Not An Algo Is Stirring Ahead Of The ECB’s Announcement

In today’s abnormally quiet overnight session one could hear a pin, and certainly the USDJPY, drop: with everyone focusing on the ECB announcement in one hour, not a single algo is willing to make any big moves, or even start some momentum ignition, ahead of Draghi’s announcement, which absent launching full scale QE, which it won’t, will be a disappointment which means the EUR will ultimately move higher after a kneejerk lower as the market forces Super Mario to do even more next time. As Bloomberg adds, a cut in refi and deposit rates is fully priced in and latest price action suggests investors brace for     disappointment if ECB stops short of signaling asset purchases or other liquidity measures to combat deflation.

The overnight USDJPY trading team did its job and bought yen consistently during the Japanese session, as a result the Nikkei closed just barely green while the Topix ended its 10-Day rally. Also halting a rally was the 10 Year which in the past few days experienced the longest and sharpest consecutive days of selling in many months. However, with shorts having reloaded it is only a matter of time before the covering rally resumes.

European shares little changed with the construction and insurance sectors outperforming and financial services, real estate underperforming ahead of ECB and BOE interest rate decisions. The Italian and Spanish markets are the best-performing larger bourses, Swedish the worst. The euro is stronger against the dollar. Greek 10yr bond yields fall; Irish yields decline. Commodities decline, with WTI crude, Brent crude underperforming and natural gas outperforming.

Chinese equity markets recovered some of their manufacturing PMI-inspired losses overnight, with the Shanghai Composite (+0.8%) closing in the green, assisted some-what by services (50.7 vs. Prev. 51.4) and composite PMIs (50.2 vs. Prev. 49.5) from China, which continue to show modest economic growth in the country. Elsewhere, the Nikkei 225 managed to hold the 15,000 level in a directionless session, eventually finishing up just 0.08%.

U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Challenger job cuts, household change in net worth due later.

  • S&P 500 futures little changed at 1925.2
  • Stoxx 600 little changed at 343.7
  • US 10Yr yield down 2bps to 2.58%
  • German 10Yr yield little changed at 1.44%
  • MSCI Asia Pacific up 0.1% to 143
  • Gold spot up 0.1% to $1244.7/oz


Chinese equity markets recovered some of their manufacturing PMI-inspired losses overnight, with the Shanghai Composite (+0.8%) closing in the green, assisted some-what by services (50.7 vs. Prev. 51.4) and composite PMIs (50.2 vs. Prev. 49.5) from China, which continue to show modest economic growth in the country. Elsewhere, the Nikkei 225 managed to hold the 15,000 level in a directionless session, eventually finishing up just 0.08%.


Euribor curve bull flattened this morning and EONIA fwds came under modest selling pressure, as market participants positioned for the upcoming ECB policy decision. At the same time, having gapped higher at the open, Bunds erased the opening gains as supply from Spain and France was successfully absorbed in thin trade ahead of the 1245BST/0645CDT announcement.


M&A news continue to swing single stocks, with FTSE-100 listed Smith & Nephew (SN/ LN) surging today after reports that Medtronic could be looking to acquire the company in order to benefit from the tax inversion process. Nonetheless, the FTSE-100 underperforms, weighed on by retail stocks Next (NXT LN) and Associated British Foods (ABF LN) – owners of bargain clothing range Primark – after retailer ASOS (ASC LN) issued a stark profit warning, wiping over USD 3bln from their market capitalisation. Ahead of the ECB rate decision, utilities are the best performing sector on the hopes that high-dividend paying stocks will surge on the back of any ECB asset-purchases or prospective liquidity measures.


EUR trades slightly firmer against most others, with the 1.36 handle providing modest support, however reading too much into the morning’s trend could prove unwise given the thin volumes ahead of the ECB rate decision later today. Elsewhere, NZD/USD surged higher following a note from Westpac on next week’s RBNZ rate decision, suggesting a move toward more hawkish tones from the central bank. AUD/USD initially tumbled after Australian trade balance unexpectedly printing a deficit before bouncing back following the Chinese HSBC Services PMI data.


In the metals complex, Platinum continues to underperform as it has done throughout the week, despite reports Platinum producers have asked for more time to consider the proposal before government brokered talks resume today, while gold has traded sideways throughout the session. While WTI and Brent crude futures both trade softer alongside precious metals

US President Obama has suspended all sanctions against Iranian oil imports for a period of six months as the Iranian government adhere with Western demands on their nuclear weapons programme. (PTI) Despite P5+1 group’s limits on Iranian oil sales, Iran have actually exceeded their sanctioned oil export levels routinely since the beginning of the year.

* * *

Deutsche’s Jim Reid completes the overnight recap

6 years and 10 months after the ECB embarked on their first major intervention in financial markets, today is likely to see the next major policy announcement and one that is unlikely to be their last. It’s a reflection of just how stressed underlying economies still are that the three largest DM central banks (the Fed, ECB and the BoJ) are still engaging in unconventional policy to varying degrees over 7 years on from the first major issues with sub-prime. Even zero is not necessarily enough with the ECB likely to go into negative territory with deposit rates today.

Looking back, in August ’07 the ECB injected €170bn into markets after money markets had seized up as banks basically refused to lend to each other. The point of today’s intervention must surely be more directed at the underlying economy. However there will be many (including us) that would say that the ECB’s success will likely depend on how much they can push the Euro lower. Will today be enough? Probably not on its own but for us one the most important take-away from today’s meeting is how much Draghi leaves the door open for more action (in particular QE) in the months ahead. So all eyes  on the press conference after the announcement.

For the record, DB’s Mark Wall & Gilles Moec expect a “package” of policy easing today (for full report refer to weighty expectations dated 31 May). The easier options for the ECB are extending full allotment, cutting the refi rate and ending SMP sterilization. Given Draghi & Co’s recent tone, Wall & Moec  think the Council will go further and in addition implement a negative deposit rate and a targeted LTRO. The policy they expect the ECB to most pin its hopes on to impress the markets is the targeted LTRO. They expect a modest, SME loanoriented LTRO. In terms of the wider market, Bloomberg median consensus is for the refi rate to be cut by 15bp (to 0.1%) and the deposit facility rate to be cut 10bp (to -0.1%). CNBC surveyed 30 market participants, including economists, strategists and fund managers, and found that 65% of them expect the ECB to take at least one of three substantial actions: lowering the refinance rate, cutting the deposit rate or announcing a long-term refinance operation or LTRO. About half of the respondents expect two of those three actions to be announced and a quarter think all three will happen. Aside from these policy options, there have also been reports of other policy tools such as a BOE-like Funding for Lending Scheme and an easing of asset backed securitisation rules.

Indeed given the number of policy options at hand, our fixed income strategist Abhishek Singhania points out that it’s very hard to judge what constitutes over/under delivery from the ECB. Nevertheless Abhishek notes that a 10bp cut to each of the main policy rates appears to be the market consensus and is fully priced-in at this point. A 15bp cut would be the ECB over-delivering while anything less than 10bp would be a case of underdelivery. In terms of forward guidance, the ECB could emphasise that there is no floor to the deposit facility rate. The other area of focus is in regards to LTROs where overdelivery could be defined as the central bank offering funding at longer maturities (3yr+), at a capped rate with very little conditionality in terms of either size or collateral use.

Turning to Asian markets, a relatively subdued overnight session ahead of today’s risk events with some profit taking in Japanese equities (-0.3%), and similar sized losses on the KOSPI (-0.5%) and ASX200 (-0.3%). The Chinese HSBC services PMI printed at a four month low of 50.7 (prev 51.4) suggesting that growth momentum remains fairly patchy despite the better official manufacturing PMI released on the weekend. While on the topic of China, a quick update on the story we mentioned in yesterday’s EMR about the investigation regarding missing commodity inventory at the port of Qingdao.

South Africa-based Standard Bank said it was “working with local authorities” to investigate potential irregularities at China’s third-largest port.  Meanwhile, global commodities trader Louis Dreyfus also said that it was assessing the impact of the investigation on one of its units (Reuters). As background, authorities are investigating whether commodity inventory at the port had been pledged multiple times to different banks in order to raise financing. It’s uncertain whether this could result in banks being more cautious in giving trade finance to merchants or if it may result in diminished demand for commodity imports. London copper has fallen 2.4% in the past two days. In Australia, the AUD has seen some volatility but is still trading around 0.1% higher following a miss on the April trade report (-$122n deficit vs surplus of $510m expected).

Coming back to Wednesday, the S&P500 (+0.19%) managed to notch up another record high but they started on a downbeat tone after the ADP employment miss. ADP employment for May rose +179k (vs +210k expected) after the prior month was revised down -5k to +215k. In the details, small and medium sized business hiring increased by 143k compared to 158k previously, while large businesses added 37k jobs in the month, versus 56k previously. DB have kept their +200k forecast for payrolls and it seems that Street forecasts for payrolls have barely budged either post ADP. Treasury yields also dipped to a low of 2.56% following the data, but the upward trend resumed shortly afterwards, helped along by the better than expected US nonmanufacturing ISM. The non-manufacturing ISM for May printed at 56.3 (vs 55.5 consensus). DB’s economists noted that various subcomponents of the index performed well including business activity (62.1 vs. 60.9) which rose to the highest level since February 2011 (63.3). Similarly, new orders (60.5 vs. 58.2) were the highest since January 2011 (61.2), while the employment sub-component also rose (52.4 vs. 51.3). The latter probably partly explains why we haven’t seen more material revisions to Friday’s payrolls estimates. The US trade balance saw the deficit widen in April to a two-year high of USD 47.2bn (vs – USD40.8bn expected) which might weigh on Q2 GDP estimates. The Fed Beige book highlighted that economic activity expanded in all 12 districts at a “moderate” pace (7 districts) and “modest” pace (5 districts). With inflation, some districts noted high or rising prices for commodities, construction materials, energy and precious metals. However, in aggregate, price pressures remained “contained”.

Looking at the performance of US retail (+0.45%), basic materials (+0.32%) and financial (+0.31%) stocks, there was a noticeable growth tone to the price action yesterday. The positive sentiment was also helped along by the ongoing M&A theme which continues to make headlines. Indeed, this morningBloomberg is reporting that Sprint Corp is nearing an agreement for the acquisition of T-Mobile Inc at a price which would value that latter’s equity at about $31bn. Overall M&A volumes are still very robust, running at +75% y/y but we would highlight that other indicators of excessiveness are still reasonable by historical standards. For example, deal price premiums for Q2 are around 20% at the moment, versus an average over the last four quarters of 24% (Bloomberg). The WSJ also writes today that withdrawn M&A bids have reached $300bn so far in 2014, which represents a third of all completed transactions. The biggest withdrawn bid this year was Pfizer’s $122bn failed takeover of AstraZeneca.

Turning to the day ahead, France publishes its latest unemployment report followed by German factory orders (0700 LDN). Euroarea retail sales come at 10am. The Bank of England policy announcement is at 12noon. The ECB announces its policy rates at 1245 LDN and as usual Draghi’s press conference follows 45 minutes afterwards. It’s also worth watching out for the Governing Council’s latest macroeconomic forecasts should come out today as well. With all the events in Europe, thankfully it’s a relatively quiet day on the US calendar with weekly jobless claims and the Fed’s Kocherlakota speaking in Boston towards the market close. Also in the UK today, voters go to the polls in a by-election in the town of Newark where it will be interesting to see  whether UKIP’s momentum continues or fades post their recent European election gains.

via Zero Hedge Tyler Durden

ECB Decision-Day Guide (In 5 Simple Questions)

As we have heard numerous times this year already, tomorrow may be ‘another’ most important day of the year/cycle as Mario Draghi and his band of merry men at the ECB appear to be finally cornered (by market exuberance, macro weakness, and excess positioning) into “doing” something as opposed to just talking about it. While we have discussed the ins and outs of the potential for a small focused ABS bailout QE, negative rates, and why whatever Draghi does tomorrow will have minimal impact on the real economy; Bloomberg provides a quick and easy guide to the five things to watch for from Mario Draghi tomorrow


Draghi is desperate to avoid a Japan-style lost decade or two…


Via Bloomberg’s Alessandro Speciale,

1. Which interest rates will Draghi cut, and how far?

While all but two of 60 economists surveyed by Bloomberg News predict a cut in the main refinancing rate from the current record-low 0.25 percent, they’re divided over the size of the reduction. Twenty one economists predict the ECB will lower its benchmark by 10 basis points to 0.15 percent; 34 analysts forecast a cut by 15 basis points to 0.10 percent. Three expect the rate to fall even further.

The majority of economists in a separate survey predict the ECB will become the first major central bank to introduce a negative deposit rate, with 32 of 50 analysts saying the rate will be cut to minus 0.10 percent and 12 forecasting a reduction to minus 0.15 percent. Such a move would weaken the euro, which has appreciated 4 percent against the dollar in the past 12 months. Only six economists see the ECB keeping the deposit rate at zero.

2. Which non-standard measures is Draghi debating?

Policy makers are contemplating a package of measures, and analysts from Goldman Sachs Group Inc. to Nomura International Plc expect a rate cut to be complemented by tools aimed at reigniting credit supply. “The combined use of several monetary-policy instruments is conceivable,” Executive Board member Peter Praet said in an interview with Die Zeit.

Longer-term loans to banks conditional on increased lending to companies may take center stage, with a program modeled on the Bank of England’s Funding for Lending Scheme being one option officials have discussed. Other measures up for debate include the suspension of sterilizing crisis-era bond purchases, changes in reserve requirements and collateral policy and an extension of the fixed-rate, full-allotment regime currently scheduled to be in place until July 2015, under which banks can borrow as much cash as they like against eligible collateral.

3. How serious is the threat of deflation in the euro area?

Inflation, which the ECB aims to keep just under 2 percent, has remained below 1 percent since October and slowed to 0.5 percent last month. In March, the ECB predicted it won’t return toward its goal until the end of 2016. Draghi is set to unveil new staff projections on prices, growth and unemployment that may force the ECB further into uncharted territory.

4. What can the ECB do later in the year if the situation worsens?

Draghi said on April 24 that large-scale asset purchases would be justified if the medium-term outlook for inflation worsens. Any program would target a mix of assets to reduce “term premia across markets and jurisdictions,” Executive Board member Benoit Coeure said on April 13.

The ECB and Bank of England have called on regulators to ease rules on asset-backed securities in Europe. That would provide a broader range of funding options for companies and create assets the ECB could buy to supply liquidity.

5. What else is on the ECB’s agenda?

Draghi may be quizzed on the progress the ECB has made on minutes. Officials started drafting trial versions earlier this year and are debating a reduction in the frequency of rate-setting meetings once they start publishing the accounts.

Developments in the ECB’s comprehensive assessment of the banking system may also be a topic in the press conference, in particular in how it may take account of rising legal costs after U.S. authorities threatened to levy a $10 billion dollar fine on BNP Paribas SA for breaching trade sanctions. In addition, the place of Dexia SA, the bailed-out French-Belgian lender, in the Comprehensive Assessment may be raised, after the ECB supervisors decided to exempt it from a stress test.

*  *  *

And so while they are the key five questions… here is what the world is hoping for / expecting…


Better not disappoint Mr. Draghi

via Zero Hedge Tyler Durden

Guest Post: Afghanistan – Obama’s War

Submitted by Steve Hanke, Professor of Applied Economics at The Johns Hopkins University,

Last week, when President Obama made his trip to Bagram Air Base in Afghanistan, he claimed that “America’s war in Afghanistan will come to a responsible end.” This turned out to be the greatest applause line of his speech. With his assertion, Obama, in effect, declared himself the hero of the Afghan war — the one who put an end to that nightmare. But what Obama failed to mention was that it was his war, and that nothing but unattractive scenarios lie ahead for that war-torn state. Indeed, Afghanistan might just continue to hold down its ranking as the most violent country in the Global Peace Index.

This gloomy prognosis would not have surprised Thomas Jefferson. Yes, Jefferson’s words point to a fundamental truth, “Governments constantly choose between telling lies and fighting wars, with the end result always being the same. One will always lead to the other.”

Graciana del Castillo, one of the world’s leading experts on failed states, has just written a most edifying book on the Afghan war (Guilty Party: The International Community in Afghanistan. Xlibris, 2014). Del Castillo’s book allows us to finally understand just what a fiasco the Afghan war has been.

Why is Afghanistan, as Bob Woodward correctly termed it, Obama’s war? Del Castillo’s sharp pencil work shows that during the period 2002-2013, $650 billion have been appropriated for the Afghan war effort, and a whopping $487.5 billion of that (or 75 percent) took place after President Obama took office (see accompanying chart).

If one pulls apart that $650 billion price tag, a variety of interesting sleights-of-hand emerge. For example, about $70 billion was disbursed to what is euphemistically termed “reconstruction.” But, in reality, 60 percent of this $70 billion (or $42 billion) was actually spent on beefing up the Afghan National Security Forces. And not surprisingly, 75 percent of the $42 billion spent on national security forces was spent under President Obama’s watchful eye.

To put these outsized numbers into perspective, just consider that the total cost of the Afghan war from 2002-2013 amounts to $7089 per American taxpayer (based on the number of income tax returns). More revealing is the fact that the annual expenditure rate under the Bush administration was already $222 per taxpayer. Then, it exploded to an annual expenditure rate of $1329 per taxpayer under President Obama.

In addition to laying out the phenomenal spending magnitudes on President Obama’s watch, del Castillo demonstrates just how unsustainable all this Afghan spending is. For example, in 2013, the United States financed over $5 billion of the $6.5 billion needed to field the Afghan National Security Forces. This $5 billion of U.S. financing was roughly 10 times more than the Afghan government actually spent from its own revenue sources. In fact, the U.S. funding of Afghan forces was almost three times the total revenue collected by the Afghan government.

To put Afghanistan’s financing gap into perspective, the Afghan government estimates the total fiscal deficiency that they will face over the next decade would amount to a whopping $120 billion. Considering that a July 2013 Washington Post/ABC poll showed that only 28 percent of Americans say the war in Afghanistan has been worth the cost, it is unlikely that the U.S. would even contemplate continuing to finance the house of cards it has built at anything close to these estimates.

And if this isn’t bad enough, consider that the countryside has been forgotten and neglected during the war years. It is here where 75-80 percent of the population resides, and produces its livelihood. The rural population has done what is only natural — farm a cash crop. And, the most attractive cash crop in Afghanistan is poppies. Not surprisingly, the poppy plantations have greatly expanded, from 75,000 hectares in 2002 (near the start of the war), to over 210 thousand in 2013, surpassing the previous peak of 190 thousand hectares in 2007. Just another small example of the collateral damage associated with war and misguided economic policies in Afghanistan.

via Zero Hedge Tyler Durden

China Composite PMI Employment Drops At Fastest Pace Since Feb 2009

After last weekend’s schizophrenic expanding (official) / contracting (HSBC) Manufacturing PMI, China’s Services PMI printed at 50.7 – its lowest since August 2011, as the business expectations index dropped to an 11-month low. The Composite PMI improved (after 3 months of contraction) but most notably, the composite employment declines at the fastest pace since Feb 2009. What is perhaps most worrisome is, as Markit notes, The latest survey signalled the second-weakest degree of optimism since the series began in November 2005.”



As HSBC/Markit notes,

Subdued client demand and an uncertain economic outlook weighed on service sector confidence towards the 12-month business outlook in May.


The latest survey signalled the second-weakest degree of optimism since the series began in November 2005.



“The headline HSBC China Services PMI moderated to 50.7 in May, down from 51.4 in April. Latest data signalled a relatively big drop in the business expectations index, which fell to an 11-month low of 58.1, down from 60.7 in April. Both the new business and outstanding business indices were slightly weaker than April. The employment index, unchanged over the month, remained at a relatively low level. Coming after the stronger Manufacturing PMI reading for May, the slight disappointment in the headline Services PMI suggests that growth momentum remains slow and private sector sentiment is weak.


We think policy makers should continue to ease monetary and fiscal policies in the coming months to help support growth.”

via Zero Hedge Tyler Durden

China-Vietnam Conflict in The South China Sea

By EconMatters


China is on a roll upsetting neighbors from all directions in its aggressive stance towards territorial claims. 


East China Sea

In the East China Sea, tension and hostility from the row with Japan over a group of uninhabited islands, (known as Diaoyu in China, Senkaku in Japan, Diaoyutai in Taiwan) has dialed up:         

  • Last November, China created a new air-defense identification zone to include Diaoyu, and would require any aircraft in the zone to comply with rules set by Beijing. 
  • In May 2014, Tokyo reportedly is planning to set up 3 military outposts near the islands to boost Japan’s defense of ‘its outlying islands’.   
  • A close call to blows about two weeks ago when China scrambled four fighter jets to deter Japanese aircrafts in the disputed water where China just carried out joint maritime exercises with Russia.  

South China Sea

Tension has been rising in the South China Sea since May 1 after China’s state oil company CNOOC mobilized a deepwater semi-sub rig HD-981 drilling near the Paracel Islands (known to China and Taiwan as the Xisha Islands), close to the Vietnam coastline and also claimed by Vietnam.  In response, Vietnam dispatched some 40-vessel coast guard fleet to the rig location, but only to be outgunned and outnumbered by China’s fleet of some 60 vessels (including Navy warships, and fishing boats) and fighter jets escorting the $1-billion rig.  According to Vietnam, China has since upped the fleet around the rig to 90 vessels    


That big oil rig has sparked anti-China protests and riots in Vietnam.  China had to send ships to evacuate Chinese workers after some Chinese nationals were killed, and 400+ Chinese factories were burnt down during the riot.


Reportedly, China Oilfield Services Ltd., a unit of CNOOC operating the deep-water rig, already mobilized the rig last week about 20 nautical miles to the east, but drilling exploration was expected to continue until mid-August.  Hanoi said the rig still remains in Vietnam’s exclusive economic zone as defined by the United Nations.  While the rig is still sitting right in Hanoi’s face, the latest drama came this Tuesday after the two navies almost came to blows beyond water cannons.  


Separately, China is also has disputes with the Philippines which claims part of the Spratly Islands in the region.  Malaysia, Brunei and Taiwan all claiming parts of the South China Sea are also rejecting China’s claim. 


China ‘9-dash Line’ for Decades

Citing 2,000 years of history where the Paracel (and Spratly island chains) were regarded as integral parts of the Chinese nation, China has for decades claimed a U-shaped ‘9-dash line’ of the South China Sea (see graph below).  This is nothing new and has long been disputed and protested by the neighboring countries including Vietnam, Philippines, Malaysia, and Brunei.  ( Taiwan , which considers itself the only legitimate democratic government of China, has a similar claim to Beijing’s.) 


Map Source: WSJ

Potential Rich Oil and Gas Deposits

Everything got much more intense after it was discovered that the South China Sea (as well as the East China Sea) could have rich oil and gas deposits.  This is part of the reason for the U.S. involvement and energy-hungry China flexing its new and improved maritime and economic muscle to assert and defend its claims and sovereign rights as perceived by Beijing.   


U.S. Butting In 

The U.S. even though officially indicated not taking a position on these territorial disputes, but as Obama re-pivots to Asia to counter-balance China’s increasing influence in the region, countries like Vietnam, Philippines and Japan are looking to the U.S. to essentially back them up when push comes to shove going against China. 


To put it another way, when you look at the map comparing the size of Vietnam or even Japan, for example, to China, before even taking into account the respective GDP size, trade volume and relations, what do you think has bolstered the ‘confidence’ of Vietnam and Japan to confront China in such assertive manner, including allowing the anti-China riot to take place?  Remember, Vietnam is a communist country similar to China in that public demonstration does not ever occur without official sanctions.  The same behind-the-scene U.S. support is also evident in the case of the China-Japan island row in the East China Sea


China, Vietnam, Philippines in International Mediation

Vietnam is now preparing to sue China in an international court, while the Philippines say it will take China to a UN tribunal.   Nevertheless, experts believe the attempts by Philippines and Vietnam to pursue China via international mediation would be futile as China would not be obliged to abide by the ruling.    


U.S. Re-pivoting China To Russia

With the U.S. eager to demonstrate goodwill gesture and support to the region, the re-pivoting to Asia campaign by the U.S. is actually re-pivoting China towards Russia.  China and Russia just completed a joint naval exercise last month where both Putin and Xi Jinping attended the opening ceremony.  According to Taiwan media, as part of the exercise, China and Russia exchanged closely-guarded military and communication system intelligence which signals an unprecedented level of cooperation between the two.  Furthermore, in exchange for signing the $400Bn and 30-year gas deal, China will be gaining some much needed invaluable top military technology know-how’s from Russia.        


China Calling Obama’s Bluff

Territorial disputes (land or sea) among Asian countries are as old as history itself.  Countries usually worked things out eventually or keep status quo.  The situation in the East and South China Sea would not have escalated to the current state without U.S. trying to play all sides. 


China is basically calling Obama’s bluff that the U.S. will not be able to walk the talk.  Frankly, it’d be very imprudent of U.S. to really go against China by taking side in these regional squabbles and risks China and Russia re-acquainting into BFFs again.  


CNOOC Chairman Wang Yilin once said, 

“Large-scale deep-water rigs are our mobile national territory and a strategic weapon”.  

So China is unlikely to show weakness losing face in front of the international community, while it is too late in the game for Vietnam or even the U.S. to back out of the situation, even if they want to. Since Vietnam spent $714 million last year on Russian military kit, it’d also be interesting to see Russia’s reaction to the new ties between Vietnam and U.S. 


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via Zero Hedge EconMatters

How The West Spies On The Middle East: The Location Of The GCHQ’s Top Secret Internet Spy Base Revealed

It has been a year since the first of many Edward Snowden’s groundbreaking revelations (which promptly relegated yet another conspiracy theory into the compost heap of conspiracy facts) exposing not only the ubiquitous tentacles of the NSA, and its UK-equivalent, the GCHQ, but the incestuous relationships between the government’s spy agencies, its pervasive snooping reaching as far as Angela Merkel’s cell phone (which is finally the subject of a formal inquiry), and its (well-paid) contractors in the private sector: the bulk of the world’s largest telecom and internet companies, not to mention the makers of your favorite handheld spy smartgizmo.

And yet until yesterday, a piece of the puzzle was missing: not because it did not exist, but because certain of Snowden’s preferred outlets had refused to reveal it. That piece, as Duncan Campbell of The Register (incidentally Campbell has been breaking exclusives for more than three decades: he was the first journalist to reveal the existence of GCHQ in 1976) revealed yesterday, is the GCHQ’s (and thus indirectly the NSA’s) top secret middle eastern Internet spy base located in Seeb, Oman (officially known as Oman Comms Link Site 1), smack in the middle of the middle east, located southwest of the Straits of Hormuz, and in close proximity to America’s closest petroleum-exporting “friends”: Kuwait, Saudi Arabia, and the United Arab Emirates.

According to the Register, “the secret British spy base is part of a programme codenamed “CIRCUIT” and also referred to as Overseas Processing Centre 1 (OPC-1). It is located at Seeb, on the northern coast of Oman, where it taps in to various undersea cables passing through the Strait of Hormuz into the Persian/Arabian Gulf. Seeb is one of a three site GCHQ network in Oman, at locations codenamed “TIMPANI”, “GUITAR” and “CLARINET”. TIMPANI, near the Strait of Hormuz, can monitor Iraqi communications. CLARINET, in the south of Oman, is strategically close to Yemen.”

Wired further adds that the whole operation was referred to as Circuit and the Overseas Processing Centre 1 (OPC-1), and Seeb is just one of three bases extracting communications data from the cables going from the Strait of Hormuz (between the United Arab Emirates and Iran) into the Persian/Arabian Gulf in the heart of the Middle East. These access points, he says, are classified three levels above Top Secret and referred to as Strap 3. Campbell alleges the Timpani base is well-placed to monitor Iraqi communications, while Clarinet in the south is well positioned for Yemen. The location of the third base Guitar, was not given.

What was unsaid is that in addition to Iraq and Yemen, the bases most certainly are able to closely supervise America’s petroleum exporting allies.

An aerial photo of the base is shown below:


And here is an interactive map via Google:


The reason why we learn about this base only now is that according to Campbell, as summarized by Wired, attempts to publish this type of material before, is something he says were met with “a wave of threats and intimidation; threats of injunctions”, culminating — in the case of the Guardian — with the destruction of the Snowden hard drives, “when it was well understood it existed in at least three major cities around the world”. After the Guardian withheld the additional details about the base, the pressure was off and there was no impending punishment for publishing “Strap 1” level security data.

Here is what Campbell had to reveal about Seeb?

The secret overseas internet monitoring centre, codenamed CIRCUIT, is at Seeb in the state of Oman. It is the latest of a series of secret collaborations with the autocratic Middle Eastern state, which has been ruled for 44 years by Sultan Qaboos bin Said, installed as head of state in a British-led and SAS-supported coup against his father. The Seeb centre was originally built in collaboration with the Omani government to monitor civil communications satellites orbiting above the Middle East. It has six large satellite dishes, forming part of the well-known and long running “ECHELON” intercept system run by the “Five Eyes” English-speaking (US/UK/Australia/Canada/New Zealand) intelligence agencies.



When GCHQ obtained government approval in 2009 to go ahead with its “Mastering the Internet” project, the Seeb base became the first of its global network of Internet tapping locations. Another centre, OPC-2, has been planned, according to documents leaked by Snowden.


The CIRCUIT installation at Seeb is regarded as particularly valuable by the British and Americans because it has direct access to nine submarine cables passing through the Gulf and entering the Red Sea. All of the messages and data passed back and forth on the cables is copied into giant computer storage “buffers”, and then sifted for data of special interest.

The reason we are learning about this just now:

Information about Project TEMPORA and the Seeb facility was contained in 58,000 GCHQ documents which Snowden downloaded during 2012. Many of them came from an internal Wikipedia style information site called GC-Wiki. GCHQ feared the political consequences of revelations about its spying partners other than the United States and English speaking nations, according to knowledgeable sources.


It was this which lay behind the British government’s successful-until-today efforts to silence the Guardian and the rest of the media on the ultra-classified, beyond Top Secret specifics of Project TEMPORA – the places and names behind the codewords CIRCUIT, TIMPANI, CLARINET, REMEDY and GERONTIC.

Well now we know. And now the Saudis and the Emirs know that we know. Will this change anything in the US relations with the friendly and not so friendly nations in the region. No.

But a bigger question is just how did Campbell get these files: if only Snowden had access to them originally, and he only provided his data dump to selected outlets, of which the Guardian was the primary when it came to UK-related matters (and which was subsequently and quite violently silenced), and then the data trove followed Glenn Greenwald who Snowden picked as his mouthpiece, at the new outlet, the Intercept, then why didn’t someone post these previously? Or is there a new, even more secretive, leak within the NSA? Or, a third option: the usual suspects are no longer in control over when sensitive data gets to be disclosed and using what channels (such as the Register).

The last option is best: because these is nothing like a little competition between media outlets to get the NSA trove of data out into the public domain faster. As to whether the public will decide to do anything with said data is a different matter entirely.

via Zero Hedge Tyler Durden

It’s Not Just Europe; 16 California Counties Seek Secession From The States

Frustrated with their representation in government, residents in two of California’s northern counties are heading to the polls to decide whether they should consider seceding from the state. As Reuters reports, campaigns in both Del Norte and Tehama counties are underway to convince residents that permanently separating from California is in their best interests. As many as 16 counties in northern California could potentially join the movement, AP reports, though official secession would require approval by the state legislature as well as the US Congress. If they all decide to seek separation, the counties would make up about a quarter of California’s territory…”We have the water, forests, timber, we have the minerals. We have unspoiled agricultural land. We would be the wealthy state if we were allowed to go back and use our natural resources ourselves.”


As RT reports, residents in two of California’s northern counties are heading to the polls on Tuesday to decide whether they should consider seceding from the state.

According to Reuters, campaigns in both Del Norte and Tehama counties are underway to convince residents that permanently separating from California is in their best interests. By supporting the measures at the ballot box, supporters would be pushing local officials to continue efforts to combine parts of northern California with parts of southern Oregon into the nation’s 51st state.


The new state would be called Jefferson, as a tribute to Founding Father Thomas Jefferson, who once believed that parts of the Western United States could form a freestanding republic.


If the measures are approved, local lawmakers would join other counties and continue to try and generate momentum for secession. Already, four counties – Glenn, Modoc, Siskiyou, and Yuba – have voted to join the effort, while others are waiting for the results in Del Norte and Tehama before taking action.


As noted by the Associated Press, as many as 16 counties in northern California could potentially join the movement, though official secession would require approval by the state legislature as well as the US Congress. If they all decide to seek separation, the counties would make up about a quarter of California’s territory.


Despite their size, however, the disgruntled counties only contain a small percentage of California’s inhabitants – Del Norte, for example, is home to just 28,000 of the state’s 38 million-strong population. Fed up with the way California allocates representatives – lawmakers are delegated based on population – secession supporter and organizer Aaron Funk sees the ballot as a way forward.


“We have 11 counties up here that share one state senator,” he told the AP, noting that the greater Los Angeles area and San Francisco Bay have far more. “Essentially, we have no representation whatsoever.”

The measure faces opposition, however, from groups who worry about how Jefferson would be able to support itself financially, especially since many of its residents are poor and unemployed. California already supplies most of the funding for infrastructure and education, and most of the large swathes of land are owned by the federal government – something that would remain the same even if Jefferson were to become a state.

“We have the water, forests, timber, we have the minerals. We have unspoiled agricultural land,” added Funk to the AP. “We would be the wealthy state if we were allowed to go back and use our natural resources ourselves.”

Still, the explanations don’t add up for opposing groups in Del Norte, who fear that approving a measure that calls for secession would simply result in lawmakers using their time debating the creation of Jefferson instead of fixing real problems.

While headlines are made across the pond as the wealthier nations’ citizens seek secession from the poorer nations’ demands… (and the poorer nations’ citizens seek to leave the pressures of the richer nations’ demands) it seems the same under-current is growing in America.

via Zero Hedge Tyler Durden

America’s Insatiable Demand For More Expensive Cars, Larger Homes And Bigger Debts

Submitted by Michael Snyder of The Economic Collapse blog,

One of the things that this era of American history will be known for is conspicuous consumption.  Even though many of us won't admit it, the truth is that almost all of us want a nice vehicle and a large home.  They say that "everything is bigger in Texas", but the same could be said for the entire nation as a whole.  As you will see below, the size of the average new home has just hit a brand new record high and so has the size of the average auto loan.  In the endless quest to achieve "the American Dream", Americans are racking up bigger debts than ever before.  Unfortunately, our paychecks are not keeping up and the middle class in the United States is steadily shrinking.  The disparity between the lifestyle that society tells us that we ought to have and the size of our actual financial resources continues to grow.  This is leading to a tremendous amount of frustration among those that can't afford to buy expensive cars and large homes.

I remember the days when paying for a car over four years seemed like a massive commitment.  But now nearly a quarter of all auto loans in the U.S. are extended out for six or seven years, and those loans have gotten larger than ever

In the latest sign Americans are increasingly comfortable taking on more debt, auto buyers borrowed a record amount in the first quarter with the average monthly payment climbing to an all-time high of $474.


Not only that, buyers also continued to spread payments out over a longer period of time, with 24.8 percent of auto loans now coming with payment terms between six and seven years according to a new report from Experian Automotive.


That’s the highest percentage of 6 and 7-year loans Experian has ever recorded in a quarter.

Didn't the last financial crisis teach us about the dangers of being overextended?

During the first quarter 0f 2014, the size of the average auto loan soared to an all-time record $27,612.

But if you go back just five years ago it was just $24,174.

And because we are taking out such large auto loans that are extended out over such a long period of time, we are now holding on to our vehicles much longer.

According to CNBC, Americans now keep their vehicles for an average of six years and one month.

Ten years ago, it was just four years and two months.

My how things have changed.

And consumer credit as a whole has also reached a brand new all-time record high in the United States.

Consumer credit includes auto loans, but it doesn't include things like mortgages.  The following is how Investopedia defines consumer credit…

Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), education, boat and trailer loans but excludes debts taken out to purchase real estate or margin on investment accounts.

As you can see from the chart below, Americans were reducing their exposure to consumer credit for a little while after the last financial crisis struck, but now it is rapidly rising again at essentially the same trajectory as before…

Consumer Credit 2014

Have we learned nothing?

Meanwhile, America also seems to continue to have an insatiable demand for even larger homes.

According to Zero Hedge, the size of the average new home in the United States has just hit another brand new record high…

There was a small ray of hope just after the Lehman collapse that one of the most deplorable characteristics of US society – the relentless urge to build massive McMansions (funding questions aside) – was fading. Alas, as the Census Bureau today confirmed, that normalization in the innate desire for bigger, bigger, bigger not only did not go away but is now back with a bang.


According to just released data, both the median and average size of a new single-family home built in 2013 hit new all time highs of 2,384 and 2,598 square feet respectively.


And while it is known that in absolute number terms the total number of new home sales is still a fraction of what it was before the crisis, the one strata of new home sales which appears to not only not have been impacted but is openly flourishing once more, are the same McMansions which cater to the New Normal uberwealthy (which incidentally are the same as the Old Normal uberwealthy, only wealthier) and which for many symbolize America’s unbridled greed for mega housing no matter the cost.

There is certainly nothing wrong with having a large home.

But if people are overextending themselves financially, that is when it becomes a major problem.

Just remember what happened back in 2007.

And just like prior to the last financial crisis, Americans are treating their homes like piggy banks once again.  Home equity lines of credit are up 8 percent over the past 12 months, and homeowners are increasingly being encouraged to put their homes at risk to fund their excessive lifestyles.

But there has been one big change that we have seen since the last financial crisis.

Lending standards have gotten a lot tougher, and many younger adults find that they are not able to buy homes even though they would really like to.  Stifled by absolutely suffocating levels of student loan debt, many of these young adults are putting off purchasing a home indefinitely.  The following is an excerpt from a recent CNN article about this phenomenon…

The Millennial generation is great at many things: texting, social media, selfies. But buying a home? Not so much.


Just 36% of Americans under the age of 35 own a home, according to the Census Bureau. That’s down from 42% in 2007 and the lowest level since 1982, when the agency began tracking homeownership by age.


It’s not all their fault. Millennials want to buy homes — 90% prefer owning over renting, according to a recent survey from Fannie Mae.

But student loan debt, tight lending standards and stiff competition have made it next to impossible for many of these younger Americans to make the leap.

This is one of the primary reasons why homeownership in America is declining.

A lot of young adults would love to buy a home, but they are already financially crippled from the very start of their adult lives by student loan debt.  In fact, the total amount of student loan debt is now up to approximately 1.1 trillion dollars.  That is even more than the total amount of credit card debt in this country.

We live in a debt-based system which is incredibly fragile.

We experienced this firsthand during the last financial crisis.

But we just can't help ourselves.

We have always got to have more, and society teaches us that if we don't have enough money to pay for it that we should just go into even more debt.

Unfortunately, just as so many individuals and families have found out in recent years, eventually a day of reckoning arrives.

And a day of reckoning is coming for the nation as a whole at some point as well.

via Zero Hedge Tyler Durden

This Is Who Was Buying Stocks When Bond Yields Were Collapsing…

The week ending May 30th was an odd week for many… US treasury bond yields were collapsing but US equity prices were soaring to ever higher higher highs on weaker and weaker data. We know institutional asset managers were net sellers during this time and we know that the indiscriminate and non-economic corporate buyback-machine was in full swing but still… who was really the bid day in day out with no sense optimal timing… Thanks to tonight’s Japanese flows data, we know… Japanese investors bought the most foreign stocks in that week since 2009…



In fact, this is the most stocks that Japanese investors have bought since the week of March 6th 2009… the lows in the S&P 500… but note they were buying in this size at the top… as Lehman collapsed and all the way down…

One can’t help but wonder who has the firepower to buy all the way down into the 50% collapse of US equities in 2009 and then again last week as bonds started to flash danger signals… (and note the selling in early 2013 – when the Nikkei was exploding higher relative to US)…

via Zero Hedge Tyler Durden

Marc Faber Would “Squeeze The System Like A Lemon” If He Were In Charge

From this morning’s “Bloomberg Surveillance” with Tom Kenne, Scarlett Fu, Adam Johnson and guest host Ralph Schlosstein:




Dr. Faber, I would ask just one quick question, and that is, if you were Mario Draghi, what precisely would you do tomorrow to signal that you were after inflation, wanting to stimulate growth, and yet wanted to keep some powder dry?


Well, it’s a very good question. But it’s very hypothetical for me for the simple reason that if I were a Central Bank, I would be the greatest hawk in the world.


I would squeeze the system like a lemon and bring inflation down to deflation, because deflation has some advantage for the majority of people, for the majority of people.


It’s great if you have a strong currency and you have weak commodity prices so they can buy energy and transportation at lower costs.

via Zero Hedge Tyler Durden