Category: zerohedge

A pair of conflicting economist reports this morning.

On one hand, the DOL reported that seasonally adjusted Initial Claims dropped from an upward revised 344K to 323K (a number which will be revised higher as is now the tradition) below the expected 335K, which incidentally in an ultrasensitive environment to every piece of good news may be bad news as it means the November NFP report may come in better than expected and cement the Fed’s intention to taper as soon as December at least according to yesterday’s FOMC Minutes. Then again, the BLS noted that the decline was influenced by the Veterans’ Day holiday, so once again what is really going on beneath the surface is very much unclear. As Bloomberg notes, as a result of the holiday, “investors should anticipate a likely reversal next week in the pace of firings.” Ironic when the bulls are forced to cheer for bad economic data so the Fed balance sheet-driven melt up may continue. Continuing claims rose modestly by 66K to 2.876MM, slightly higher than expected, but well below the 3.325MM at this time last year.

 

On the other hand, Producer Price Inflation followed the recent CPI decline, and dropped by 0.2% in October in line with expectations, making the October headline PPI print the biggest drop since April’s -0.7%. Broken down by component, foods saw an increase of 0.8%, offset by a 1.5% drop in energy. PPI ex-food and energy rose by 0.2%, a fraction above the expected 0.1%, and rose 1.4% compared to a year earlier.

So adding the two reports together: Claims suggest Fed may taper soon if the labor market is indeed improving (with companies hiring part-time workers), while the PPI confirms that at least according to the BLS, inflation is nowhere to be found, suggesting much more QE in stock.

Just you typical, run of the mill, baffle with BS day.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/HZvm52gCElQ/story01.htm Tyler Durden

 

The capital market for new issues and refinancing of corporate debt has been on a tear the past few months – I think that ended yesterday. That's because the dreaded Taper Talk has resurfaced. The Fed minutes yesterday rekindled Fear of Taper.

The Taper On/Taper Off story has been with us for six months now. It started in May with the release of the Fed minutes and the first "whisper' of the Taper. The talk of the Taper reached a zenith in late September as the debt markets were convinced that Bernanke would start the Taper in October. It was a big surprise to players when Good Ole Ben chose to delay the October start and push it to sometime in the future; and now it's back.

 

 

An interesting consequence of Taper Talk is how it affects the Corporate new issue bond calendar. The following chart shows how talk of taper killed the ReFi market in June/July/October, and it also shows how the window for new issues opened right after Big Ben delayed the taper for a few months. Up until yesterday the corporate finance types and bond dealers on Wall Street were having a daily party. As of today, they will be back to struggling to push deals out the door.

 

 

My read of this is that the debt market does not work well unless there is the perception of QE -4 ever. The capital markets freeze up whenever the threat of a disruption of the $85B of grease the Fed provides every month arises. When the capital markets are working well, the deal flow is there, and this is good for the economy. When there is Taper Talk the refinancing gears get gummed up, and it acts like a drag on the economy.

There is no doubt in my mind that Yellen is going to push off the Taper for as long as she can. But even the Great Dove can't push the Taper off for too long. I think that Yellen will be forced to initiate a Taper by March. That suggests that there is a four month window before the actual event, but I don't think the Taper Talk is going to subside as it did in October/November. The Talk of the Taper will be with us (and the closing of the refinancing window) for months. As a result we are going to see a pause in the up move in equities and a closing of the bond window. This will translate into an economic drag. Whatever your forecast of 4th Q and 1st Q growth were on Tuesday, you should mark them down a bit today.

QE is the lubricant of the system. But when it is ended (or threatened to end) it causes pain. We've had five years of grease, now we are going to have to pay a price. My guess is that this new round of Taper Talk is going to hurt pretty bad. The reason is that there is next to no basis to believe that QE can be continued beyond a few more months. The Taper sign is now on, it will remain on until the talk is turned into action. When the Taper Talk sign is on, beware. The sign is now brightly lit.

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nYQlPCt_5iE/story01.htm Bruce Krasting

 

The capital market for new issues and refinancing of corporate debt has been on a tear the past few months – I think that ended yesterday. That's because the dreaded Taper Talk has resurfaced. The Fed minutes yesterday rekindled Fear of Taper.

The Taper On/Taper Off story has been with us for six months now. It started in May with the release of the Fed minutes and the first "whisper' of the Taper. The talk of the Taper reached a zenith in late September as the debt markets were convinced that Bernanke would start the Taper in October. It was a big surprise to players when Good Ole Ben chose to delay the October start and push it to sometime in the future; and now it's back.

 

 

An interesting consequence of Taper Talk is how it affects the Corporate new issue bond calendar. The following chart shows how talk of taper killed the ReFi market in June/July/October, and it also shows how the window for new issues opened right after Big Ben delayed the taper for a few months. Up until yesterday the corporate finance types and bond dealers on Wall Street were having a daily party. As of today, they will be back to struggling to push deals out the door.

 

 

My read of this is that the debt market does not work well unless there is the perception of QE -4 ever. The capital markets freeze up whenever the threat of a disruption of the $85B of grease the Fed provides every month arises. When the capital markets are working well, the deal flow is there, and this is good for the economy. When there is Taper Talk the refinancing gears get gummed up, and it acts like a drag on the economy.

There is no doubt in my mind that Yellen is going to push off the Taper for as long as she can. But even the Great Dove can't push the Taper off for too long. I think that Yellen will be forced to initiate a Taper by March. That suggests that there is a four month window before the actual event, but I don't think the Taper Talk is going to subside as it did in October/November. The Talk of the Taper will be with us (and the closing of the refinancing window) for months. As a result we are going to see a pause in the up move in equities and a closing of the bond window. This will translate into an economic drag. Whatever your forecast of 4th Q and 1st Q growth were on Tuesday, you should mark them down a bit today.

QE is the lubricant of the system. But when it is ended (or threatened to end) it causes pain. We've had five years of grease, now we are going to have to pay a price. My guess is that this new round of Taper Talk is going to hurt pretty bad. The reason is that there is next to no basis to believe that QE can be continued beyond a few more months. The Taper sign is now on, it will remain on until the talk is turned into action. When the Taper Talk sign is on, beware. The sign is now brightly lit.

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nYQlPCt_5iE/story01.htm Bruce Krasting

With the US shale revolution set to make America the largest exporter of crude, however briefly, the influence of Saudi oil is rapidly declining. This has been felt most recently in the cold shoulder the US gave Saudi Arabia and Qatar first over the Syrian debacle, and subsequently in its overtures to break the ice with Iran over the stern objections of Israel and the Saudi lobby (for a good example of this the most recent soundbites by Prince bin Talal ). But despite the shifting commodity winds and the superficial political jawboning, the reality is that nothing threatens the US dollar’s hegemony in what many claim is the biggest pillar of the currency’s reserve status – the petrodollar, which literally makes the USD the only currency in which energy-strapped countries can transact in to purchase energy. This may be changing soon following news that the Shanghai Futures Exchange could price its crude oil futures contract in yuan, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.

 In doing so China is effectively lobbing the first shot across the bow of the Petrodollar system, and more importantly, the key support of the USD in the international arena.

This would be in keeping with China’s strategy to import about 100 tons of gross gold each and every month, in addition to however much gold it produces internally, in what many have also seen as a preparation for a gold-backed currency, which however would require a far broader acceptance of the renminbi in the international arena and most importantly, its intermediation in a crude pricing loop. It is precisely the latter that China is starting to focus on.

Reuters reports:

China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.

 

“China is the only country in the world that is a major crude producer, consumer and a big importer. It has all the necessary conditions to establish a successful crude oil futures contract,” Yang Maijun, SHFE chairman, said at an industry conference.

 

Yang’s presentation slides at the conference stated that the draft proposal is for the contract to be denominated in yuan and use the type of medium sour crude that China most commonly imports.

It is hardly panic time yet: Reuters adds that industry participants with direct knowledge of the plan have said the contract would be priced in the yuan, otherwise known as the Renminbi, and the U.S. dollar. However, one can argue that the CNY-pricing is for now a test to gauge acceptance of the Chinese currency, and will take on increasingly more prominence as more and more countries, first in Asia and then everywhere else, opt for the CNY-denomination and in the process boost the Renminbi to ever greater parity with the USD.

Here are the punchlines:

“The yuan has become more international and more recognised by the financial market,” Chen Bo, Chinese trading firm Unipec’s executive general manager, told Reuters.

 

“I don’t think it would be unacceptable for the world to use the renminbi for commodities trading.”

Certainly not, although it would also entail a depegging the CNY from the USD, something which China is for now unable and unwilling to do. Because once the Yuan is freely priced, kiss all those Wal-Mart “99 cent” deals goodbye. 

Which in retrospect may be just what the US wants: a very gradual and controlled dephasing of the USD’s reserve currency status. Recall that what the Fed wants at any cost is inflation which has so far failed to materialize at the level demanded by the Chair(wo)man thanks in part to cheap Chinese goods and ongoing US exporting of inflation to China. So if that means a spike in the prices of China imports – so key to keeping US inflation in check – so be it. Because we can already see the Fed’s thinking on the matter – certainly it will be able to always restore the USD’s supreme status in “15 minutes” or less when it so chooses.

Of course, by then China, and the Petroyuan, may have a very different view on the world.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/FF5-qCF-J9U/story01.htm Tyler Durden

Investors are focused on the possible tapering of U.S. stimulus and starting to take some money off the table after a strong equities rally year-to-date. Less attention is being paid to the biggest source of risk at present: deflation in the developed world. All of the past week’s data point to heightened deflationary risks. Paltry U.S. consumer price index (CPI) figures, German producer prices undershooting and another bout of weakness in commodity prices, particularly oil, suggest deflation is winning the battle over central bank stimulus. Which is something that Asia Confidential has been forecasting for some time.

It’s no coincidence that at the same time, the Japanese yen has reached four month lows versus the U.S. dollar. Japan is printing an enormous amount of money in a bid to end its 20-year affair with deflation. It wants inflation at all costs and the yen is collateral damage. Lowering the yen increases the competitiveness of Japanese exporters, resulting in more cars, robots and flat-panel TVs being shipped abroad. And that means Japan is exporting deflation, and resultant lower prices in these goods, to the rest of the world. Key competitors in China and South Korea are starting to fight back but are being hampered by their strong currencies versus the yen.

There’s increasing talk that Europe will resort to more stimulus soon to wade off deflation. The euro has been remarkably strong compared to other currencies, making the region’s exporters increasingly un-competitive. Across the Atlantic, Bernanke and co. have been further hinting at QE tapering, but with rising deflation risks, any tapering seems unlikely. If Japan succeeds in weakening the yen further, you can be sure that other countries will start to complain and print money to lower their own currencies. The phrase “currency wars” may come back in vogue soon enough.

What does all this mean for markets? Well, it increases the odds of a further stock market correction before year-end. And a bond rally would seem overdue. But more broadly, it means the tussle between deflation and central bank stimulus should continue. That means more money printing and low interest rates for the foreseeable future. Which could push asset prices higher from already elevated levels, raising the odds of a major correction down the track.

Disinflation reigns

I’ve spoken of deflation so far, but it’s really disinflation (falling inflation) that’s occurring. A host of recent data suggests that this remains the primary threat to global economies, including:

1) The U.S. inflation rate fell to 1% annualised in October, the lowest figure in almost 50 years, excluding the 2008 financial crisis. Inflation in America peaked in 2011 and remains way below the Fed’s 2% target rate. The chart below is courtesy of Business Insider.

2) U.S. bank loan growth is showing a similar slowdown. Stimulus isn’t resulting in increased lending and therefore isn’t filtering through to the real economy. There’s just not enough end-demand for loans as businesses and consumers remain cautious about taking on debt.

3) The German producer price index (PPI) fell 0.2% month-on-month in October, more than expected. On an annualised basis, the PPI fell 0.7%. It points to slower inflation ahead.

4) The trend of slowing inflation is a Europe-wide issue. No wonder the European Central Bank cited falling inflation as a factor in its decision to cut rates earlier this month.

5) It’s not data as such, but softening commodity prices also point to falling inflation. The correction in oil prices is particularly pertinent.

These are just a few of the signs that deflation remains firmly in charge.

Why Japan’s largely to blame

Japan is back on the radar of investors given a breakout in its stock market and the yen reaching a four-month low. There’s a larger story brewing though. And that’s growing evidence that the grand experiment of Abenomics has been a complete and utter failure.

Recent third quarter GDP of 1.9% was half the level of the second quarter. More importantly, personal incomes
have barely budged while the cost of living has soared, thanks to the falling yen. This week’s trade figures showed imports surging 26% year-on-year (YoY) in October, versus 19% expected, due to soaring fuel imports. This overshadowed exports rising 19% YoY, more than analyst forecasts. Consequently, Japan’s trade balance (difference between exports and imports) fell to the third lowest level on record.

Why does this matter? Well, Japan runs a budget deficit of close to 10%. It used to run a major trade surplus, which has now turned into a trade deficit. If you run budget and trade deficits, you need to plug the gap either via private savings or the central bank printing massive amounts of money. The problem with the former is that using private savings to finance the gap means there’ll be less savings for private investment, a key growth driver for the economy. This means that you can expect Japan to print increasing amounts of money and for the yen to weaken further.

Besides the yen, the other point of interest will be Japanese government bonds. If Japan accelerates the monetisation of debt (central bank buying bonds to finance government), that’ll crowd out private players in the bond market. In fact, this is already happening. The so-called crowding out effect will almost certainly lead to increased volatility as private players are marginalised.

This is important because Japan desperately needs bond yields to stay low. The government’s enormous debt load (nearing 245% of GDP) means that just a small increase in bond yields and interest rates would lead to interest expenses on government debt reaching intolerable levels (a 2% rate would have interest expenses covering 80% of government revenues).

As Asia Confidential has highlighted on several occasions, Japan is in a desperate situation where there are no happy endings. There are only bad and worse outcomes. The government has chosen an extraordinary experiment which could well pave the way for the worst outcome to occur.

But this isn’t just a Japan issue. Other countries aren’t going to sit idly by and watch Japan steal market share due to the softening yen. At some point, they’re going to hit back with currency devaluations of their own. And then the real currency wars will begin in earnest. History shows these wars never end well as global trade suffers from the tit-for-tat between countries.

Are bonds set to come back?

Markets have largely ignored deflationary risks thus far. Stocks have surged, with few corrections, while bonds have spluttered. Given stagnant to falling GDP in the developed world and declining inflation, the bond market action has been particularly puzzling. Usually, government bond yields closely correlate with nominal (real plus inflation) GDP. If nominal GDP is falling, then so too should government bond yields.

This is why you should expect government bond yields in the developed world to head lower given the current deflationary threats. And it should also mean stocks have a further correction in the near future.

Short-term market action is always difficult to call though. Long-term trends are easier to distinguish. And on this front, little has changed. You have an ongoing battle between deflation and central bank government efforts to prevent it via QE. Deflation is winning right now, which is why you should expect more QE, not less, going forward.

If that’s right, stimulus and low interest rates could be with us for some time yet. Asset prices may be bid up further. And the market bears may have to wait before a more serious correction happens. The catalyst for that is likely to be a loss of faith in central bank stimulus.

This post was originally published at Asia Confidential:
http://asiaconf.com/2013/11/21/deflation-is-crushing-qe/

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/tQ-QejYwITk/story01.htm Asia Confidential

As we recently noted, thanks to the overwhelming dominance of the BoJ, the Japanese government bond market is “for all intent and purpose” dead. As the chart below shows, that is the lesson that Europe has learned also. Since the Greek bailout, bond trading volumes (and thus liquidity) has collapsed to practically zero. Of course, this is ignored by the mainstream media, instead focusing on the ‘low’ yields of that nation’s debt as indicative of ‘recovery’ around the corner and a market that knows better. Instead it is simply a measure of the domestic banks meager pricing at the margin of a bond market that reflects nothing but a shell of its former self. The pattern is similar (though not so terrible) for Spanish and Italian debt as the entire European bond market devolves into OMT-driven farce.

 

 

(h/t @fmirw)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/9OqLONmqjKM/story01.htm Tyler Durden

• When it fails, do more of it – Bank of Japan hints at extending ultra-loose monetary policy (FT)
• PBOC Says No Longer in China’s Interest to Increase Reserves (BBG)
• Fed casts about for endgame on easy-money policy  (Hilsenrath)
• Big trucks still rule Detroit in energy-conscious era (Reuters)
• Debt Limit Rise May Not Be Needed Until June, CBO Says (BBG)
• Some Insurance Regulators Turn Down White House Invitation (WSJ)
• Say Goodbye to the Car Salesman (WSJ)
• U.S. drone kills senior militant in Pakistani seminary (Reuters)
• French business sector contracts sharply (FT)
• How Germany’s taxman used stolen data to squeeze Switzerland (Reuters)
• Fed casts about for endgame on easy-money policy (WSJ)
• France, Italy call for full-time Eurogroup chief (Reuters)
• Bank of England stresses it in no rush to raise interest rates (Reuters)
• ECB Board Considering Publishing Minutes of Policy Meetings (WSJ)
• Drop in Traffic Takes Toll on Investors in Private Roads (WSJ)
• US budget talks generate cautious optimism (FT)

 

Overnight Media Digest

WSJ

* Investigators looking into how a government funding decision got to investors early are struggling over how to distinguish between illegal insider tips and accurate predictions based on research and analysis.

* The U.S. and Afghanistan said they ironed out the final disputes over the agreement on long-term American presence, just hours before the Loya Jirga assembly was convening to consider the deal.

* Federal Reserve officials, mindful of a still-fragile economy, are laboring to devise a strategy to avoid another round of market turmoil when they pull back on one of their signature easy-money programs in the months ahead.

* A complex bet in the foreign-exchange market backfired on Goldman Sachs Group Inc during the third quarter, contributing to a revenue slump that prompted senior executives to defend the firm’s trading strategy.

* Blackstone Group is about to unleash a seasoned turnaround specialist on some of the private equity giant’s 77 companies.

* A complex bet in the foreign exchange market backfired on Goldman Sachs during the third quarter, contributing to a revenue slump that prompted senior executives to defend the firm’s trading strategy.

* A preliminary gauge of China’s manufacturing activity showed a mild weakening of growth momentum in November, weighed down by sluggish new export orders, and suggesting the third-quarter rebound in the world’s second-largest economy may be losing steam.

* The White House won’t support plans to recapitalize Fannie Mae and Freddie Mac because they don’t address core concerns over having two large entities dominate the nation’s $10 trillion mortgage market, said the president’s top economic adviser.

* One morning this month, agents from the Federal Bureau of Investigation showed up unannounced at the home of a New York-based currencies trader for Deutsche Bank AG.

The agents showed him transcripts of an electronic chat in which the trader appeared to boast about trying to manipulate foreign exchange markets, according to people familiar with the incident.

 

FT

Chancellor George Osborne pressed Brussels last year to spare the Co-operative Bank from tougher rules applied to big listed banks.

France’s socialist government has promised reforms in the country’s onerous tax system but has stopped short of pledging tax cuts.

Shale gas fracking is unlikely to succeed in Europe because the continent lacks the right mix of land rights and infrastructure, according to the head of trading at power company Eon .

Authorities in France have placed the French unit of Swedish furniture retailer Ikea and its two top executives under formal investigation over allegations of illegally gathering data on employees and clients.

Coal miner Bumi’s plan to overhaul its ownership end boardroom conflicts hit a hurdle after the company’s chairman missed a deadline to show he had lined up financing for a key part of the restructuring deal.

Private equity firm KKR & Co LP has taken control of Winoa in a debt restructuring deal after the French steel abrasives maker’s previous private equity owner refused to inject cash.

 

NYT

* The Federal Reserve Open Market Committee wrestled at its most recent meeting with ways of supporting an economy that still needs help.

* Shareholders are putting AT&T and Verizon Wireless on notice: Tell the public more about the companies’ role in government surveillance efforts or risk a ding to the bottom line.

* State insurance commissioners met with President Obama and said insurers and states would have to decide to extend non-compliant health plans for one more year.

* Opposing portrayals of Michael Steinberg, a former trader at SAC Capital Advisors, emerged during opening statements at his criminal insider trading trial in Federal District Court.

* Rupert Murdoch, chairman of News Corporation and 21st Century Fox, and Wendi Deng Murdoch agreed to end their 14-year marriage.

* Neil MacBride, the former U.S. attorney in Alexandria, Virginia, will join Davis Polk & Wardwell as a partner, the firm will announce on Thursday.

* The Tribune Company, owner of The Chicago Tribune and The Los Angeles Times, will lay off 700 employees at those newspapers and the six others it owns, it said in memos to the staff on Wednesday.

* An ambitious plan to revise the system for taxing multinational corporations, released on Tuesday by the Senate Finance Committee chairman, Max Baucus, would hit technology companies and large pharmaceutical companies especially hard.

* A measure of consumer spending rose more than expected in October as households bought a range of goods, suggesting positive momentum in the economy early in the fourth quarter.

* The New York Times on Wednesday announced a reorganization of its Washington bureau, including the elevation of Carolyn Ryan to bureau chief and the start of two new
ventures.

 

Canada

THE GLOBE AND MAIL

* The Royal Canadian Mounted Police is alleging that Nigel Wright, Canadian Prime Minister Stephen Harper’s former chief of staff, breached the Criminal Code for his part in an extensive Conservative operation to contain the Senate expenses scandal.

* The British Columbia government has announced a new action plan for patients with mental-health challenges, a response to a declaration by Vancouver’s mayor and police chief that the city faces a crisis in handling people with severe, untreated mental illness.

Reports in the business section:

* Suncor Energy Inc, which last month approved a new multi-billion-dollar oil sands mine, plans to spend over $1 billion more in 2014 than it expects in 2013.

* Cliffs Natural Resources Inc announced on Wednesday that it would stop developing the Ring of Fire mineral deposit in Northern Ontario, dealing a blow to the provincial government’s plans to tap the resource-rich area and grow the local economy.

NATIONAL POST

* Toronto Mayor Rob Ford’s new, smaller office will have nine members in it, his fifth chief of staff in three years confirmed Wednesday. The office does not include David Price, his former director of logistics and operations and friend of Doug Ford who has had a controversial run at city hall.

* The Canadian prime minister’s senior staff worked with top Tory senators to whitewash a Senate report into Mike Duffy’s contested expenses after unsuccessfully trying to shape an independent audit, new Royal Canadian Mounted Police documents allege.

FINANCIAL POST

* Alberta pocketed just $26 million in its biggest land auction in two years, diffusing hype that a forgotten corner of the province holds the next big oil and gas play.

* The long-delayed rotation away from a reliance on consumer spending as Canada’s economic engine to stronger exports and business investment just isn’t happening – much to the chagrin of Stephen Poloz, the Bank of Canada governor who previously ran Export Development Canada.

 

China

CHINA SECURITIES JOURNAL

– The timely introduction of crude oil futures will boost China’s capital market liberalization, said a commentary in the paper.

SECURITIES TIMES

– China’s State Council plans to consolidate the registration of all immovable property under one department to ease the bureaucratic burden for enterprises, said Li Keqiang, the country’s premier at a meeting on Wednesday. Currently, registration of immovable property is overseen by many different departments.

SHANGHAI SECURITIES NEWS

– China’s National Development and Reform Commission plans to introduce ecological conservation indicators to better assess the interplay of economic development and damage to the environment, said Xu Shaoshi, director of the commission, recently. Relevant government departments will be instructed.

CHINA DAILY

– China appointed spokesmen for its seven military branches on Wednesday to increase operational transparency. The spokesmen are mainly drawn from the public relations departments in related branches and will release information about key activities and respond to public concerns, said sources with knowledge of the matter.

PEOPLE’S DAILY

– If tangible benefits are not felt by Chinese people and if a more equitable social environment is not created, then reform will lose its significance, said a commentary in the paper which acts as the party’s mouthpiece.

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

Advance Auto Parts (AAP) upgraded to Outperform from Neutral at Credit Suisse
BreitBurn Energy (BBEP) upgraded to Outperform from Neutral at RW Baird
Crestwood Midstream (CMLP) upgraded to Outperform from Neutral at RW Baird
Green Mountain (GMCR) upgraded to Buy from Neutral at Janney Capital
Hillshire Brands (HSH) upgraded to Outperform from Market Perform at BMO Capital
Leap Wireless (LEAP) upgraded to Hold from Sell at Deutsche Bank
Mechel (MTL) upgraded to Buy from Sell at Citigroup
Plains All American (PAA) upgraded to Outperform from Neutral at RW Baird
Rayonier (RYN) upgraded to Hold from Sell at Deutsche Bank
Summit Midstream (SMLP) upgraded to Outperform from Neutral at RW Baird
Westar Energy (WR) upgraded to Buy from Neutral at UBS

Downgrades

Allianz SE (AZSEY) downgraded to Neutral from Buy at Citigroup
Amicus Therapeutics (FOLD) downgraded to Neutral from Buy at Janney Capital
Amicus Therapeutics (FOLD) downgraded to Neutral from Overweight at JPMorgan
Consolidated Edison (ED) downgraded to Underperform from Hold at Jefferies
J.M. Smucker (SJM) downgraded to Neutral from Overweight at JPMorgan
Philip Morris (PM) downgraded to Neutral from Conviction Buy at Goldman
Pioneer Natural (PXD) downgraded to Perform from Outperform at Oppenheimer
Qualcomm (QCOM) downgraded to Outperform from Strong Buy at Raymond James
Quintiles (Q) downgraded to Hold from Buy at Deutsche Bank
Republic Services (RSG) downgraded to Neutral from Buy at Goldman

Initiations

Agrium (AGU) initiated with an Outperform at Raymond James
Allscripts (MDRX) initiated with a Buy at Deutsche Bank
AmerisourceBergen (ABC) initiated with a Hold at Deutsche Bank
athenahealth (ATHN) initiated with a Buy at Deutsche Bank
CVS Caremark (CVS) initiated with a Hold at Deutsche Bank
Cardinal Health (CAH) initiated with a Hold at Deutsche Bank
Catamaran (CTRX) initiated with a Hold at Deutsche Bank
Cerner (CERN) initiated with a Buy at Deutsche Bank
Charles River Labs (CRL) initiated with a Hold at Deutsche Bank
Check Point (CHKP) initiated with an Overweight at Barclays
Computer Programs (CPSI) initiated with a Hold at Deutsche Bank
Covance (CVD) initiated with a Hold at Deutsche Bank
EverBank Financial (EVER) initiated with an Overweight at Barclays
Express Scripts (ESRX) initiated with a Hold at Deutsche Bank
Facebook (FB) initiated with an Outperform at FBR Capital
Fortinet (FTNT) initiated with an Equal Weight at Barclays
Gartner (IT) initiated with a Market Perform at FBR Capital
Honda (HMC) initiated with a Buy at Jefferies
Imperva (IMPV) initiated with an Overweight at Barclays
LinkedIn (LNKD) initiated with a Market Perform at FBR Capital
McKesson (MCK) initiated with a Buy at Deutsche Bank
MedAssets (MDAS) initiated with a Buy at Deutsche Bank
Medidata Solutions (MDSO) initiated with a Buy at Deutsche Bank
Monster Worldwide (MWW) initiated with an Outperform at FBR Capital
Quality Systems (QSII) initiated with a Sell at Deutsche Bank
Radware (RDWR) initiated with an Outperform at Imperial Capital
Rite Aid (RAD) initiated with a Buy at Deutsche Bank
Sorrento Therapeutics (SRNE) initiated with a Buy at CRT Capital
Thomson Reuters (TRI) initiated with an Outperform at FBR Capital
Walgreens (WAG) initiated with a Buy at Deutsche Bank

HOT STOCKS

Johnson Controls (JCI) announced 3-year, $3.65B share repurchase program, $800M ASR
Green Mountain (GMCR) authorized additional $1B share repurchase plan
KKR (KKR) to acquire Winoa Group from LBO France, terms not disclosed

EARNINGS

Companies that beat consensus earnings expectations last night and today include: Spectrum Brands (SPB), Pactera (PACT), Taomee (TAOM), Jiayuan.com (DATE), China Distance Education (DL), L Brands (LTD), Jack in the Box (JACK), Williams-Sonoma (WSM), ValueVision (VVTV), Bazaarvoice (BV), Green Mountain (GMCR)

Companies that missed consensus earnings expectations include:
Sears Holdings (SHLD), Post Holdings (POST), Planar Systems (PLNR)

Companies that mat
ched consensus earnings expectations include:
Stage Stores (SSI)

NEWSPAPERS/WEBSITES

• Credit Suisse Group (CS) said it had begun a program to ring-fence its Swiss banking business from riskier investment banking operations in the U.S. and U.K., part of a plan to address concerns about institutions that are deemed too big to fail, the Wall Street Journal reports
• China Mobile (CHL) plans to introduce a new brand for mobile services on December 18, raising expectations of an imminent start to its iPhone (AAPL) sales in the country, the Wall Street Journal reports
• Janet Yellen will take an important step today toward becoming the first woman to lead the Federal Reserve, with the Senate Banking Committee expected to back the nomination and clear her path to lead the central bank, Reuters reports
• U.S. regulators are considering whether to give banks more time to comply with the Volcker rule, which bans them from gambling with their own money, Reuters reports
• Vodafone Group (VOD), set to receive $130B for exiting the U.S., will focus on expanding wireless networks even as potential buyers may be sizing up the company for a bid, said CEO Vittorio Colao, Bloomberg reports
• Bank of America (BAC) told a judge in federal court in Manhattan it shouldn’t pay any penalty in a U.S. lawsuit accusing it of selling defective loans to Fannie Mae (FNMA) and Freddie Mac (FMCC). The government argued that the bank should pay the maximum penalty of $863M. The bank said it should pay $1.1M at the most, Bloomberg reports

SYNDICATE

Air Lease (AL) files to sell 10.14M common shares for holders
Arthur J. Gallagher (AJG) announces $200M at-the-market equity program
Attunity Ltd (ATTU) files to sell common stock
Broadway Financial (BYFC) files to offer 17.96M common shares for holders
Cardiovascular Systems (CSII) 2.61M share Secondary priced at $30.00
Ceragon Networks (CRNT) 14M share Secondary priced at $2.40
Cinedigm Digital (CIDM) files to sell 2.9M common shares for holders
Evogene (EVGN) 5M share Secondary priced at $14.75
Forestar Group (FOR) files to sell 5.4M tangible equity units
FreeSeas (FREE) files to sell 75M shares of common stock for holders
Navigator Holdings (NVGS) 12M share IPO priced at $19.00
Sequans (SQNS) 12.5M share Spot Secondary priced at $1.80

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Following yesterday’s latest Taper Tantrum, it was critical to get a smattering of bad global overnight news to provide the ammunition for the algos that not all in the world is fine and the easy monetary policy will continue indefinitely pushing stocks ever higher at the expense of the global economy. Sure enough first China, and then Europe complied, following the biggest China Flash PMI miss and drop in 6 months, followed shortly thereafter by a miss and a drop in the Eurozone Composite PMI down from 51.9 to 51.5, below expectations of an increase to 52.0, primarily on the back of a decline in the Service PMI from 51.6 to 50.9, with 51.9 expected even as the Mfg PMI rose modestly from 51.3 to 51.5. The country breakdown showed a significant deterioration in France and an improvement in Germany.

This is broken down in the chart below:

But the biggest overnight driver by a wide margin was the Yen, which tumbled nearly 100 pips and the USDJPY hit an overnight high of just over 100.90, which pushed the Nikkei up by almost 2%, and kept the futures well bid. However, what has confused algos in recent trading is the expected denial by Draghi of a negative interest rate, which while good for the EURJPY that drives the ES, what is the flipside is that this means less easing by the ECB, and thus interpreting the data does not result in a clear BTFD signal. Which may be a problem because should stocks close red today it will be the first 4 day drop in who knows how long.

Looking at the day ahead, the US data calendar features initial jobless claims, PPI and the Philly Fed survey. Elsewhere the Senate Banking Committee has scheduled a vote today on the nomination of Janet Yellen to be the next Fed chair. Democrats hold a two-vote lead on the 22-member committee. The Fed’s Bullard speaks again today, together with Lacker and Powell.

Overnight headline bulletin from Bloomberg and Ran:

• Euribor curve reversed some of the bull flattening observed yesterday following reports that the ECB said to weigh -0.1% deposit rate if more easing needed, with  Draghi today stating that negative rates discussed in last meeting and no news since then. EUR also benefited from the latest comments by the head of the central bank.
• RBA Stevens said that the RBA remains open-minded on currency intervention.
• USD/JPY continues to test 101.00 level, supported by favourable interest rate differential flows and comments by BOJ’s Kuroda who said that the BOJ has room to  conduct more easing.
• Stocks traded lower in Europe this morning as market participants reacted to the release of the FOMC meeting minutes and also digested the release of somewhat mixed Eurozone PMI data.
• Treasuries little changed, 10Y yield highest since mid-September, 2/10 steepest since August after Fed minutes yesterday signaled tapering possible “at next few meetings.”
• Pimco predicts 10Y yields will be capped near 3% into 2015 even with the Fed beginning to trim asset purchases as early as January
• Euro-area manufacturing expanded for a fifth month in November, while Chinese factory output growth cooled; Germany’s PMI manufacturing 52.5 vs 52 est., services 54.5 vs 53 est.
• A measure of new orders at U.K. factories rose to the highest in almost two decades in November and expectations for the next three months improved, the Confederation of British Industry said
• The Bank of Japan will need to postpone the time-frame for achieving a 2% inflation target as it refrains from enlarging its asset-purchase program, economists forecast in a Bloomberg News survey
• States and insurers are hoping to bypass the troubled Obamacare exchanges, a sign of skepticism that the Obama administration will meet its goal by the end of November to fix the technical problems plaguing the web site
• If they miss the deadline, millions of Americans may find themselves without health insurance next year.
• Sovereign yields higher, EU peripheral spreads tighten. Japan stocks higher while other Asian markets decline; Asian stocks excluding China, European stocks fall, U.S. equity-index futures gain. WTI crude, copper lower; gold gains

 

Main US events:

• US: Initial jobless claims, cons 335k (14:30)
• US: Fed’s Powell (15:45), Lacker (18:30), Bullard (19:00)

Market Recap from RanSquawk

Stocks traded lower this morning as market participants reacted to the release of the FOMC meeting minutes and also digested the release of somewhat mixed Eurozone PMI data. Still, as the session progressed, stocks managed to move off their worst levels, with flows into riskier assets encouraged by lower trading bonds and also comments by Merkel who said that Europe needs to boost growth. Nevertheless, US equity futures have outperformed their European counterparts, with some of the outperformance attributed to analysts at GS who stated that the S&P 500 will rise 6% and reach 1900 at year-end 2014 and that US GDP growth will accelerate to 3% in 2014. In other news, even though the BoJ voted unanimously to keep monetary policy unchanged, the Nikkei 225 index advanced to its highest level since May 23rd, supported by broad based JPY weakness which stemmed from favourable interest rate differential flows. The move higher by the pair and the domestic stock index was also aided by the latest foreign investors’ net buying data of Japanese equities which jumped to some USD 13bln worth last week, the biggest amount in seven months. Of note, AUD came under broad based selling pressure this morning, with AUD/USD breaking below the 100DMA line in the process after RBA’s Stevens said that the RBA remains open-minded on currency intervention. Going forward, market participants will get to digest the latest weekly jobs report, PPI and also Philadelphia Fed Business Outlook reports.

Asian Headlines

The BoJ votes unanimously to keep monetary policy unchanged; BoJ’s Kiuchi proposed ending 2% target in mid-term to long term; proposal defeated by 8-1 vote. The BoJ said will make policy adjustments as needed will ease until 2% inflation is stable and expects Japan’s moderate recovery going forward. They added that uncertainties remain high for Japan’s economy and Japan CPI is likely to rise gradually. This morning, BOJ’s Kuroda said that the BOJ has room to conduct more easing and to adjust policy without hesitation as needed.

Chinese HSBC Manufacturing PMI (Nov) M/M 50.4 vs. Exp. 50.8 (Prev. 50.9); New Export Orders (Nov) 49.4 (Prev. 51.3); 3 month low.

– HSBC economist Hongbin Qu said China’s growth momentum softened a little in November, as the HSBC Flash China

Manufacturing PMI moderated due to the weak new export orders and slowing pace of restocking activities.

Goldman Sachs also raises China 2014 GDP forecast to 7.8% from 7.7%; raises India 2014 GDP growth forecast to 5.5% from 5.4%. Goldman Sachs upgrades China and Taiwan stocks to overweight adding that the MSCI AXJ is to gain 13% in dollar terms in 2014.

EU & UK Headlines

ECB’s Draghi says negative rates discussed in last policy meeting and no news since then.

– ECB did not act because it sees deflation risk materializing in Euro area, still expects inflation to return gradually to levels below but close to 2%.

– One concern is effect of rate cut on some countries.

– Is aware rate cut has raised some concerns.

– ECB cut rates to restore appropriate safety margins.

Eurozone Composite PMI (Nov A) M/M 51.5 vs Exp. 52.0 (Prev. 51.9)
Eurozone Serv
ices PMI (Nov A) M/M 50.9 vs Exp. 51.9 (Prev. 51.6)
Eurozone Manufacturing PMI (Nov A) M/M 51.5 vs Exp. 51.5 (Prev. 51.3)

German Services PMI (Nov A) M/M 54.5 vs Exp. 53.0 (Prev. 52.9)
German Manufacturing PMI (Nov A) M/M 52.5 vs Exp. 52.0 (Prev. 51.7)

French Services PMI (Nov P) M/M 48.8 vs Exp. 51.0 (Prev. 50.9) – 4 month low
French Manufacturing PMI (Nov P) M/M 47.8 vs Exp. 49.5 (Prev. 49.1) – 6 month low

France and Spain successfully tapped markets this morning, both selling at the top end of expected range. The DMO also sold GBP 4.75bln of 1.75% 2019 Gilt which led to immediate weakness given the lacklustre bidding data and higher than prev. tail.

UK CBI Trends Total Orders (Nov) M/M 11 vs Exp. 1 (Prev. -4) – Highest since 1995.

UK Public Sector Net Borrowing (Oct) M/M 6.4bln vs Exp. 5.1bln (Prev. 9.4bln, Rev 8.6bln) – UK budget deficit narrows as sales taxes and stamp duty increase.

– UK Public Finances (PSNCR) (Oct) M/M -16.8bln vs Prev. -0.6bln (Rev. -0.5bln)

– UK PSNB ex Interventions (Oct) M/M 8.1bln vs Exp. 7.5bln (Prev. 11.1bln, Rev. 10.3bln)

Barclays month-end extensions: Sterling Aggr (+0.06y)

Barclays month-end extensions: Euro Aggr (+0.04y)

US Headlines

Analysts at GS who stated that the S&P 500 will rise 6% and reach 1900 at year-end 2014 and that US GDP growth will accelerate to 3% in 2014. Also, buybacks and dividends will grow by 25% to USD 960bln and account for 45% of cash usage by S&P 500 firms in 2014, the highest share since 2007.

PIMCO’s Crescenzi sees 10y Treasury Yield near 3% and a Fed taper by March.

Barclays month-end extensions: Treasuries (+0.10y) – Of note, although the avg. is around 0.06y, larger than avg. increase had been expected given the 3y, 10y and 30y refunding auctions last week.

Equities

The positive sentiment that was evident overnight in Asia which also saw the Nikkei 225 index finish up at its highest level since May 23rd failed to carry over into the European session, where stocks traded lower as markets reacted to the FOMC minutes and mixed EU PMIs. The cautious sentiment supported the more defensive sectors, with health care and utilities outperforming. On a more positive note, analysts at Goldman Sachs stated that buybacks and dividends will grow by 25% to USD 960bln and account for 45% of cash usage by S&P 500 firms in 2014, the highest share since 2007.

Goldman Sachs FX-trading revenue has fallen during Q3 following a wrong-way bet in the FX market for USD/JPY, press reports indicated that the bank lost more than USD 1bln on currency trades during the third quarter.

FX

USD/JPY advanced to its highest level since early July, supported by favourable interest rate differential flows as market participants reacted to the release of the latest FOMC meeting minutes which noted that Fed taper is likely in coming months on better data and that most FOMC members said that IOER cut could be worth considering. AUD came under broad based selling pressure this morning, with AUD/USD breaking below the 100DMA line in the process after RBA’s Stevens said  that the RBA remains open-minded on currency intervention. Despite the aggressive selling pressure, the move lower failed to erase touted 0.9250 barrier level. Consequent AUD weakness saw EUR/AUD move above its 100DMA line and to its highest level since late October, which when combined with firmer trading EUR/JPY cross ensured that despite mixed EU PMIs, EUR/USD moved back to unchanged on the session.

 

Commodities

Iran and world powers have ended their first session after less ten minutes, however, ‘this was just a brief introductory session’ according to one diplomat in Geneva. It was later reported by an Iranian negotiator that talks are now entering a critical phase.

According to an Iranian news agency, paramilitary forces have concluded their maneuvers on an island near the strategic oil tanker shipping lanes through the Strait of Hormuz.

BofAML sees oil prices curbed by a stronger USD and weaker growth.

Libya’s crude output expected at 250,000 bpd tomorrow with the nations EL Feel oil field at full output tomorrow of 83,000 bpd according to a NOC spokesman.

China refined copper imports up 26.85% Y/Y at 292,620 tonnes according to customs. October refined copper exports up 14.39% Y/Y at 14,601 tonnes.

October primary aluminium exports up 112.32% Y/Y at 9,296 tonnes. Primary aluminium imports up 1.79% Y/Y at 49,789 tonnes. Refined zinc imports up 125.6% Y/Y at 74,391 tonnes. Refined nickel and alloy imports down 12.66% Y/Y at 15,315 tonnes.

Russian Gold and Forex Reserve (Nov 15) W/W 507.7bln vs Prev. 510.8bln.

China September gold output at 37.642 tons, according to China gold association.

 

SocGen’s recap of key macro and FX events:

It didn’t take much for the EUR and euribor futures to respond to the headline that the ECB is considering a “mini deposit rate-cut” if more easing is needed. The central bank described inflation risks as “balanced” after the refi rate cut to 0.25% last month so unless it feels it is underestimating the downside pressure on prices in the December forecasts, a deposit rate cut should not be imminent. The amount banks have on deposit with the ECB has dropped from over EUR800bn at the peak in 2012 to EUR43.8bn as of last week. The minutes of the Fomc meeting released yesterday stated that tapering could happen at one of the next few meetings, though as ever the timing will be dependent on better data (our call is March-14). Most Fomc participants said a cut in the IOER could be worth considering. The USD strengthened across the board in Asia with USD/JPY motoring to a 100.85 high and 10y swaps reaching 2.86%.

The door to lower deposit rate in the euro area has been wide open since the early summer and technically the ECB has assured us that it is technically ready to deploy this weapon. Given the discord on the governing council, it is perhaps the highest and realistically achievable as the central bank digs deeper into its emergency toolbox. How potent a mini deposit rate cut to -0.10% from 0.00% turns out to be (for the EUR and the economy) may emerge right before we cross that bridge if overseas money market funds reduce their EUR denominated security holdings. But so far, the price action suggests it is the only tool that is genuinely striking fear into the heart of EUR bulls. The remarks on the deposit rate were sourced to two people with “official knowledge of the debate” and this now ostensibly puts the onus on the speech of ECB president Draghi at 11:00 cet in Berlin (attended by German Chancellor Merkel). Without the central bank jawboning, and despite a stronger than expected start to Q4 for US retails sales, EUR/USD would have logged an eight successive day of gains yesterday. The outside day after a close below 1.3488 constitutes a sell signal. Short-term support runs at 1.3383/75.

Flash eurozone PMI data are forecast to show small declines in manufacturing and services activity in November, though the indices should stay comfortably above the 50-level signalling expansion. Spain will auction 2017 benchmark paper and France is preparing to sell 2016 and 2018 OATs. US data today are forecast to show a fall in initial claims to 335k, whilst annual PPI inflation is expected to have stayed unchanged at 0.3%. A drop to 15.0 from 19.8 is pencilled in for the Philly Fed survey.

DB’s Jim Reid concludes the overnight recap:

Markets skidded a little yesterday as the late US session yesterday proved that the taper does matter, the only debate for markets is really how much it matters. The S&P 500 dropped around 10 points (close -0.36%) after the latest FOMC minutes were perhaps on the hawkish side as it was difficult to rule out the December taper on the streng
th of what was released. Indeed the committee openly discussed how they “could decide to slow the pace of purchases at one of its next few meetings.” As DB’s Joe Lavorgna points out, at the time of the meeting payrolls appeared to be losing some momentum with September at just 148k, and with concerns about the economic consequences of the government shutdown. So they now have arguably less to worry about than they did at this meeting. We still think they won’t taper until March at the earliest but Joe thinks the strong payroll number that he expects in 2 weeks could be enough to pull the trigger. It will be a fascinating run up to Christmas. To taper ahead of YE would likely be negative for markets as there hasn’t been enough consistently strong data for markets to calmly accept a handover from the huge external support to organic growth. As we said we don’t think it happens and therefore markets will probably be higher/tighter at year end but it’s a closer call than it was 2 weeks ago.

Aside from the tapering debate, the FOMC minutes revealed that the Fed continues to grapple with strengthening forward guidance as a means of driving a psychological wedge between QE tapering and eventual rate hikes. But despite all the recent talk of lowering the unemployment threshold for rate hikes, it was somewhat surprising that only “a couple of participants” favoured reducing the 6.5% threshold. Indeed a number of other participants raised concerns about what a move would do in terms of market perceptions of the durability of the FOMC’s commitment to the thresholds. There was also some discussion about setting a quantitative floor for inflation, under which the Fed would not hike rates, but again the benefits of doing this were considered “uncertain and likely to be rather modest”. The Committee also discussed a reduction of interest on excess reserves as a means of signalling lower-forlonger, but the benefits were judged to be “small”. So for now it seems we are left with Yellen/Bernanke’s assurances that Fed policy will remain accommodative for some time to come even after QE begins to moderate, and that rate hike thresholds are not necessarily triggers for action.

As alluded to above, markets hit a bit of turbulence late in the US session but it was also interesting to see the 7bp selloff in 10yr UST yields in the several hours prior to the release of FOMC minutes. It’s not exactly clear what drove this but the Twitter-sphere was awash with talk of a “bombshell” in the FOMC minutes – which didn’t eventuate. The +12bp intraday move (+9bp on the day) in UST yields was almost as large in magnitude as the +15bp selloff following the bumper October payrolls report two Fridays ago. LATAM EM did predictably poorly as the UST selloff took hold, and EM credit spreads closed at the wides. US credit held in reasonably well but Gold dropped 2.5% and we’re currently not too far away (around 4%) from retesting the June lows of $1200/oz. The stronger dollar drove some of the weakness in EURUSD (-0.73%) but a Bloomberg report suggesting that the ECB was weighing a negative deposit rate was responsible for much of the drop. The Bloomberg report did not contain too much other detail and cited two anonymous ECB sources. But it does come after a lot of recent public commentary from ECB officials suggesting additional stimulus is a policy option. Talk of negative interest rates wasn’t just confined to the ECB yesterday. The Fed’s Bullard, who is considered a bit of a bellwether on the FOMC, commented that he would like to study the possibility of negative rates on reserves as an incentive to stimulate bank lending. Bullard also mentioned that a December taper was definitely on the table if we get a strong November jobs report.

Turning to Asia, this month’s global flash PMIs have gotten off to a softer start following a weaker-than-expected Chinese HSBC manufacturing PMI (50.4 vs 50.8). It’s the first month-on-month drop in the China HSBC PMI in five months but the running three-month average 50.5 is still the highest level since April 2013. Though most Asian equities have reacted negatively to the PMI, Japanese equities are outperforming today (Nikkei +1.6%) after a Japanese government panel recommended that the country’s $1.2trillion Government Pension Investment Fund should diversify its portfolio to more aggressive investments. USDJPY is up 0.4% today. The Bank of Japan policy meeting was pretty much in line with market expectations and the Nikkei and USDJPY were unchanged following the announcement.

Looking at the day ahead, flash Euroarea PMIs will be setting the tone early today. Consensus is expecting a small pickup in both manufacturing and service PMIs including in France where there has been some concern of late. Merkel and Draghi will be speaking in Berlin at a conference. Draghi’s speech is titled. “Strategies for more growth”. The US data calendar features initial jobless claims, PPI and the Philly Fed survey. Elsewhere the Senate Banking Committee has scheduled a vote today on the nomination of Janet Yellen to be the next Fed chair. Democrats hold a two-vote lead on the 22-member committee. The Fed’s Bullard speaks again today, together with Lacker and Powell.

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Yesterday when a “source” released a rumor about a possible -0.1% European deposite rate, we had a quick assessment.

30-60 minutes until ECB sources denies everything

— zerohedge (@zerohedge) November 20, 2013

We were a little off on the timing, but once again spot on in principle, and moments ago Mario Draghi just said that negative rates were discussed in the last policy meeting and there was no news since then, that a rate cut has raised “some concers” and that certainly one should not infer negative rates. In other words, just like in May speculation is one thing, enactment of NIRP – something totally different. And just like that our other assessment of yesterday’s “leak” was also confirmed:

This is what is called a “rumor-based” market test

— zerohedge (@zerohedge) November 20, 2013

And so now the ECB knows that the most it can get out of the EUR on a NIRP rumor is about 100-150 pips.

Finally, as we observed in “An ECB Negative Deposit Rate? Don’t Hold Your Breath, Says Citi“, this is just what Citi also warned. Some of Draghi’s other comments:

• DRAGHI SAYS DON’T TRY TO INFER NEGATIVE DEPOSIT RATES
• DRAGHI SAYS HE IS AWARE RATE CUT HAS RAISED SOME CONCERNS
• DRAGHI SAYS ONE CONCERN IS EFFECT OF RATE CUT ON SOME COUNTRIES
• RATE CUT WAS AMID SUSTAINED DOWNWARD DRIFT IN INFLATION
• DRAGHI SAYS GRADUAL DISINFLATION HAS BEEN BROAD BASED
• DRAGHI: EURO AREA MAY HAVE PROLONGED PERIOD OF LOW INFLATION
• DRAGHI: RATE CUT WASN’T BECAUSE ECB SEES DEFLATION RISK

As expected, the EUR pairs surge. Which means we are back to using the “ECB does QE” rumor as the default “forward daily guidance” on the EURUSD and EURJPY closing price.

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When the US shutdown sent shivers and ripples through the financial markets in October with the fear that the federal government would end up defaulting on the repayment of its debts, the banks decided to set up contingency plans.

It turns out that JP Morgan and other banks decided that in the event of the default on payment then the bank would stand as guarantor to the federal government and end up forking out $5 billion so that its customers would not be at a loss. There are therefore two questions that arise immediately with this statement. First of all just how far can we believe what the banks are telling us and secondly shouldn’t we have let them dig deep into their pockets and pay some of the money back that they have been given since the financial crisis and are still getting to line their vaults from the state even today?

Playing Games

It has been reported that JP Morgan spent $100 million on contingency plans to deal with the growing crisis over the US budget and the federal government shutdown that ended on October 17th 2013. That’s just one of many banks that had $100 million to spend on the updating of computer systems that were intended to deal with fiscal emergencies. Consultants were taken on to create scenarios and hypothetical models to see how the markets would react and how they would deal with it.

They were playing games in the boardrooms, while the people were out of work for 16 days. They were playing at toy soldiers while the federal government was closed and reduced to essential departments and the policymakers and the politicians were chin-wagging over whether they could pass the budget or not and allow the Tea Party to gain a foothold on US politics (although the Tea Party is losing popularity in the US and has dropped since 2010). It comes to something when people are paid to squander money. They have far too much those banksters to know what to do with.

Still, one saving grace is that they will be able to put it to use again on January 15th when government spending comes to an end, unless it gets another green light from Congress. They will have a second shot too on February 7thwhen the easing of the enforcement of the debt limit will also be over in the US. Or probably, the banks will have to spend $100 million apiece again, because the data will be out of date by then and the parameters, coefficients and calculations will no longer hold.

The Right Thing to Do

Chief Executive of JP Morgan Chase & Co Jamie Damon stated “we’re going to fund. It’s the right thing to do”. The right thing to do? Since when did the banks in the US or in any other country do the right thing? Please! Pray do tell!

Are we to believe that the banks have turned over a new leaf and become morally unquestionable? Have the banks decided to do the ‘right thing’ because it’s good for society, or because they will get the benefit of doing so? I can’t see any bank anywhere in the world doing social-charity stunts for the public and the federal government. If they have paid out millions in contingency plans, then their hope is obviously that if they prop up the state, they will be able to demand a higher return on that investment and get ten times their money back through charging interest.

Calculations put the amount of money that JP Morgan would have had to pay out at roughly $5 billion per month. Of course that would be an advance on the federal government and so the latter would have to reimburse the sum plus interest. The US citizens that were being propped up would have nothing more than an advance (with interest because it boils down to a loan) on their salaries that had been cut by the federal government. That means that banks like JP Morgan would be earning on their investment twice. Of course that’s the right thing to do. John Pierpont would be proud of you! It’s hardly suprising that the banks were apparently on the phone every day to the federal government and despite the fact that the conversation was very one-sided, they were begging to negotiate around a table over who would get the best pickings of the US shutdown. It’s surprising that in a country that has no money left, the banks still have tons of it stockpiled somewhere ready to be used when the state collapses (if it hasn’t already).

Economists and bankers have never in the past been able to adequately prepare for the way the markets might react. They rarely see anything coming even when it’s standing there on the doorstep knocking on the door. If the markets were that easy to predict, we would all be rich, wouldn’t we?

October’s fight over the budget (which had nothing to do with the budget and everything to do with politics) is the third fight in the past two years in the US. Back in 2011, the US got downgraded by Standard & Poor’s. Then in 2013 the US budget sequestration took place, with automatic spending cuts (with cuts taking place from 2014 until 2021).

The October fisticuffs between the Republicans and the Democrats was the third one. Third time lucky? Maybe the fourth time lucky; roll on January! Maybe it should have been time for the banks to bail US out for once!

Originally posted: Banks: The Right Thing to Do

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