is still months away should the behavioral shifts created by the low prices in January and February remain in place. Commodity markets are physical spot markets, not anticipatory financial markets that are driven by expectations. This is why an early rally in oil prices would prove self-defeating before a real deficit materializes as it would reverse the supply curtailments that are expected to rebalance the market in 2H16.


The ‘green shoots’ for oil include US E&P’s guiding production lower (c.600 kb/d), supply disruptions in Iraq and Nigeria (c.750 kb/d), non-OPEC ex-US producers reporting significant potential reductions (c.400 kb/d) and strong US oil demand. While the Iraqi and Nigerian disruptions will likely prove temporary, they do help in the rebalancing process and have likely helped to tighten Brent timespreads. However, the other green shoots are both price sensitive and are still more relevant for expectations of rebalancing, than the rebalancing seen to date. The current oil market is still in a large surplus as witnessed by last week’s large US inventory build and the large global stock overhang. To keep the financial pressure on producers, we maintain our near-term view of a trendless oil market with substantial volatility between $40/bbl (under which creates financial stress) and $20/bbl (under which creates operational stress). 


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Iron ore rallied the most in the past week, breaching $60/t today. We believe this rally too will likely prove temporary and are maintaining our end-of-year target of $35/t . The rally in iron ore prices was the result of a surge in steel prices needed to widen mill margins in order to incentivize operators to pay the restart costs and rebuild operating inventories of raw materials as China enters this year’s peak construction season. However, the physical shortfall in steel supply can be filled easily and the subsequent deterioration in steel margins is likely to put iron ore prices under renewed pressure. In other words, the market fundamentals are unchanged and the current rally is only a brief lull before production cuts at high-cost mines are required to make room for low-cost producers.

Goldman’s conclusion: “While deflation, divergence and de-leveraging are all likely to reassert themselves and reapply modest downward pressure on commodity prices in the near-term, we do believe that the negative feedback loop that they create has mostly played out in this cycle from a bearish price trend perspective, particularly in oil which is why we maintain a bullish end-of-year view in energy. However, it is important to remember that in the end this was a supply-driven bear market and will not trade like a demand-driven market. In a demand-driven market, once demand gets ahead of supply following an economic recovery, supply struggles to catch up as it was also likely slowed by the lower prices. In the current supply-driven market, demand hasn’t really changed, it takes lower prices to push and keep supply below demand to create a deficit. As a result, higher prices are much harder to sustain in a supply-driven market since supply is primed to return with higher prices. But this lesson will likely only be learned through false starts.”

Where we disagree with Goldman is that demand hasn’t changed: it most certainly has, and as we have shown repeatedly in recent months, demand across various commodity sectors, especially in distillates as a result of collapsing global trade (just see China’s overnight trade numbers)…


… is also in freefall.

All that said, a warning: Goldman’s recent forecasts have been absolutely abysmal. If this the past few months are any indication, oil may well continue squeezing higher until it goes back into the triple digits… before it crashes back into the single digits.


via Zero Hedge http://ift.tt/1UPiP5Y Tyler Durden