Category: zerohedge

Despite yesterday’s slow drift lower off the early gains, The Dow’s 8th win a row and the “best May since 2005” was heralded as proof that all the world’s problems are behind us and it’s plain-sailing from here to new record highs.

However, as former FX trader and fund manager Richard Breslow warned “I keep visualizing oblivious fun-seekers in danger of getting way out over their skis.”

And judging by today’s price action – they were…

Stocks down, gold down, bonds down, the dollar is spiking along with VIX…

But, as Bloomberg reports, there are a lot more problems looming…

Emerging markets aren’t heavy, they’re setting up to implode…

Ten-year Treasury yields aren’t struggling with what to do around this distracting 3% level. They’ve broken back above the, this time, really “psychologically” critical barrier and are coiling for a now inevitable move higher. Do not pass go, do not collect your coupon payment.

The dollar is no longer trying to hold on to recent gains, it’s going to run everything else over. And equities are preparing for a renewed bout of illness from geopolitical risk and trade wars. The price action notwithstanding.

All or none of this could come to pass. But it is a collection of trades du jour that one needs to make sure can hang together. And whether their purveyors will be willing to stick with them, even without instant gratification, remains to be seen. It isn’t the green or red on your screens that should inform your mood. It’s actually meant to work the other way around.

The first thing I’d ask is how much is positions versus view. Both matter, but the former has taken on a significance that can have a lasting, even if not ultimately dispositive, effect on asset prices. Washouts used to take hours or maybe days to be cleared. Now they can last weeks. Or seconds. Made all the worse by the enormous and often blind accumulation of yield grabs.

How many “investors” in Turkish lira or Argentine pesos really had any business carrying this risk? Is today’s caning of the lira from President Erdogan’s latest, and not groundbreaking, comments or because the much rumored “surprise” rate hike wasn’t forthcoming? This is not meant to argue Turkey isn’t in an economic mess. But you can’t actually make an informed decision without knowing the back story.

Contagion across the asset class can have as much to do with portfolio damage control as any real causal relationship. I shudder when I think of all the inquiries about getting into frontier markets. Last week we were still being told that emerging market economies are in great shape to withstand higher global rates. Not true, but never mind. Today, there is “underlying vulnerability” galore.

But why just pick on EM? European government bonds have spent the last two days behaving exactly the same way. So many people relying on Super Mario to buy their inventory. And then along came Francois Villeroy. And yet, peripheral spreads remain bid.

In equities, that asset we all love to hate, a big leap is being made from a risk-off sentiment to the fact that they trade pretty well. Aren’t they supposed to do something bad before being sent to the penalty box? Frankly, I’d rather sell the S&P 500 on a break below 2700 than here. Especially, because the canaries are getting a bit long in the tooth. I’ll tell you what: watch the Shanghai Composite against resistance at 3200 if you want an early warning sign.

As for the dollar, just remember that we’re back to square one on the year. It neither went to zero nor has it flown. Look at it right now and forget what happened during a very trying first part of the year. It too could be back here from stale positions that no longer were working.

Maybe we’re getting closer to a point where not everyone will have the same positions and we can get back to having fun.

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One of the catalyst cited by traders for yesterday’s late swoon in the market, was the unexpected news that Gartman had turned bullish again saying in his latest letter that “we’ve no choice but to err quietly bullish of shares generally.”

Gartman: “we’ve no choice but to err quietly bullish of shares generally.”

— zerohedge (@zerohedge) May 14, 2018

It probably did not take Gartman long to realize that his current trade recos are mutually conflicting: on one hand bullish stocks, on the other, pretending to still be short the 10Y, even though he was clearly stopped out on payrolls Friday when the 10Y dropped below his stop loss of 2.92%…

… a combination which as today’s market has shown means one or the other has to give – quiet simply, it is no longer possible to have stocks, yields, the dollar and oil all rising at the same time.

So one day after his latest flip-flop, what does the man who two months ago made a “watershed” call for a secular market top, think will happen next? Well, good news to the bears: he thinks that “this weakness shall not last long.”

STOCKS, IN GLOBAL TERMS, HAVE FINALLY FALLEN A BIT as seven of the ten markets comprising our International Index have fallen and as three have risen. None, however, have moved  by anywhere near 1%, save for the market in Hong Kong where shares were down 0.9%; however, after the massive run to the upside that shares in Hong Kong have enjoyed over the course of the past week and one half as the Hang Seng has risen from 29,925 on the 4th of  May to yesterday’s “closing” high of 31,515, or an increase of 5.3%, some correction… some consolidation… some profit taking it certainly to be expected.

The same… or very nearly the same… can be said of the US market where the S&P made its low of 2,630 on the 3rd  of May and made its way to 2,730 as of last evening, or an increase of 3.8%; it is become a bit overbought and some consolidation is not only to be expected, it is perhaps almost mandatory.

Finally, to “prove” the near universality of the recent global strength in the equities markets, the markets in Europe collectively made their low on the 3rd of May also and have risen 1.8% over that same interval of time. Thus, this has indeed been a “collective,” well established bullish run in broad global terms and so a reasonably broad, “collective” consolidation is almost de rigueur.

What shall be the catalyst for this correction? The fact that the yield on the US ten-year treasury security is back  above 3.00% shall be sufficient news to account for a bit of weakness. Too, the fact that commodity prices are rising and that inflationary pressures are making themselves known shall account for some of that weakness. Further, the uncertainty that a joint 5Star/Lega government installed in Rome shall account for some of the weakness in European shares. Further, still we can point to the confusion in Southeast Asia and the change in government in Malaysia as a reason for a correction, and further still, we can point to the problems in Venezuela and Argentina as yet another reason.

Finally, we note that the CNN Fear & Greed Index, which has fallen to single-digits several weeks ago marking a very serious over-sold level and which has since then risen to 54 as of last night’s close, has gone from inordinately low levels back to neutrality and is itself due for some consolidation… perhaps even a bit of correction.

In other words, there are reasons a ‘plenty from which a bit of international equity market weakness can and shall develop. Likely, this weakness shall not last long

Did the multi-decade bear market just start?

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Despite Trump apparently folding in the ongoing trade war with China by consenting to reingage Chinese telecom ZTE, the two sides remain far apart in the ongoing discussions how to shrink the US trade deficit (and Chinese surplus), and as US Ambassador to China Terry Branstad said on Tuesday, the US wants China to give a timetable on how it will open up its markets to US exports as the two countries are still “very far apart” on resolving trade frictions.

While a US delegation led by Treasury Secretary Steven Mnuchin presented China earlier this month with a list of demands to tackle allegations of intellectual property theft and other trade policies Washington considers unfair, it failed to achieve any success and the two countries failed to reach an agreement on the long list of US demands and decided to resume talks in Washington.

Branstad, who was present at the meeting, said the Chinese appeared to be “taken back” by the significance of the list, and said that “The Chinese have said ‘we want to see the specifics.’ We gave them all the specifics in terms of trade issues. So they can’t say they don’t know what we’re asking for.”

“We’re still very far apart,” Branstad said quoted by the SCMP, adding that China has not met pledges to open up its insurance and financial services area, as well as reduce car tariffs.

“There are many areas where China has promised to do but haven’t. We want to see a timetable. We want to see these things happen sooner than later,” he said at a conference in Tokyo.

Branstad also said US President Donald Trump would like to see a “dramatic increase” in food exports to China. “We’d like to see China being just as open as the United States,” he said.

As is well known, the Trump administration has drawn a hard line in trade talks with China, demanding a US$200 billion cut in the Chinese trade surplus with the United States, sharply lower tariffs and advanced technology subsidies. Trump has proposed tariffs on US$50 billion of Chinese goods under its “Section 301” probe. Those could go into effect in June following the completion of a 60-day consultation period, but activation plans have been kept vague.

Meanwhile, China warned that its own retaliatory tariffs on US goods, including soybeans and aircraft, will go into effect if the US duties are imposed.

Branstad said the United States could rescind the “Section 301” tariffs if China moved forward on opening up its agriculture and car markets.

“I think it could be adjusted,” he said. “It’s possible, depending upon how the trade talks go.” Increasing US exports of liquified natural gas could also be an area the two countries could agree on as trade talks resume in Washington this week, he said.

“The United States and China are the two biggest economies in the world. The more we can work things out, the better it’s going to be not just for US and China, but for the entire world economy,” he said.

On Tuesday morning, just as China’s Vice Premier Liu He arrives with a Chinese delegation in Washington Tuesday through Saturday to continue trade negotiations, Trump tweeted that “Trade negotiations are continuing with China. They have been making hundreds of billions of dollars a year from the U.S., for many years. Stay tuned!”

Trade negotiations are continuing with China. They have been making hundreds of billions of dollars a year from the U.S., for many years. Stay tuned!

— Donald J. Trump (@realDonaldTrump) May 15, 2018

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As retail sales data printed, 10Y treasury yields spiked to their highest since 2014 (3.0465%) which seemed to spark a notable drop in US equity futures ahead of the open…

10Y Yield is within a fraction of a tick of the 1/2/14 high yield of 3.0516%…

which would take us back to July 2011…

30Y Yields are heading back into their resistance zone…

The Dollar Index is soaring (and the yield curve steepening)…

And that seemed to trigger equity futures selling…

VIX mini-flash-crashed as retail sales printed but as stocks sink, VIX is back above 13…

But, but, but… aren’t rates rising for the right reason?

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Following March’s surprising surge in Retail Sales – after 3 months of declines – April saw spending growth slow notably to just +0.3% from a revised-higher March 0.8% gain.

February’s initial decline was also revised to a rise…

 

Core retail sales (ex autos and gas) also slowed and missed expectations suggesting some spillover from higher gas prices…

Under the hood saw every sector see gains in spending aside from Electronics and Appliance Stores, Health and Personal Care, Sporting Goods, and Food Sevice and Drinking Places. Perhaps all feeling the pinch from higher gas prices.

Most notably, the Control Group – which adjusts out food, autos, gas, and building materials – saw YoY growth slow dramatically…

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Authored by Ana Alexandre via CoinTelegraph.com,

The Seminole County, Florida, tax collector Joel M. Greenberg announced May 14 that the county will begin accepting cryptocurrency for payment for various services this summer in order to eliminate heavy fees and improve payment accuracy and efficiency.

image courtesy of CoinTelegraph

According to a press release, the county will begin accepting Bitcoin (BTC) and Bitcoin Cash (BCH) to pay for services, including property taxes, driver license and ID card fees, as well as tags and titles. The Seminole County Tax Collector will reportedly employ blockchain payments company BitPay, which will allow the county to receive settlement the next business day directly to its bank account in US dollars. Greenberg commented on the initiative:

“We live in a world where technology has made access to services on demand, with same-day delivery and the expectation of highly efficient customer service and we should expect the same from our government. The aim of my tenure in office is to make our customer experience faster, smarter, and more efficient, and to bring government services from the 18th century into the 21st century and one way is the addition of cryptocurrency to our payment options.”

With this move, the county reportedly aims to remove risks connected to credit card usage, such as fraud and identity theft. According to BitPay, Seminole county is the first government agency to use the company’s services.

Earlier this month in the state of Arizona, a bill that would have allowed state residents to pay taxes using crypto was amended, removing the provisions which obligated the state to accept crypto. Instead, the bill merely obliges the Department of Revenue to “study” whether a taxpayer may “pay the taxpayer’s income tax liability by using a payment gateway, such as Bitcoin, Litecoinor any other cryptocurrency.”

Also this month, the city of Berkeley, California moved forward with an initiative to apply blockchain technology to public financing for community projects. The pilot project also aims to decrease the minimum price of a municipal bond from $5,000 to $10-25, which would allow more people to invest in municipal projects they support. Vice Mayor Ben Barlett added that, should the political process allow it, the city could consider issuing a type of token which would function much like a municipal bond in providing city funding.

via RSS https://ift.tt/2jZ9JHm Tyler Durden

• Gazans bury their dead after bloody day of protests (Reuters)
• U.S. Embassy Move, Bloodshed Add to Friction With Allies (WSJ)
• Britain calls for investigation into Gaza violence (Reuters)
• China Data Shows a Hint of Slowdown While Factories Still Hum (BBG)
• Iran’s Zarif meets EU foreign policy chief as Europe tries to save nuclear deal (Reuters)
• Volcker Rule Rewrite Is Said to Drop Key Trading Burden on Banks (BBG)
• North Korea Starts to Dismantle Nuclear-Test Site (WSJ)
• Safety, verification questions hang over North Korea’s plan to close nuclear site (Reuters)
• A World Apart: Charting the Gulf Between Chinese and U.S. Tariffs (WSJ)
• US, China still ‘very far apart’ on trade: ambassador Terry Branstad (SCMP)
• Investors Are Wary as Companies Ramp Up Capital Spending (WSJ)
• Thomson Reuters to move forex derivatives to Ireland from London due to Brexit (Reuters)
• How to Lease a $50,000 BMW for Less Than a Subway Pass (BBG)
• Soros’s Foundation Quits Hungary Under Government Pressure (WSJ)
• Second Wynn Picasso Yanked From Christie’s Sale After Mishap (BBG)
• Uber Ends Forced Arbitration for Harassment Claims (WSJ)
• Allianz making plans to wind down Iran business (Reuters)
• Forget Florida—More Northern Retirees Head to Appalachia (WSJ)
• Japan’s SoftBank to open Saudi Arabian office (Reuters)

Overnight Media Digest

WSJ

– The United States and China are closing in on a deal that would give China’s ZTE Corp a reprieve from potentially crippling U.S. sanctions in exchange for Beijing removing tariffs on billions of dollars of U.S. agricultural products, said people in both countries briefed on the deal. on.wsj.com/2IgCRsb

– Ted Eliopoulos, the investment chief of the California Public Employees’ Retirement System, expects to leave his post by the end of the year, the latest in a series of executive exits from the Calpers. on.wsj.com/2wMIZCW

– CBS Corp filed a lawsuit against the Redstones and their family holding company and invoked a little-known provision in the CBS corporate charter that would significantly diluting the voting power that the Redstones have held over CBS for nearly two decades. on.wsj.com/2rISWvw

– The U.S. Supreme Court opened the door to legal sports betting across the country by invalidating federal prohibitions on such wagers, in a ruling Monday that could mark a groundbreaking shift for sports leagues, fans and casinos. on.wsj.com/2Ilceyc

– Facebook Inc has suspended some 200 applications for suspected misuse of users’ information shared on or through Facebook, the company said Monday. on.wsj.com/2rGqiMy

– Fiat Chrysler Automobiles employees believed the auto maker used illegal software in diesel-powered vehicles to cheat on U.S. emissions tests and concealed it from regulators, according to allegations by plaintiffs’ lawyers in federal court documents unsealed Monday. on.wsj.com/2GhGbNJ

 

FT

Climate change should be placed “front and centre” of the Bank of England’s mandate so that the central bank can boost green investment, according to a new report from the campaign group Positive Money, published on Tuesday.

British Land Company Plc has lodged a formal planning application for a 4 billion pounds ($5.43 billion) redevelopment of 53 acres in southeast London that will create a new town centre and include 3,000 homes.

U.S. Ambassador Woody Johnson has urged Britain to increase defence spending and push ahead with the F-35 programme, echoing President Donald Trump’s warning that U.S. allies had to become more self-sufficient.

 

NYT

– To alleviate trade tensions, President Donald Trump is considering easing up on a major Chinese telecommunications company, ZTE, in exchange for China agreeing to buy more American products and lifting its own crippling restrictions on American agriculture, people familiar with the deliberations said. nyti.ms/2jUE5L8

– There seems to be little about the scrappy energy company First Utility, in central England, that would appeal to Royal Dutch Shell Plc, the button-down oil giant. nyti.ms/2rHga63

– Ellen’s, the Dallas restaurant that was the target of a boycott by the National Rifle Association earlier this month, donated $15,000 over the weekend to a grass-roots group founded in the wake of the 2012 Sandy Hook Elementary School massacre. nyti.ms/2rIiutE

– The World Health Organization on Monday announced a sweeping plan that urges governments around the globe to eliminate the use of trans fats, the industrially produced edible oil that gave birth to margarine, Crisco and other artery-clogging products that have been linked to millions of premature deaths. nyti.ms/2k16IXb

 

Canada

THE GLOBE AND MAIL
** Ten U.S. senators are seeking to place a temporary freeze on American duties against Canadian newsprint, saying the trade dispute needs further study. (tgam.ca/2rJNIjm)

** After half a century under Desmarais-family control, Power Corp of Canada wants investors to know it isn’t running out of steam – in fact, it’s planning a multibillion-dollar spending spree. (tgam.ca/2rIuA5e)

** H&R real estate investment trust has reached a deal to sell 63 U.S. retail properties for $633 million, slashing its exposure to the retail sector across dozens of American cities. (tgam.ca/2rKOvQQ)

NATIONAL POST
** Canada has slipped in its global ranking for innovation, falling back three spots compared to last year as business investment levels slumped, according to a new report. (bit.ly/2rJ7F9P)

** Aurora Cannabis Inc, the hungriest M&A player in the Canadian marijuana space, continued its shopping spree on Monday, announcing plans to acquire rival MedReleaf Corp for an estimated C$3.2 billion ($2.50 billion), all in stock. (bit.ly/2rL8pv5)

 

Britain

The Times

Officials charged with managing the taxpayers’ stake in Royal Bank of Scotland have begun contacting City brokers to gauge interest in a potential share sale, only days after the lender agreed a provisional deal with American prosecutors over the sale of toxic mortgage-backed bonds. bit.ly/2L2WBgG

Management at Centrica Plc came under fire at the company’s annual meeting on Monday as frustrated shareholders demanded answers about the collapse of the British Gas owner’s share price. bit.ly/2KYfAJc

The Guardian

Npower owner Innogy has privately told staff it is extremely concerned they will bear the brunt of thousands of job cuts planned as part of a major shake-up of the European energy industry. bit.ly/2IgNkE7

The struggling childrenswear and maternity retailer, Mothercare, said it was finalising a comprehensive restructuring and refinancing package to put the business on a stable and sustainable financial footing. bit.ly/2L0JgFu

The Telegraph

Transport giant FirstGroup Plc is facing a mounting activist campaign to put itself up for sale in the wake of a failed takeover bid from American private equity firm Apollo Global Management. bit.ly/2KYuVJI

Zimbabwe-based gold miner Caledonia is looking to buy out its local partners as it capitalises on a liberalisation of the laws governing the mining sector. bit.ly/2L1kXrh

Sky News

William Hill Plc Chairman Roger Devlin has told ministers in a letter that proposed reforms to Fixed-Odds Betting Terminals (FOBTs) could leave it vulnerable to a takeover bid. bit.ly/2IgjT4T

Private equity firms including Bowmark Capital, Inflexion and Trilantic Partners are among a pack of potential buyers of James Grant Group, in a 140 million stg ($189.90 million)sale. bit.ly/2Igm5JF

The Independent

Uber has poached former Amazon director Jamie Heywood and appointed him its general manager for Northern and Eastern Europe. The new hire will have a host of legal battles to contend with in the role which covers the UK and 11 other countries. ind.pn/2L2lxoj

The Work & Pensions and Business select committees, which have been conducting a joint investigation into Carillion , commented upon some of the evidence from Santander , one of the company’s banks. ind.pn/2Ifza65

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After closing its Budapest office last month, Open Society, the purportedly philanthropic organization created to push a liberal, globalist political agenda espoused by billionaire investor George Soros, said Tuesday that it has officially pulled out of Hungary after accusing Prime Minister Viktor Orban of “repressing civil society,” according to the WSJ.

“Faced with an increasingly repressive political and legal environment in Hungary, the Open Society Foundations are moving their Budapest-based international operations and staff to the German capital, Berlin,” the group confirmed on Tuesday.

Patrick Gaspard, the president of the Open Society Foundations, lashed out at Hungary’s government, accusing it of “denigrating and misrepresenting our work,” while repressing civil society “for the sake of political gain.”

Soros attributed his decision to leave Hungary, the country where he was born, to the ruling Fidesz party’s push to pass a bill known as the “Stop Soros” plan. The bill would place new restrictions on non-governmental organizations found to be meddling in the country’s political affairs. The billionaire investor has criticized the law as anti-Semitic.

Open Society previously said it will move its Hungary operations to Berlin.

Should the bill become law, it would require all NGOs which “support illegal immigration” to be register with the government, while any NGO that receives funding from abroad would need to pay a 25% tax. It would also force foreign citizens and Hungarian nationals who support illegal immigration to be subject to a restraining order which would require them to stay away from the country’s border. “If Soros is found to have engaged in such activity, meaning he organizes illegal immigration, then the rules will apply to him,” government spokesman Zoltan Kovacs said in February.

When OS first announced their withdrawal from Budapest last month, Prime Minister Orban responded with derision: “You might understand if I don’t cry my eyes out.”

Orban has repeatedly criticized Open Society for pushing a pro-immigrant agenda that he believes is harmful to the country. Following Orban’s landslide victory in elections earlier this year, Orban proclaimed that Soros wouldn’t stop supporting opposition lawmakers until Fidesz had been defeated.

“I know they won’t accept the result of the election, they will organize all sorts of things, they have unlimited financial resources.”

Hungary has been stepping up pressures on NGOs – not just Open Society, but also other organizations – since 2014, when a row with the Norwegian government led to Hungarian police raiding the offices of several aid groups, the Wall Street Journal reported.

Soros came to prominence and made his mark in the world in finance in the early 1990s when he broke the Bank of England by shorting the pound, leading to the collapse of the currency after the British government was forced to pull it from the Exchange Rate Mechanism.

Open Society was launched in 1979, with the first non-US-based office opening in Hungary in 1984. The group currently spends more than $940 million a year to support 26 regional and national offices. Late last year, Soros announced that he was dedicating the bulk of his eleven-figure fortune to Open Society.

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The pain trade has returned with a bang this morning as both 10Y Treasury yields and the dollar are grinding higher, the former back above 3.00%…

… the latter at the highest level since last Wednesday as oil continued to advance and soak up liquidity…

… in the process slamming near record Treasury and USD shorts – hence “pain trade” – while leaving a risk-off flavor to markets on Tuesday, with European stocks struggling for traction following declines across Asia, which saw a disappointing set of data out of China overnight , while US futures were roughly 0.2% lower around 7am ET.

European bourses opened on the backfoot but since then are trading mixed (Eurostoxx 50 flat) with the Italy’s FTSE MIB (+0.3%) outperforming its peers with traders watching out for any potential breakthroughs in forming a government. The Stoxx Europe 600 Index slipped a second day despite the weaker euro, before paring the drop to trade little changed amid mixed national gauges.  Bonds across Europe remained under pressure, extending Monday’s decline on the back of hawkish comments from an ECB official.

In the latest economic disappointment out of Europe, Germany reported a sluggish start to the year with Q1 GDP printing at 0.3%, below the 0.4% expected, and down from 0.6% in Q4, with trade losing momentum and domestic demand not strong enough to fill the void. This was the weakest econ performance since Q3 2016.

Earlier equity benchmarks fell in South Korea and Australia, and were flat in Japan. Stocks rose in Shanghai and dropped in Hong Kong after data showed China’s industrial production momentum holding up but investment and spending slowing.

For those who missed it, here is the key China April data again:

• Chinese Industrial Production Y/Y 7.0% vs. Exp. 6.4% (Prev. 6.0%); YTD (Apr) 6.9% vs. Exp. 6.7% (Prev. 6.8%). (Newswires)
• Chinese Retail Sales Y/Y 9.4% vs. Exp. 10.0% (Prev. 10.1%); YTD (Apr) 9.7% vs. Exp. 9.8% (Prev. 9.8%)
• Chinese Fixed Assets Ex-Rural YTD 7.0% vs. Exp. 7.4% (Prev. 7.5%)

In FX trading, the dollar resumed its sharp ascent as 10-year Treasury yield rose above 3% before the release of U.S. retail-sales data; the greenback advanced against more than half of its Group-of-10 peers, while the euro stayed weak after disappointing German growth data. Of note, an index of emerging-market currencies declined the most in two weeks, led by a retreat in the rand, lira and forint. More concerning is that not one of 24 EM currencies tracked by Bloomberg advanced, as a result, the MSCI index of EM FX fell 0.5%.

“A strong U.S. dollar supported by high U.S. Treasury yields with the 10-year once again rising above the psychological level of 3% should curb capital inflows to risky assets,” Rabobank strategists warned, echoing what we said yesterday.

Looking at US TSYs and the yield curve, Fed officials have got the flattening yield curve on their radar screen, but policy makers have different ways of looking at the situation with some worrying about further rate hikes causing it to invert, while others view it as a normal part of monetary policy normalization. “Yield curve flattening in the U.S. tells you that investors are not convinced of the sustainability of this economic upturn – any sign of a less than impressive recovery in consumer spending in 2Q would undoubtedly reinforce those doubts and hurt the U.S. dollar,” according to Derek Halpenny, European head of global markets research at MUFG.

In the latest geopolitical developments, President Trump and Canadian PM Trudeau discussed via phone call the possibility of a quick NAFTA agreement, in which US President Trump urged for a prompt NAFTA agreement.

Looking at Brexit, UK PM May admitted that the current options regarding UK customs plan are unworkable. This has subsequently increased fears among Eurosceptics that further delays will mean an extension of the 21-month transition period with a Conservative meeting yesterday leading to a clash between PM May and backbencher Rees-Mogg. Further reports suggested that extending the transition arrangement with the EU could be the only way to find a solution to the Irish border issue.

In overnight central bank news, Fed nominee Clarida said he fully supports Fed dual mandate and will seek to maintain financial resilience, while he added he will take a balanced approach on reaching Fed targets. Elsewhere, Riksbank’s Jochnik said that with inflation stable around 2% it is important to begin lifting rates. Underlying inflation remains weak. He added there is no goal for the SEK, but the recent strengthening has been good. Meanwhie, BoJ Governor Kuroda says there are no plans to move the 10yr yield target for the time being as inflation is still at a distance from 2% target, discussions are being had at board level on side-effects of easy policy, but the removal of the time-frame isn’t linked to the debate on impact of easy policy on bank profits.

Economic data on Tuesday include retail sales and NAHB Housing Market index. Home Depot and Hydro One are among companies due to release results.

Bulletin Headline Summary From RanSquawk

• US Treasury 10-year yield above 3%, dollar stands firmer against its peers
• Sterling off lows as UK real earnings move back into positive territory
• Looking ahead, highlights include US retail sales, Fed’s Williams and Kaplan

Market Snapshot

• S&P 500 futures down 0.2% to 2,726.00
• STOXX Europe 600 down 0.03% to 392.06
• MXAP down 0.8% to 175.23
• MXAPJ down 1% to 570.96
• Nikkei down 0.2% to 22,818.02
• Topix down 0.04% to 1,805.15
• Hang Seng Index down 1.2% to 31,152.03
• Shanghai Composite up 0.6% to 3,192.12
• Sensex up 0.2% to 35,641.55
• Australia S&P/ASX 200 down 0.6% to 6,097.82
• Kospi down 0.7% to 2,458.54
• German 10Y yield rose 1.0 bps to 0.621%
• Euro down 0.04% to $1.1922
• Brent Futures up 0.5% to $78.61/bbl
• Italian 10Y yield rose 5.6 bps to 1.672%
• Spanish 10Y yield fell 2.5 bps to 1.307%
• Brent Futures up 0.6% to $78.66/bbl
• Gold spot down 0.2% to $1,310.45
• U.S. Dollar Index up 0.2% to 92.75

Top Overnight News from Bloomberg

• Italy’s populists are struggling to nail down the final details of their plans to form the next government and tensions are beginning to mount. “Either we get started or we say goodbye to each other,” League leader Matteo Salvini said after talks with President Sergio Mattarella on Monday
• China’s economic momentum broadly held up in April with industrial production exceeding forecasts, though slowing investment signaled a moderation in the coming months. China says trade dispute impacts haven’t yet shown up in economy
• Growth slowed across the euro-area economy at the start of the year, with Germany seeing its pace of expansion cut in half amid weaker trade. The 0.3% rise in output in Europe’s largest economy was softer than forecast, and the Dutch and Portuguese economies also cooled more than expected
• Britons got their first real-pay increase in more than a year in the first quarter as wage growth overtook the rate of inflation. Average weekly earnings excluding bonuses rose 2.9% from a year earlier, the fastest pace since August 2015, while inflation averaged 2.7% in the same period
• The Turkish lira and bonds declined to new record lows after President Recep Tayyip Erdogan said he plans to take more responsibility for monetary policy if he wins an election next month, spooking investors who worry about his distaste of high interest rates
• Following President Donald Trump’s inauguration of the U.S. embassy in Jerusalem, Hamas vowed to keep protesters storming the Gaza border on Tuesday, a day after 59 Palestinians were killed in confrontations with Israeli troops, the bloodiest toll in the territory since a 2014 war
• U.S. regulators planning to drop Volcker Rule assumption that positions held by banks for less than 60 days are speculative and therefore banned, according to people familiar
• Fed vice chair nominee Clarida favors ’balanced approach’ to policy
• U.K Mar. Avg. Weekly Earnings 2.6% vs 2.6% est; Earnings ex-bonus 2.9% vs 2.9% est.
• BOJ’s Kuroda: will not change 10y target under YCC for the time being due to weak inflation
• German GDP 1Q P GDP q/q 0.3% vs 0.4% est; Destatis note government final consumption expenditure decreased for the first time in just under five years
• China Apr. Retail Sales 9.4% vs 10.0% est; Industrial Output 7.0% vs 6.4% est; Fixed-asset Investment 7.0% vs 7.4% est

Asian equity markets were subdued with price relatively range-bound following the modest performance in US, where the major indices finished in the green but well off best levels and the DJIA met resistance just shy of the 25k level but still edged its longest run of gains since September. ASX 200 (-0.6%) was lacklustre with the telecoms sector dragged by weakness in Telstra shares while tech outperforms as Link Administration shares rally on reports the Co. is exploring options with Pexa in which it is the 2nd largest shareholder of. Nikkei 225 (-0.2%) traded lacklustre with focus for individual stocks on corporate earnings, while Shanghai Comp. (+0.6%) and Hang Seng (-1.2%) also lacked impetus despite a firm liquidity operation by the PBoC, with profit taking observed in Hong Kong following the recent streak and as varied tier-1 data from China added to the cautious tone after Industrial Production topped estimates but Retail Sales disappointed. Finally, 10yr JGBs were subdued following similar trade in T-notes which extended on the prior day’s losses as the US 10yr treasury yield rose back above 3.000%, while a mixed 30-yr JGB auction added to the subdued tone as it showed a decline in accepted prices. US & China are reportedly closing in on a deal which would give ZTE a reprieve from US sanctions, in exchange for Beijing removing tariffs on billions of US agricultural products, according to people familiar with the matter. In related news, there were also comments from US Ambassador to China Branstad that China and US remain at a far distance on trade and that President Trump wants a dramatic rise in farm exports to China.

Top Asian News

• China Data Shows a Hint of Slowdown While Factories Still Hum
• Cliffhanger in Bitter Contest for India’s Swing State Vote
• Tencent Shares Suddenly Lose $17 Billion One Day Before Earnings
• Tata Steel Gets Tribunal Nod for Biggest Acquisition Since Corus
• MUFG Sees Profit Falling More Than Analysts Estimate This Year

European bourses opened on the backfoot but since then are trading mixed (Eurostoxx 50 flat) with the Italy’s FTSE MIB (+0.3%) outperforming its peers with traders watching out for any potential breakthroughs in forming a government. Sectors are also mixed with financials leading the gains while telecom names lag amid downbeat earnings from Vodafone (-3.1%) and Eutelsat (-11.3%). Other individual movers in the wake of earnings include Thyssenkrupp (-4.3%), Iliad (-17.7%), Pandora (-11.7%), easyJet (+2.3%) and Commerzbank (+2.3%).

Top European News

• Italian Populists Head to Overtime Divided on Coalition Plan
• German Economy Expands 0.3% Q/Q in 1Q; Est. Expands 0.4% Q/Q
• Germany Blames Trade for Weakness Aggravating Euro-Area Slowdown
• Credit Agricole Caught in Fixed-Income Slump Like Rivals
• Eutelsat Plummets Most in Two Years After ‘Otherworldly’ Results
• Allianz’s Asset-Management Unit Sees Profit Soar on Inflows

In FX, the Dollar remains on a firmer footing overall after Monday’s late rally that came alongside a rebound in US Treasury yields and has culminated in the 10 year benchmark crossing the 3% threshold again. The index is back above 92.500 within a 92.815-60 range having arrested a relatively pronounced retracement just ahead of 92.200 yesterday. However, retail sales data and more Fed rhetoric could provide further direction and result in another tweak in 2018 rate expectations that have tipped towards 4 hikes for the first time, per CME pricing (and only just at 51%). JPY: Around 0.25% lower vs the Greenback and mildly underperforming other G10 peers, with Usd/Jpy touching 110.00 again following reports of importer demand during Asia-Pacific trade, but the big figure still proving a formidable barrier to overcome, with recent peaks only a fraction above and the 200 DMA not far away if stops are tripped. Marginally less dovish comments from BoJ Governor Kuroda have also helped to cap the pair. AUD: The next biggest loser or victim of the Usd revival among majors as the pair retreats to test 0.7500 where more big option expiry interests lie (some 2.6 bn over today and Wednesday). RBA minutes merely reiterating no reason to raise rates anytime soon given slow wage and inflation developments, while risks associated with Aud strength were also highlighted yet again. GBP: Choppy trade in the run up to UK labour data, with sellers front-running and Cable down to the low 1.3520 area before bouncing towards 1.3550 on an ultimately mixed jobs and earnings report.

In commodities, Brent is currently trading higher, nearing 3 ½ year highs. The widening spread between the two is stated to be due to geopolitical concerns, as well as an anticipated increase in US June shale production (+145k BPD), that is compounded by record crude production. This leaves the US market well-supplied as the world market is squeezed further by OPEC cuts. In the metals sector, gold is currently down for the day (-0.3%) at USD 1310.20. Copper has also fallen slightly on increasing stockpiles of the metal. Dalian Iron ore has hit one-month highs on the back of strong Chinese demand.

Looking at the day ahead, the preliminary Q1 GDP report in Germany is due  (0.4% qoq expected), along with the Q1 GDP report for the Euro area (0.4% qoq; 2.5% yoy expected). In the UK, the March unemployment rate (4.2% expected) and average weekly earnings growth (2.6% expected) along with other employment data are due, while in France the final April CPI revisions are also due. March industrial production data for the Euro area is also due, as well as the May ZEW survey in Germany. In the US the big focus will be on the April retail sales report (0.5% expected for ex-auto), while May empire manufacturing, March business inventories and the May NAHB housing market index print are also due. Fed nominees Clarida and Bowman are due to appear for confirmation hearings while the Fed’s Kaplan and Williams are both scheduled to speak. UK PM Theresa May is also  due to meet with her Brexit Cabinet while China Vice Premier Liu He is due to visit Washington and continue trade talks.

US Event Calendar

• 8:00am: Fed’s Kaplan discusses outlook for energy market, economy
• 8:30am: Empire Manufacturing, est. 15, prior 15.8
• 8:30am: Retail Sales Advance MoM, est. 0.3%, prior 0.6%; Retail Sales Ex Auto MoM, est. 0.5%, prior 0.2%
  • Retail Sales Ex Auto and Gas, est. 0.4%, prior 0.3%; Retail Sales Control Group, est. 0.4%, prior 0.4%
• 10am: NAHB Housing Market Index, est. 69, prior 69
• 10am: Business Inventories, est. 0.1%, prior 0.6%
• 10am: Fed nominees Clarida and Bowman testify before Senate panel
• 1pm: Fed’s Williams to speak at Economic Club of Minnesota
• 4pm: Total Net TIC Flows, prior $44.7b; Net Long-term TIC Flows, prior $49.0b

DB’s Jim Reid concludes the overnight wrap

This morning we’ve already seen the latest Chinese data dump which was a bit mixed. The April retail sales (9.4% yoy vs. 10.0% expected) and fixed asset investment (7% yoy vs. 7.4%) were both lower than expectations, but industrial production rose 1ppt mom and was above consensus at 7% yoy (vs. 6.4% expected). Yesterday our Chinese economist wrote the third part of their series explaining why they had turned bullish on growth. See below in our DB  macro updates section for the link.

The big event today is probably US retail sales but we also have second reading of European GDP, UK employment numbers, the latest UK Brexit cabinet meeting, and possible headlines from the Chinese VP travelling to Washington to continue trade talks. These will be previewed fully at the end.

This is definitely the peak data day of the week and bonds go into it having sold off a fair bit over the last 24 hours especially in Europe. Across the region, Bunds (+5.2bp) and Gilts (+2.8bp) both weakened while peripherals slightly underperformed with losses led by Spain (+6bp) and Italian BTPs (+5.7bp). Over in the US, the yield on the UST 2y rose for the 7 consecutive day (+1.2bp) to the highest since August 2008 while the UST 10y closed marginally above 3% again (3.003%). It wasn’t easy to pinpoint the reason for the fixed income weakness but hawkish ECB speak, rising Oil (WTI +0.25% to $71.14/bbl), and the halo impact of Mr Trump’s weekend scaling back on trade sanctions for China’s ZTE were all cited. On the ECB, Villeroy suggested that the ECB’s “well past” guidance on the first rate hike refers to “at least some quarters, but not years” post the end of QE and that “we’ll probably give additional guidance for the end of the year for the timing of the rate hike and the contingencies”. Not particularly new news but it did seem to impact markets.

Conversely, equities were relatively muted with lower trading volume and volatility yesterday. The S&P initially traded 0.5% higher but pared back gains to close marginally up for the fourth straight day (+0.09%). The move was weighed down by the real estate and utilities sectors as well as Xerox (-4%) after the company abandoned its merger with Fujifilm. Elsewhere, the Dow (+0.27%) and Nasdaq (+0.11%) also advanced while the VIX rose for the first time in eight days (+2.2% to 12.93). In Europe, key bourses such as the Stoxx 600 (-0.05%), DAX (-0.18%) and FTSE (-0.18%) retreated modestly, while Italy’s FTSE MIB edged up +0.26%.

Following on with Italian politics where we’re still waiting for more firm conclusions from the coalition talks. Yesterday, the 5SM and League Party told President Mattarella they need a bit more time for negotiations. The 5SM leader Di Maio noted “a few extra days” may be needed and confirmed that both parties agreed not to publicly name the candidates for the Premiership.

This morning in Asia, markets are broadly lower, with the Hang Seng (-0.90%), Kospi (-0.61%), Nikkei (-0.09% and Shanghai Comp. (-0.22%) all down as we type. Now recapping other markets from yesterday. The US dollar index edged up for the first time in four days (+0.05%), while the Euro dipped -0.13% and Sterling rose 0.1%. Elsewhere, the Argentina Peso dropped 7.7% to a fresh record low vs. the USD as Bloomberg cited unnamed sources that noted the Central bank has shifted its strategy in supporting the Peso, to now allowing the currency to fall within a certain limit. Further, an IMF spokesman noted that it will not set Peso targets as a condition for the credit line currently under negotiations with Argentina. Over in commodities, precious metals weakened (Gold -0.44%; Silver -0.86%) while other base metals broadly retreated (Copper -0.62%; Zinc -0.25%; Aluminium +0.44%).

Now turning to some of the trade headlines. Following President Trump’s conciliatory tweet on the Chinese telco. company ZTE on Sunday, the US Commerce Secretary Ross has confirmed that his department is considering whether “…there are alternative remedies….and that’s the area we’ll be exploring very, very promptly”. Elsewhere, the WSJ reported that the US and China may swap an end to sanctions on ZTE in return for the removal of Chinese tariffs on American farm products. Finally, on the overall views on trade between US and China, Mr Ross has warned that “gaps remain wide” with Beijing. So lots bubbling along ahead of this week’s trade talks.

Moving onto the two Fed speakers on rates and yield curve. The Fed’s Bullard reiterated that “we’re at some risk of an inverted yield curve later this year or early 2019” and that “it’s been the Fed, I think, that has flattened the curve more than worries by investors on the state of the economy”. On rates, he repeated that “….the Fed does not need to be so aggressive that we invert the yield curve”. Conversely, the Fed’s Mester noted the Fed should continue on its current, gradual path of monetary tightening and that the Fed may eventually need to raise rates above its  neutral rate of about 3%. On inflation, she believes it will trend to the 2% target, but doesn’t expect it to rise sharply, in part as some of the pick-up reflects higher commodity prices and some of the recent strength are likely temporary, as low readings from last March drop out of the calculations.

Finally we highlight some of DB’s macroeconomic research from overnight. In the US, our colleagues Quinn Brody and Torsten Slok have published a preview of the mid-term congressional elections, including implications for the economy
and markets. They believe that investors should monitor polls and betting odds ahead of the November elections for different market scenarios. Volatility may rise regardless of the outcome, but, based on historical relationships, equities may be more likely to rise if Republicans manage to maintain control of Congress. In China, our team noted that April land sales remained strong, particularly in lower tier cities while property prices continued to rise. Overall, they believe this is positive for growth and investment. Their macro view remains unchanged: growth should sustain at 6.6% in 2018, with risks to the upside. In Europe, Peter Sidorov has reviewed the recent trends in private sector credit in the euro area to reverse engineer the rate of credit growth implied by the GDP forecasts. Their GDP forecast implies credit growth will rise to around 5% yoy by the end of 2019. With the euro area set to move from passive deleveraging to an outright releveraging mode by the end of 2018, his note also thinks about the sustainability of the euro area credit cycle.

There were limited data releases yesterday. In France, the April Bank of France industry sentiment index edged down 1pt mom to 102 (vs. 103 expected).

Looking at the day ahead, the preliminary Q1 GDP report in Germany is due  (0.4% qoq expected), along with the Q1 GDP report for the Euro area (0.4% qoq; 2.5% yoy expected). In the UK, the March unemployment rate (4.2% expected) and average weekly earnings growth (2.6% expected) along with other employment data are due, while in France the final April CPI revisions are also due. March industrial production data for the Euro area is also due, as well as the May ZEW survey in Germany. In the US the big focus will be on the April retail sales report (0.5% expected for ex-auto), while May empire manufacturing, March business inventories and the May NAHB housing market index print are also due. Fed nominees Clarida and Bowman are due to appear for confirmation hearings while the Fed’s Kaplan and Williams are both scheduled to speak. UK PM Theresa May is also  due to meet with her Brexit Cabinet while China Vice Premier Liu He is due to visit Washington and continue trade talks.

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In a world in which Elon Musk found himself with increasingly fewer friends, one thing was certain: Morgan Stanley analyst Adam Jonas, always eager for that lead left spot in the next Tesla convertible, would stick with Tesla and Musk through thick and thin, no matter what.

Well, that ended this morning when Jonas appears to have had enough, slashing his price target on the car maker from $376 to $291, stating that following 1Q18 results, he is making significant cuts to his near-term and long-term auto margin forecasts, while forecasting greater equity dilution, i.e. another stock offering. Jones now sees “Tesla as trading near fair value with a balanced risk-reward.”

Jonas starts by commenting on the now legendary – and bizarre – Tesla Q1 conference call, saying that “regarding the feedback from the 1Q18 conference call… Elon Musk reserves the right to do very difficult things that could yield great commercial value long term. At the same time, investors reserve the right to understand the costs and the risks near term.”

Nonetheless, Jonas appears ready to brush aside the public outcry following the call saying that “we believe any impact on the investor engagement side is fairly limited and the market will focus on more pertinent and quantifiable debates such as the interplay between cash consumption and capital raising.”

He does, however, focus on the “recent increase in the pace of management departures and an apparent reorganization of the business suggest to us the need to address some of the technical and fundamental hurdles weighing on company margins.”

Going back to the reasons for the earnings forecast cut, Jonas notes that this was “driven by margins” (no punt intended) and adds:

While 1Q18 results were broadly in line with consensus expectations (and slightly above our forecasts), we are making material reductions to our earnings estimates to reflect lingering manufacturing issues with the Model 3 – most recently at Fremont final assembly. While our volume forecasts are largely unchanged, we have reduced our medium and long-term gross margin assumptions for Tesla’s passenger car operations. It is our view that the challenges in ramping up Model 3 production reflect fundamental issues of vehicle design, manufacturing process, and automation levels that can weigh against the profitability of the vehicle. The company has acknowledged that it, to some extent, overautomated the Model 3 production process and is now reengineering accordingly. Movements in raw material prices and FX add further headwinds vs. our prior expectations. Tesla management believes the Model 3’s margin performance below its 25% target level will be temporary, whereas we believe this headwind is more structural.

Ominously, Jonas – who until now was the company’s biggest cheerleader – says that given the execution risk reflected in current results, “an added level of caution is prudent” and explains:

• We lowered our long-term auto gross margin forecast to 27% vs. 34% previously. We have assumed Model S gross margins of 35%, Model X at 31%, Model 3/Y at 24%, Roadster at 40% and ZEV credits at 100%.
• We lowered our long-term operating margin forecast to 9.8% from 14.3% previously. This change takes our long-term view of group OP margins from best in class premium levels to margins in line with that of the German premium names or recent GM N. American margins. Of this reduction in long-term margin forecasts, 200bps is driven by the above concerns regarding automation, 200 bps is driven by FX (given the stronger dollar and Tesla’s US based production), and 100bps is driven by raw mats.
• The changes in our Auto margin forecasts drive nearly 90% of our price target reduction to $291.
• We have delayed our forecast of the launch of Tesla Mobility (or Tesla Network/mobility as a service) by roughly 1 year, to the middle of 2019. This change contributed around $7 to our price target reduction. We now forecast 2k units fleeted in 2019 ramping to over 50k by 2021, 1 million by 2027 and 1.7 million by 2030.
• Additionally, we have increased our estimate for Tesla’s capital raising from $2.5bn to $3.0bn, which we continue to expect in 3Q18. We assume 50% of proceeds are used to pay down debt.
• We continue to value Tesla Energy at $0.
• Lowering our bull case 21% to $441 (vs. $561 previously) and our bear case 45% to $97 (vs. $175 previously). Our bear case moves proportionally more than the bear case reflecting the great amount of financial leverage versus previous periods and the fact that we continue to ascribe zero value for TSLA Energy/SCTY.

Jonas summarizes the major concern facing Tesla as follows:

In our view, the number one issue at the heart of the Tesla investment debate is whether the company is 1) currently operating at a low level of utilization of a very large industrial complex, where incremental revenue can bring large incremental gross margins and improvement of cash consumption, or 2) the next 50-100% of growth in revenue brings forth other calls on cash and does not materially move the company in the direction of a fully self-funding existence.

With all that said, Jonas then cuts the umbilical cord connecting him to Musk and also cuts his price target to $291 from $376, for the following reason:

We see Tesla as trading near fair value with a balanced risk reward, and believe that is subject to extremely high
levels of fundamental execution risk, market/funding risk, and a highly volatile share price. In our view, Tesla does not offer enough upside to justify an OW rating or enough downside to justify an UW rating.

More concerning to Tesla bulls, Morgan Stanley sees the “bear” case price at just $97 now, down from $175, and a level that would trigger a full-blown margin call on Musk’s stock-backed loans.

And here is Jonas’ latest income statement projection, which now sees the company having a net loss in 2020:

An amusing aside: asking a rhetorical question, why he didn’t simply cut TSLA to sell, the formerly fawning analyst gives the following meandering and meaningless explanation (the real reason, of course, is that Morgan Stanley would still like to be an underwriter on the upcoming stock sale):

Why not Underweight? With 3% downside to our revised price target and high levels of volatility, an investor could reasonably ask why we are not downgrading the stock to Underweight today. There are 3 primary reasons why we reiterate our Equal-weight at this time: (1) It is difficult to judge the true underlying profitability of the automotive operations until Model 3 production is ramped to a higher level and until current bottlenecks are surmounted. (2) We want more discovery around Tesla’s potential capital raising execution, including the instruments of capital (debt, equity, ABL facility, etc.), the genre (strategic or financial investor), size and, of course the price. (3) Potential strategic value – our $291 price target is driven by our DCF of the auto business and mobility as a service business. We believe there is significant potential strategic value within Tesla, including its invested capital, design, brand, technology, relationships with key stakeholders (suppliers, governments, commercial partners) and its people.

Still, the message is clear: Tesla has just lost its biggest fan on Wall Street, and as a result the TSLA stock is trading down 2.4% to $285 in the premarket on this “betrayal’ by one of the company’s – formerly – most prominent sellside friends.

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