Boeing Shares Slide On Reports 777 Fuselage “Split Dramatically” During Stress Test
In a blockbuster report that has hammered Boeing’s shares just before the long holiday weekend, the Seattle Times reported that a failure of a Boeing 777 stress test that had been initially reported on in September was actually worse than those reports suggested.
The ST also published what appears to be a grainy cellphone photo of the damage:
The test plane’s fusilege “split dramatically” along the underside of the plane near where the landing wheels are stowed. The body of the plane was rent open with the force of a bomb. Workers in another hanger nearby said the ground the shook and they heard a load explosion. The Seattle Times clarified that their earlier reporting about a door flying off its hinges was mistaken: the 777’s doors close from the inside and are larger than the holes they cover, but one door was seriously damaged.
When Boeing tested the original 777 model in 1995, it kept going until the aluminum wings snapped at 1.54 times limit load. On the 787, it chose to stop at 1.5 and then ease the composite wings back down again. Breaking a pair of composite wings could result in release of unhealthy fibers in the air, so it’s likely that with the 777X also having composite wings, that was the plan again this time.
But as Boeing personnel along with six FAA observers watched from the windows of a control room, at 1.48 times limit load – 99% of ultimate load – the structure gave way. Under the center fuselage, just aft of the wing and the well where the landing gear wheels are stowed, the extreme compression load caused the plane’s aluminum skin to buckle and rupture, according to the person familiar with the details.
The resulting depressurization was explosive enough that workers in the next bay heard it clearly. One worker said he heard “a loud boom, and the ground shook.”
Then there was the secondary damage…
That then caused secondary damage: The photos show that the fuselage skin split part of the way up the side of the airplane, along with areas of bent and twisted structure that extended through the area around a passenger door.
A day after the incident, based on incomplete information, The Seattle Times and other media outlets incorrectly reported that a cargo door had blown out.
Unlike the plane’s cargo doors, which hinge outward, the passenger doors on airliners are plug-type doors that only open inward and are larger than the hole they close. But the structure around that passenger door just aft of the 777X wing was so damaged that the pressure blew the door out and it fell to the floor.
These secondary damage sites — the rip up the side of the fuselage, the door blown out — alarming as they might seem, are not a concern to air safety engineers. “The doors were not a precipitating factor,” said the person familiar with the details.
It’s the initiating failure, the weakness in that localized area of the keel, that Boeing must now fix.
As uncomfortable as it sounds, Boeing probably won’t need to do a retest: Since the rupture occurred so close to the threshold level, the FAA will likely allow Boeing to make the necessary changes independently and then show its work via analysis.
A safety engineer at the Federal Aviation Administration (FAA), speaking anonymously without permission from the agency, said that because the blowout happened so close to the target load, it barely counts as a failure.
Boeing will have so much data gathered on the way to the 99% stage that it can now compare with its computer models to analyze the failure precisely, the FAA engineer said. It can then reinforce the weak area, and prove by analysis that that’s sufficient to cover the extra 1%.
One engineer said the rip actually isn’t anything to worry about.
The engineer said it’s not that unusual to find a vulnerability when taking an airplane structure to the edge of destruction.
“The good news is they found it and can address it,” the FAA engineer said. “They found a problem they can fix. They can beef up the structure based on analysis.”
Unfortunately for Boeing, traders weren’t in the mood for excuses, and sent the company’s shares lower in premarket trade…even as the broader market was set to open at record highs.
Q3 GDP Unexpectedly Revised Higher: US Economy Grew 2.1% As Fed Was Cutting Rates
With GDP estimates for the current quarter printing below 0.5% according to the Atlanta and NY Fed, markets will probably not care much how much the BEA revised Q3 GDP, although we are confident the US president will care, and will blast it on his tweeter account shortly, after GDP in the last quarter was revised unexpectedly higher, from 1.9% to 2.1% (2.130% to be precise), and up from the 2.0% GDP print in the second quarter.
According to the BEA, the revision to GDP reflected upward revisions to inventory investment, business investment, and consumer spending. These revisions were partly offset by a downward revision to state and local government spending.
Some more details:
Personal Consumption was came in at 2.9% annualized, above the 2.8% expected, and contributed 1.97% of the bottom line GDP print, up from 1.93% in the first estimate.
Fixed Investment was also revised modestly higher, up from -0.22% to a -0.18% detraction from GDP
Nonresidential fixed investment, or spending on equipment, structures and intellectual property fell 2.7% in 3Q after falling 1% prior quarter
Private inventories saw the biggest revision, increasing from a negative -0.05% to a positive +0.17%.
Net trade, while generally flat, shrank modestly, from -0.08% to -0.11%
Government spending also dipped fractionally, declining from 0.35% to 0.28%.
And visually:
Even as the economy grew more than expected, inflation remained subdued, with the GDP price index rising 1.8% in 3Q after rising 2.4% prior quarter, and above the 1.7% expected. Meanwhile, Core PCE rose 2.1% in 3Q after rising 1.9% prior quarter; it was below the 2.2% expected print as the Fed continues to hedonically adjust anything that does not fit the narrative of non-existant inflation.
Finally, corporate profit growth ground to a halt in Q3, rising at a 0.2% quarterly rate in the third quarter after increasing 3.8% in the second quarter:
Profits of domestic nonfinancial corporations increased 0.7% after increasing 3.2%.
Profits of domestic financial corporations decreased 2.4% after increasing 0.6% .
Profits from the rest of the world increased 1.2% after increasing 7.7% .
And while we have yet to see where Q4 GDP will come out, the fact that the Fed cut rates three times in a quarter in which the economy rose 2.1% will surely bring smiles to the faces of many Fed skeptics.
Durable Goods Orders Rebound Bigly In October, CapEx Proxy Surges
After unexpectedly sliding in September, Durable Goods New Orders were expected to contract further in preliminary October data but instead surprised bigly to the upside, rising 0.6% MoM (-0.9% exp) after a downward-revised 1.4% drop in September.
Notably, however, Durable Goods Orders remain down 0.9% YoY…
Source: Bloomberg
Additionally, the proxy for capital expenditures, Capital Goods Shipments Non-Defense Ex-Air, rose0.8% MoM (-0.2% exp) – the biggest jump since Jan 2019 (after 4 months of contraction)…
Source: Bloomberg
So with China’s Industrial Profits crashing by the most on record in October and US Durable Goods Orders rebounding aggressively, one might suggest ‘Trump is winning’ the trade war.
“It’s Going To Be Bad” – Heavy Snow And Wind Could Affect Millions Of Travelers This Week
A pre-Thanksgiving snowstorm has already traversed the Central Plains toward the upper Midwest. The storm is producing dangerous weather conditions during one of the busiest driving days of the year, reported NBC News.
Winter Storm Dorothy dumped 7 to 12 inches of snow late Monday into Tuesday across Denver.
Winter storm warnings and winter weather advisories have already been posted for many regions in the Central Plains and upper Midwest on Wednesday.
Heavy snow and winds are expected for parts of the upper Mississippi Valley into the northern Great Lakes Wednesday. Blizzard-like conditions could make driving unsafe ahead of holiday travels.
Dorothy is expected to dump nearly a foot of snow across central Nebraska to western and northern Iowa, southeastern South Dakota, southeast Minnesota, northern Wisconsin and the Upper Peninsula of Michigan by late evening.
“It’s going to be bad,” said Todd Krause, a National Weather Service (NWS) meteorologist.
“The snow is going to come down hard. It’s going to come down fast,” Krause said. “Visibility is going to be very, very poor during the height of the snowstorm.”
Strong winds from the winter storm could lead to airport delays, damaged infrastructure, power outages, and snowdrifts across the Midwest and Great Lakes.
“Strong winds will contribute to more blowing and drifting snow in these areas, resulting in dangerous travel conditions,” NWS said.
The storm will then move towards the Northeast on Thursday could produce high winds in New York City, possibly grounding the iconic floats seen at the Macy’s Thanksgiving Day Parade. Temperatures will be in the 50s on Thursday, with winds sustained above 20 mph, could gust up to 35-40 mph.
In the West, a “bomb cyclone” has made landfall in the mountain areas of Oregon and Northern California.
“This low pressure system will likely undergo bombogenesis (pressure drop of at least 24mb in 24 hours) by late Tuesday afternoon,” said NWS, “at which point it will likely become a sub-980 mb low with hurricane force winds over the offshore waters!”
Here’s a satellite look at the “bomb cyclone” that will be moving into the area over the next few hours. Hopefully everyone is prepared for strong, significant storm today! #orwx#cawxpic.twitter.com/hJwblDOEgO
Blizzard conditions are expected for elevated regions in southern Oregon and Northern California through Thanksgiving.
Tens of millions of people are expected to travel Wednesday-Thursday for the holiday season. Several parts of the US will experience fierce weather that may make it unsafe to drive.
Elon Musk Claims There’s Already 250,000 “Orders” For Tesla’s Cybertruck
With such an impressive unveiling that included audible laughter from the audience and two broken windows, it should come as no surprise that Elon Musk fanboys are falling all over one another to throw their money at their “visionary” savior.
And this seems to be exactly what’s happening. That is, of course, if you believe Elon Musk.
Musk first claimed on Twitter last week that there were already 146,000 “orders” for Tesla’s new Cybertruck. Of course, what Musk meant to say was “pre-orders” or “reservations”, and not actual orders. We wonder if Musk’s court ordered Twitter-sitter had a chance to approve that Tweet before Musk put it out.
By the end of the week, that number stood at 187,000 and then was bumped to 200,000 by Musk on Twitter days later.
Now, just hours ago, Musk updated his total and said that there are now 250,000 reservations for the truck, which – if true – would amount to about $25 million in refundable $100 deposits.
But whether or not all 250,000 reservations will translate into orders remains another question. Customers obviously have to take additional steps after pre-ordering the Truck. According to Tesla:
“After you submit your completed pre-order and the options you selected become available in production, we will invite you to complete the configuration of your Vehicle. We will then issue you the Vehicle Configuration and Final Price Sheet based on the base price of the model and any options included or that you select.”
Lest we forget Tesla, which also has a couple of additional steps of its own that it needs to take – you know, like actually manufacturing and producing the truck.
But the fact that almost any millennial living in his or her mothers’ basement can scrounge up $100 for a refundable deposit didn’t seem to bother the pro-Tesla scholars over at electrek, who figured that, at first, it was fair game to extrapolate the first 146,000 pre-orders announced to $8 billion in sales.
Recall, we covered the sh*tshow that was the Cybertruck reveal the day it happened. As we said then, “a picture is worth a thousand words”.
And here’s that picture: a truck with two shattered windows that looks like it rolled out of a dumpster heap at a metal scrapyard, being offered for the low low price of just $39,900.
The global economy is already in the worst distress that we have seen since 2008, and it appears that the global slowdown is actually picking up pace as we head into 2020. And this is happening even though central banks around the world have been cutting interest rates and pumping massive amounts of money into their respective financial systems. The central bankers appear to be losing control, and it certainly wouldn’t take much of a push for this new crisis to evolve into a complete and utter nightmare. The U.S. economy hasn’t been hit quite as hard as economies in Asia and Europe have been, but without a doubt things are slowing down here too. Corporate earnings have been falling quarter after quarter, auto loan delinquencies just hit a record high, the Cass Freight Index has declined for 11 consecutive months, and we just witnessed the largest drop for U.S. industrial production since 2009. Everywhere around us there is bad economic news, but most Americans are still completely oblivious to what is happening.
In this article, I am going to share even more evidence that a global economic slowdown has already begun. When you add these numbers to all of the other numbers that I have been sharing in recent weeks, it becomes impossible to deny that something major is taking place.
The following are 5 more signs that the global economy is careening toward a recession…
#1 It is being projected that global auto sales will be down approximately 4 percent this year. According to CNN, this will be the second consecutive year that global auto sales have fallen…
With only a month left in the year, global auto sales are on track for a 3.1 million drop, about 4%, for the year, according to Fitch. That would be the biggest decline since 2008, when the financial crisis hit, and the second year in a row that sales have fallen. Fitch expects worldwide car sales to total 77.5 million in 2019.
#2 Global trade just keeps falling. According to Zero Hedge, total global trade has now declined on a year over year basis for four months in a row…
Global trade on a YoY basis contracted by 1.1% in September, marking the fourth consecutive YoY declines and the most extended period of subdued trade since the financial crisis in 2009.
The CPB said supply chain disruptions between the US and China, due mostly to the trade war, were the most significant drag on international trade volumes. US volumes fell 2.1% in September MoM. Though in China, imports plunged 6.9% MoM.
As you can see from those first two examples, we keep witnessing things happen that we haven’t seen since the last financial crisis. Over the past few months, I have used phrases such as “since 2008” and “since 2009” over and over again. We literally have not seen economic numbers this bad since the last recession, and we are still in the very early phases of this new downturn.
And in some cases, the numbers are actually even worse than anything that we saw during the last recession, and that brings us to our next sign…
China Industrial Enterprises total profits collapsed in October to CNY427.5bn from CNY575.6bn in September – a 9.9% YoY plunge, the biggest drop on record.
In fact, China’s Industrial sector has seen annual declines in its profits for 4 of the last 6 months.
The trade war has hit the Chinese economy really hard, but it doesn’t look like a trade deal will happen any time soon.
Consumer confidence dipped for a fourth straight month in November as economic conditions weaken toward the end of 2019, data released Tuesday by The Conference Board shows.
The board’s consumer confidence index dipped to 125.5 this month. That’s down from 126.1 in October. Economists polled by Dow Jones expected the index to rise to 126.6.
This wasn’t supposed to happen, and if it keeps happening that is going to have important implications for the 2020 election.
#5 Even the wealthy are cutting back on their spending. According to Yahoo Finance, this is a continuation of a trend that we have been seeing for the past three quarters…
Spending by the top 10% fell 1% in the second quarter from the same period last year, according to an analysis of Federal Reserve data by Moody’s Analytics. And a four-quarter average of outlays by the high earners has slipped on an annual basis the past three quarters, marking the first such declines since the Great Recession of 2007-09.
In recent years, global central banks have engaged in unprecedented intervention in an attempt to stave off another crisis, and for a while their efforts appeared to be successful.
But just because the coming crisis was delayed does not mean that it was canceled.
In fact, over the past few years our long-term financial problems have actually gotten a lot worse. We are facing the biggest debt bubble in the history of the planet, global financial markets are more primed for a crash than they have ever been before, and civil unrest is breaking out all over the world. The stage is certainly set for “the perfect storm” that I keep talking about, and most Americans have absolutely no idea what is coming.
In all the time that I have been writing about the global economy, things have never looked more ominous then they do right now.
So buckle up and hold on tight, because it certainly looks like we are in for a very bumpy ride in the months ahead.
Global Markets Grateful For Trade Deal Optimism, Levitate To All Time Highs
With little out there to threaten the melt-up in global stocks, and with hte occasional “trade deal optimism” trickling in from Trump’s tweets or Chinese soundbites, traders were thankful for yet another all time high in S&P futures while world markets made another push for a record high on Wednesday after Trump said Washington and Beijing were in the final throes of inking an initial trade deal.
The MSCI’s all-country world index was just within 0.4%, or 2 points, of its record high from January 2018…
… while US equity futures rose all night until they rebounded off the giant gamma wall at 3,150…
… which we discussed previously has set the trading range for the S&P between 3,100 and 3,150. And so, having hit the top end of the dealer sweet spot, the S&P may now revert lower… but don’t hold your breath.
Europe’s Stoxx 600 index also rose to within 1% of its record close, with 15 of 19 sector groups advancing amid very subdued volumes.
Earlier in the session, Asian stocks advanced for a fourth day, led by tech firms, with the MSCI Asia Pacific index adding 0.3% in overall quiet trading, and while Shanghai struggled after Chinese industrial company profits plunged the most since 2011, Australian shares reached record highs and Japan’s Nikkei drew support from the growing likelihood of extra fiscal stimulus, while the Topix added 0.3%, driven by electronics and machinery makers, as foreigners extended their buying of Japan equities for a seventh week, its longest stretch in two years. A senior Japanese ruling party official said on Wednesday he believed the government was striving to compile a supportive spending package worth about 10 trillion yen ($92 billion).
The Shanghai Composite Index closed 0.1% lower, with China Yangtze Power and Ping An Insurance Group among the biggest drags. Profits at Chinese industrial companies fell for a third month, dropping by the most since at least 2011. India’s Sensex rose, heading for a fresh record, as Housing Development Finance and Kotak Mahindra Bank offered strong support.
As usual, the big topic of discussion, or rather diversion, was trade, even though China continues to slow not due to the trade war but its inability to stimulate a credit impulse, while the only reason why US stocks are at record highs is QE4.
“Something will come out of the phase one (Sino-U.S. trade) talks,” said TD Securities Senior Global Strategist James Rossiter. “Rolling back tariffs to where they were in August, with the December ones put on hold or canceled maybe.” But he said the two countries were unlikely to go beyond that, and China’s declining industrial profits underscored the economic strain exerted by the tensions.
Another signal of the rising market confidence was the VIX plunging to 7 month lows. It is now less than half the level it was in August, when U.S.-China talks looked close to collapsing, and a third of last December’s level when stock markets were pulled lower by trade angst and rising interest rates. Kay Van-Petersen, global macro strategist at Saxo Capital Markets in Singapore, said while Sino-U.S. trade headlines may be driving some tactical, near-term moves in the market, they were mostly just “noise”. And echoing what we said, the Saxo strategist said that the broader market direction is “about the accommodative Fed and accommodative monetary policy and the fact that structurally the meta-trend is still lower in yields and rates,” he said.
In FX, the dollar relentless levitation continued, and the greenback was stronger against developed and emerging currencies, with dollar/yen holding above 109 and euro/dollar steady at $1.10. That was despite softer-than-expected U.S. economic data on Tuesday, which showed a fourth straight monthly contraction in consumer confidence and an unexpected drop in new home sales in October. Sterling initially dropped then spiked as pre-election opinion polls showed some narrowing of the Conservative lead over opposition parties, although Prime Minister Boris Johnson is still favored gain an overall majority. The reaction to the polls squeeze has been modest as the prospect of another hung parliament raises the prospect of some form of coalition government made up of parties supporting a second Brexit referendum.
“So far, the market has been relatively complacent when it comes to the risks ahead,” said Thu Lan Nguyen, FX strategist at Commerzbank. “Yes, the Tories still have the lead, but they’re certainly not gaining.”
In emerging markets, traders were watching Brazil’s real, which fell to a record low, below the troughs of the 2015 recession, despite central bank intervention.
Among the main commodities, oil prices edged lower after reaching their highest since late September on the reassuring trade headlines. U.S. West Texas Intermediate crude was down 0.21% at $58.29 per barrel. Global benchmark Brent crude lost 0.11% to $64.20 per barrel.
Expected data include annualized GDP, durable-goods orders, and personal income and spending.
Market Snapshot
S&P 500 futures up 0.2% to 3,149.75
STOXX Europe 600 up 0.4% to 410.26
MXAP up 0.3% to 165.63
MXAPJ up 0.4% to 530.12
Nikkei up 0.3% to 23,437.77
Topix up 0.3% to 1,710.98
Hang Seng Index up 0.2% to 26,954.00
Shanghai Composite down 0.1% to 2,903.20
Sensex up 0.4% to 40,972.32
Australia S&P/ASX 200 up 0.9% to 6,850.60
Kospi up 0.3% to 2,127.85
German 10Y yield unchanged at -0.372%
Euro down 0.1% to $1.1006
Italian 10Y yield rose 0.6 bps to 0.824%
Spanish 10Y yield fell 0.7 bps to 0.382%
Brent futures up 0.3% to $64.46/bbl
Gold spot down 0.2% to $1,459.24
U.S. Dollar Index up 0.1% to 98.36
Top Overnight News
Global central banks are approaching the end of the year with a collective shudder at the risky behavior that their low interest-rate policies are encouraging. Policy makers from European Central Bank and the Federal Reserve are among those raising cautionary flags at potentially unsafe investing stoked by their efforts to flood economies with ultra-cheap money
President Donald Trump declared Tuesday that talks with China on the first phase of a trade deal were near completion after negotiators from both sides spoke by phone, signaling progress on an accord in the works for nearly two years
Profits at Chinese industrial enterprises fell for a third straight month, dropping by the most since at least 2011 as producer prices continue falling and domestic demand slows
China saw strong demand for its third offering of dollar bonds in three years, though U.S. investors largely left the deal alone amid the trade war. Fund managers were also a diminished presence from last year, with the bulk of the sale taken up by banks and the public sector — a group that includes central banks and sovereign wealth funds
The earliest-available indicators of China’s economic performance point to a continued slowdown in November. Economic growth was already the slowest in almost three decades in the third quarter
Elizabeth Warren’s steady rise in the polls has shifted into reverse as attacks from her Democratic rivals over her Medicare for All plan take a toll. A Quinnipiac poll released Tuesday found that Warren has dropped by 14 points since October, when she topped the field in the same poll. Joe Biden now has a clear lead and she is in a three-way statistical tie for second place with Pete Buttigieg and Bernie Sanders. Every other candidate had 3% support or less
A White House budget official said he warned his superiors that a hold on security assistance for Ukraine could be illegal, and he waited months for an explanation for the delay he described as unusual, according to transcripts released Tuesday
The road map for quantitative easing laid out by Reserve Bank of Australia Governor Philip Lowe is spurring a rally in the nation’s bonds as investors seize on his comments to bet on deeper interest-rate cuts
The earliest-available indicators of China’s economic performance point to a continued slowdown in November. Economic growth was already the slowest in almost three decades in the third quarter, and Bloomberg Economics’ gauge aggregating the earliest data from financial markets and businesses shows that continuing
U.K. Labour party leader Jeremy Corbyn accused Boris Johnson’s government of secretly negotiating with the U.S. over the National Health Service as he sought to shift the focus from a spat over antisemitism that has embroiled his campaign for next month’s election
Asian equity markets traded broadly firmer after Wall Street extended on record levels once again, but with gains capped given the lack of material breakthrough from the recent slew of optimistic US-China trade rhetoric and following a further slump in Chinese Industrial Profits. ASX 200 (+0.9%) and Nikkei 225 (+0.3%) were positive with notable strength in Australia’s telecoms sector as Telstra was boosted in anticipation of a stronger performance in H2 and with gold miners underpinned after the precious metal found relief from support at USD 1450/oz, while Tokyo sentiment rode on the recent upward trajectory in USD/JPY and with Toshiba lifted by prospects of a sooner return to the main market following reports the Tokyo Stock Exchange will ease requirements to fast-track promotion to the main board as soon as next year. Hang Seng (+0.2%) and Shanghai Comp. (-0.1%) were somewhat indecisive with Hong Kong kept afloat by hopes protests were waning and that the university siege may have drawn to an end, although the mainland was choppy due to continued PBoC liquidity inaction and after Industrial Profits further deteriorated with its largest decline since 2011. Finally, 10yr JGBs ignored the mostly positive tone in stocks and extended on the prior day’s post-40yr auction rebound to briefly test resistance at the 153.50 level, with prices also supported by the BoJ’s presence in the market today with the central bank’s Rinban operations heavily concentrated on 5yr-10yr maturities.
Top Asian News
Another Yield-Starved Japanese Bank Steps In to Buy CLOs
Westpac Still Under Fire as Advisers Say Directors Must Go
Investors in China Can’t Wait to Finally Own Alibaba Shares
Hong Kong Sets Record in $5 Billion Land Sale to Sun Hung Kai
Major European bourses (Euro Stoxx 50 +0.2%) are higher in quiet but choppy trade, as global equities continue to build on recent momentum amid elevated trade hopes since the latest US President Trump comments that trade talks are in the “final throes”. Meanwhile, month-end factors continue to distort price-action. Sectors are in the green across the board, with outperformance seen in Materials (+0.3%) and Consumer Discretionary (+0.3%). In terms of individual movers; British American Tobacco (+2.1%) nursed losses seen at the open after the Co. noted that it is on track for a strong year despite a slowdown in the US vaping market. Elsewhere today’s notable gainers include Aroundtown Properties (+2.5%) whose shares advanced after the Co. posted strong gains in both revenue and EBITDA. In terms of the laggards, Knorr Bremse (-3.5%) is under pressure after the Co. posted earnings that missed on top line expectations. Meanwhile, Rolls Royce (-1.5%) and Compass Group (-2.5%) are both lower following downgrades at Morgan Stanley and SocGen respectively. Taking a broader view, Barclays continue to see moderate upside for European equity markets in 2020, forecasting a further 9% of upside for the Euro Stoxx 50 by next year’s end. Although “the tactical risk-reward has become less appealing following the latest rally, as macro recovery and reducing policy uncertainty appear to be widely expected… light positioning, the relative expensiveness of ‘safe assets’, the positive delta in activity & earnings and the easier financial conditions argue for an extension of the equity bull market into 2020” the bank concludes.
Top European News
Better Macro Should Support European Stocks in 2020: Jefferies
Bain, Fortress, Apollo Consider Investing in Monte Paschi: MF
Lloyds to Cut Chief Executive Horta-Osorio’s Pension Award
Vodafone Wins German Court Backing in Price Fight With Elliott
In FX, The Dollar remains on a firm footing ahead of a packed US agenda with data front loaded and compressed due to Thursday’s Thanksgiving holiday. The Greenback is up vs most G10 rivals, albeit rangebound as the DXY meanders between 98.407-259 parameters, and just shy of resistance at 98.450. Back to today’s raft of releases, Q3 GDP and October core PCE are likely to headline, but durable goods may steal the limelight given the erratic nature of that series.
CAD/NZD/SEK/NOK – The major outliers and ‘outperformers’, as the Loonie maintains a degree of bullish technical momentum after Usd/Cad closed below the 200 DMA on Tuesday (1.3278) and the Kiwi benefits from favourable cross-winds with Aud/Nzd pivoting 1.0550 and Nzd/Usd holding relatively firmly above 0.6400 having largely shrugged off or taken in stride comments from RBNZ Governor Orr, the latest FSR and NZ trade data. Similarly, the Scandi Crowns have not really sustained serious or lasting damage from a dip in Swedish household lending, flip from trade surplus to a deficit twice the size or rise in the unofficial Norwegian survey-based jobless rate, as Eur/Sek tests support at 10.5500 and Eur/Nok straddles 10.1000.
GBP/AUD/JPY/CHF/EUR – The Pound has recovered pretty well if not impressively from early weakness and a breach of yesterday’s low (circa 1.2835) that seemed partly Eur/Gbp related amidst reports of RHS demand for the end of November. Indeed, Cable has bounced ahead of last Friday’s base (around 1.2822) towards 1.2885 and eclipsing the 21 DMA (1.2881) and the cross is back near 0.8650 having climbed to within a few pips of its 21 DMA (0.8587), as Eur/Usd hovers just above 1.1000. Note, hefty options expire close by (2 bn from 1.0995-1.1000 and 1.1 bn between 1.1035-40), while a key Fib (1.0994) is also keeping the single currency in narrow confines. Elsewhere, broadly risk-on sentiment amidst latest positive US-China trade chat (phase 1 deal in final throes per President Trump) is capping the Yen and Franc just under 109.00 and over parity respectively, with expiry interest also in proximity for Usd/Jpy (3.3 bn from 108.95-109.00 and 1 bn at 109.15). Back down under, a couple of dovish RBA calls vs 1 less dovish has weighed on Aud/Usd and protected a serious approach on 0.6800, but the pair is holding above 1bn expiries between 0.6760-75.
RBNZ Financial Stability Report noted that New Zealand’s financial system is resilient to a range of economic risks although global financial stability risks and domestic debt vulnerabilities remain, while it added that prolonged low long-term interest rates could generate excess leverage and overheated asset prices. Furthermore, the RBNZ stated negative OCR is not currently a central scenario in its published forecasts and it is considering potential impacts of unconventional monetary policy tools on bank profitability.
In commodities, the crude complex is slightly firmer, with Brent Feb’ 20 futures making fresh weekly highs above yesterday’s high (around USD 64.30/bbl) , as the market rebounds from overnight post bearish API inventory data lows as it opts to instead take its cue from better risk appetite spurred by trade hopes. Looking ahead, attention will be on EIA inventory data, where weekly crude stocks are seen drawing by 347k barrels, although if EIA crude stocks follow API’s lead and print a surprise build, this would mark a fifth straight week of builds. It is also the first day of the OPEC Economic Commission Board Meeting, which ends tomorrow, after which the board may provide policy recommendations to OPEC – although the recommendations are non-binding. Elsewhere, eyes turn to Libya following reports of military action around the El-Feel oilfield (circa. 100k BPD capacity), although no damage or production halts have been reported, the organisation stated that an escalation in violence could prompt evacuations and production shut-down. Looking at metals, gold prices continue to be subdued from lack of haven demand, with prices having briefly slipped below the USD 1460/oz mark. Meanwhile, copper prices continue to gain traction, as positive trade feels spur macro risk appetite, although prices did take a fleeting hit during overnight trade in the wake of abysmal IP data out of China.
US Event Calendar
8:30am: GDP Annualized QoQ, est. 1.9%, prior 1.9%
Personal Consumption, est. 2.8%, prior 2.9%
Core PCE QoQ, est. 2.2%, prior 2.2%
8:30am: Durable Goods Orders, est. -0.9%, prior -1.2%; Cap Goods Orders Nondef Ex Air, est. -0.2%, prior -0.6%
8:30am: Cap Goods Ship Nondef Ex Air, est. -0.2%, prior -0.7%
8:30am: Initial Jobless Claims, est. 220,500, prior 227,000; Continuing Claims, est. 1.69m, prior 1.7m
8:30am: Durables Ex Transportation, est. 0.1%, prior -0.4%
9:45am: MNI Chicago PMI, est. 47, prior 43.2
10am: Personal Income, est. 0.3%, prior 0.3%; Personal Spending, est. 0.3%, prior 0.2%
10am: PCE Deflator MoM, est. 0.27%, prior 0.0%; PCE Deflator YoY, est. 1.4%, prior 1.3%
10am: PCE Core Deflator MoM, est. 0.11%, prior 0.0%; PCE Core Deflator YoY, est. 1.7%, prior 1.7%
10am: Pending Home Sales MoM, est. 0.2%, prior 1.5%; Pending Home Sales NSA YoY, est. 6.0%, prior 6.3%
2pm: U.S. Federal Reserve Releases Beige Book
DB’s Jim Reid concludes the overnight wrap
I was on Bloomberg TV yesterday and one comment I made that had a few people asking me questions was the one where I said that I thought nominal yields will stay below nominal GDP for the rest of my career. I truly believe this is the only way of supporting the existing colossal global debt burden and what is likely to be more debt in the future. Central banks will end up being forced to own a lot more bonds as far as the eye can see to facilitate this but I do think both will eventually be forced higher by policy. Clearly for reasons of which I’m not aware of, my career might not have long left but given a new house this year, building renovations that cost the original estimate times Pi, and school/university fees into the 2040s that’s how long I might need to work and how long I think this period of financial repression might need to last. We talk about this a lot in this year’s long-term study on debt. See here for a reminder.
Today markets will wind down ahead of Thanksgiving tomorrow but this means that a number of important US releases are shoe-horned into one day. We’ll get the second reading for third-quarter GDP, which is expected to show no change to the headline number of 1.9% growth, though there are expectations for a 0.1pp downgrade to consumption. We’ll also get durable and capital goods orders for October, which are expected to decline a bit further month-on-month (by -0.9% and -0.2%, respectively) but watch for the impact of the GM strikes. Apart from the national accounts data, core PCE prices for October will be released, which should show below-target inflation of 1.7%, and the Chicago PMI is expected to rise +3.8pts to 47.0 after it hit its lowest level since 2015 last month at 43.2. We’ll also get the biggest opinion poll and subsequent seat model forecast of the U.K. election campaign so far tonight (more on this below).
Ahead of all this, it was another day of edging to fresh record highs for markets, with the S&P 500 (+0.22%), the NASDAQ (+0.18%) and the DOW (+0.20%) all advancing to new highs in response to yesterday’s news that there had been a phone call between the US and Chinese negotiators. It was a similar story in Europe, with the STOXX 600 up +0.10% at its highest level since May 2015. Trade-sensitive indices fell back, however, with the Philadelphia semiconductor index down -0.50%. That move came despite an assertion by President Trump that the two sides are in the “final throes” of negotiations, possibly as concerns intensified over the recently-passed Hong Kong bill, which President Trump has neither confirmed nor denied that he will sign. If he does not sign or veto the bill by December 3, it will become law regardless.
Meanwhile, after the US markets closed, President Trump said in an interview for former Fox News Bill O’Reilly’s website that he’s holding up the trade deal to ensure better terms for the US while saying, “We can’t make a deal that’s like, even. We have to make a deal where we do much better, because we have to catch up.” President Trump also spoke of Hong Kong in the interview and said that the US wanted to see things “go well in Hong Kong” while adding that he was confident of a good outcome.
Overnight, the US Department of Commerce has released an advanced notice for proposed rulemaking (ANPRM) that will implement last May’s executive order on information and communications technology and services supply chain security. Also of note is that it did not name China as an “adversary nation”, as suggested in an earlier draft.
A quick refresh of our screens this morning show that Asian markets are mostly trading up with the Nikkei (+0.45%), Shanghai Comp (+0.07%) and Kospi (+0.42%) all higher while the Hang Seng is trading flat. As for FX, all the G10 currencies are trading weak against the dollar with the Australian dollar (-0.21%) leading the declines. Elsewhere, futures on the S&P 500 are up +0.06% while WTI crude oil prices are down -0.21% after a report from the American Petroleum Institute indicated that US crude inventories increased by 3.64mn barrels last week. As for overnight data releases, China’s October industrial profits declined by -9.9% yoy (-5.3% yoy last month), the largest decline in the 8 years we can find data at this time of the morning. However, the series is quite volatile in nature.
In other news, S&P said in an overnight report that Australia’s AAA credit rating – one of only 11 in the world – would come under increased “downward pressure” if the government opted to deploy fiscal stimulus that changed the trajectory of the budget while adding that the top ranking is reliant on “strong fiscal outcomes.” This perhaps helps to explain the Australian government’s determination to return to a balanced budget in the backdrop of a slowing economy.
Back to yesterday and it’s worth highlighting that volatility has now returned to very low levels, with the VIX index down by -0.12pt to 11.75 – its lowest level since October 2018, while in Europe the V2X was down -0.29pts to 12.10pts – just 1.1pts off its low for the year.
Sovereign bonds also advanced on both sides of the Atlantic, with 10yr Treasury yields down -1.9bps to 1.736%. However, the 2s10s curve snapped a run of 9 successive sessions flatter as the curve steepened by +1.1bps with 2yr yields -2.8bps. Yields fell in Europe too, with 10yr bunds (-2.4bps), OATs (-2.3bps) and gilts (-4.4bps) all lower. Bank stocks underperformed as a result, with the STOXX Banks index down -0.66%, and the S&P Banks industry group down -0.31%.
Possibly supporting the bull steepening move were comments from Fed Governor Brainard, who explicitly said that she supports a form of yield curve control targeted at the front end of the yield curve. Her proposal would cap front-end Treasury yields to reinforce forward guidance and ideally drive down longer-end rates as a result. She says that this policy would be better than outright QE, though she did say that she would support QE in a severe downturn. Brainard also committed to supporting a flexible inflation target, to “anchor inflation expectations at 2 per cent by achieving inflation outcomes that average 2 per cent over time or over the cycle.” Such a change in the Fed’s target appears increasingly likely as a result of their ongoing policy review.
Earlier in the day, Dallas Fed President Kaplan said that “I think policy is in the right place now”, but also said that “We think the fourth quarter is going to be weak”. Kaplan is going to be a voting member on the FOMC next year. He expects growth around 2% for 2020, and would likely need to see a downside surprise versus that figure before supporting any change in policy.
In FX markets, sterling fell -0.26% yesterday as narrowing opinion poll leads for the Conservatives led to investor concern that there might be continued uncertainty over Brexit moving forward into next year. Following Monday’s ICM poll which had a 7pt Tory lead, yesterday morning saw another from Kantar with the lead falling from 18pts to 11pt lead in a week. As such sterling moved from being the best performing G10 currency on Monday to the worst yesterday. A YouGov poll later also showed an 11pt lead, only down 1pt since Friday.
Tonight, market attention will be on the release of YouGov’s MRP (multilevel regression and post-stratification) model at 10pm GMT, used to forecast the result. At the last election, this model predicted a hung Parliament over a week before the elections in contrast to expectations that there’d be a larger Conservative majority, so it’ll be fascinating to see if it’s forecasting any surprises this time round (albeit slightly further out from polling).
Staying with FX, the Brazilian Real depreciated -0.17% to its weakest-ever level against the dollar yesterday, in spite of intervention from the central bank. The move came after Brazil’s Economy Minister commented that a weaker currency is not a problem. Meanwhile, The Brazilian central bank has embarked on a series of rate cuts recently, with 50bp reductions at each of the last 3 meetings. Added to this has been general concerns over political stability in Latin America in light of recent protests across the continent, while former President Lula’s release from prison has raised the prospects of a more radical, populist left-wing government further down the line as he re-enters the political fray. Overnight, Brazil’s central bank chief Roberto Campos Neto has said that the central bank will intervene further if they need to normalize the foreign exchange market.
Sticking with LatAm, yesterday Chile’s central bank said that it will hold its next monetary policy decision two days earlier than scheduled in a bid to provide “timely information” about the country’s economic situation following weeks of social unrest. The central bank will now make the rate decision on December 4 (earlier December 6) and present their quarterly monetary policy report, known as the IPOM, the next day at 8:30 am (earlier December 9).
Elsewhere, the dollar weakened -0.07% after 5 days of gains, while bitcoin (-1.22%) fell for a 10th consecutive session against the dollar, with the latter falling to its lowest level since May.
In terms of data out yesterday, the Conference Board’s consumer confidence reading came in slightly below consensus at 125.5 (vs. 127.0 expected), although the previous month’s reading was revised up by two-tenths. The present situation reading fell to a 5-month low of 166.9, although the expectations indicator rose to 97.9. Looking at the labour market indicators, the differential between those saying jobs were “plentiful” and jobs were “hard to get” fell to 32.1 (vs. 36.1 previously), also at a 5-month low.
Other US data releases included new home sales beating expectations in October, coming in at a seasonally adjusted annual rate of 733k (vs. 705k expected), while the previous month was revised up by +37k to 738k. That means that new home sales have had their best two months in over 12 years and adds to a run of strong data on the US housing market. Elsewhere, the Richmond Fed’s manufacturing survey fell to -1 (vs. 5 expected), and amidst the ongoing trade war, the advanced goods trade deficit for the US fell to $66.5bn in October (vs. $71.0bn expected), its lowest level since May 2018.
In Europe, the main data out yesterday was the GfK consumer confidence reading from Germany, with the December forecast up to 9.7 (vs. 9.6 expected). More notable, however, was the expectations indicator, which rose to 1.7 in November, up from -13.8 the previous month, which was the biggest single-month increase in expectations since July 2010.
To the day ahead now, and this morning’s data include French consumer confidence for November, along with Italian consumer confidence, manufacturing confidence and economic sentiment for the month. Meanwhile, ahead of tomorrow’s Thanksgiving holiday we have a raft of US data releases, including the second reading of Q3 GDP, along with personal consumption and core PCE. Then there’s the preliminary October reading of durable goods orders and non-defence capital goods orders. And to round it off, there’s the MNI Chicago PMI reading for November, personal income and spending data for October, pending home sales for October, and the weekly initial jobless claims and MBA mortgage applications. Turning to central banks, the Fed will be releasing their Beige Book, while we’ll hear from the ECB’s Lane again.
Rabobank: “Global Central-Bankery Continues To Go Where No-One Has Gone Before”
Submitted by Michael Every of Rabobank
Stocks at new recorder record highs; bonds up (yields down); CNY up; broad USD DXY up; China issuing USD6bn of sovereign debt at a narrow spread over USTs….it’s all up, up, and away. And why not? Trump tells us the US is “in the final throes” of a phase one trade deal with China. Usually that language is used to imply something is dying, but hey ho, decimate is used to mean annihilation rather than killing one in ten of the enemy, and quantum leap is used to imply something big when it actually means something amazingly small. Suffice to say markets loved it. So much so in fact that it is a song we should keep singing over and over, like another ‘final’- “The Final Countdown”.
Three decades after Europe’s pop-metal kitsch classic first hit the charts, they are still out there playing it, and whenever anyone hears the keyboard intro “Deedle deedle….deedle dee”, everyone knows the song and joins in enthusiastically: how can you not? As such, I suggest that from now on, every time the White House talks about the impending phase one trade deal coming soon, to save time they just play the track for the press. Or just the keyboard intro. And rallying markets can continue to trade off the deep wisdom of the lyrics:
“We’re leaving together; But still it’s farewell; And maybe we’ll come back; To earth, who can tell?
I guess there is no one to blame; We’re leaving ground (leaving ground); Will things ever be the same again?
It’s the final countdown; The final countdown”
And indeed, will things ever be the same again in markets? Not just because of the constant dangled promise of a trade deal that the vast majority of those working in those same markets admit is unlikely to mean much of anything; but because global central-bankery continues to go where no-one has gone before. Mass asset-purchases; negative rates; ‘Not-QE’; yield curve control–Brainard says the Fed should use asset purchases to cap yields on short- and medium-term Treasuries, a-la BOJ, where it hasn’t worked, of course–and, shortly no doubt, solving the global climate crisis and inequality! In their special central-bank minds, *this* is the voyage all the rest of us are mere passengers on:
“We’re heading for Venus (Venus); And still we stand tall; ‘Cause maybe they’ve seen us (seen us); And welcome us all, yeah
With so many light years to go; And things to be found (to be found); I’m sure that we’ll all miss her so…”
But then back to that trade deal:
“It’s the final countdown; The final countdown; The final countdown; The final countdown; Oh, The final countdown, oh It’s the final count down; The final countdown; The final countdown; The final countdown; Oh; It’s the final count down.”
And then back to central banks and that trade deal working together:
“We’re leaving together; The final count down; We’ll all miss her so; It’s the final countdown; It’s the final countdown; Oh; It’s the final countdown, yeah.”
Schiff Hits The Fan: First House Democrat Publicly Opposes Impeachment
With public support for impeachment waning and the risk of a potentially disastrous Senate trial looming, House Democrats have suffered their first impeachment defection after Rep. Brenda Lawrence of Michigan said she no longer supports the effort.
“We are so close to an election. I will tell you, sitting here knowing how divided this country is, I don’t see the value of taking him out of office,” said Lawrence, who instead favors censuring President Trump over allegations that he withheld military aid in Ukraine for self-serving purposes, according to the Washington Examiner.
“I do see the value of putting down a marker saying his behavior is not acceptable.“
“I want to censure. I want it on the record that the House of Representatives did their job and they told this president and any president coming behind him that this is unacceptable behavior and, under our Constitution, we will not allow it,” Lawrence continued.
Lawrence backed the House inquiry as recently as early October, but changed her tune after recent polls reveal a drop in public support for impeachment following weeks of televised testimony from hand-picked witnesses who were unable to conclude that Trump withheld Ukraine aid in a quid pro quo, extortion, or any other phrase that polled well.
According to the FiveThirtyEight average of national polls, support for impeachment has shrunk from 50.3 percent in mid-October to 46.3 percent presently, while opposition has risen from 43.8 percent to 45.6 percent.
Among independents in the FiveThirtyEight average, support for impeachment topped out at 47.7 percent in late October but has sunk to 41 percent over the past three weeks. –The Hill
Maybe, but too many of them are afraid their offices and homes would soon be like halftime at the Yale-Harvard game. https://t.co/30lUkpX401
An impeachment in the House would mean a trial in the GOP-controlled Senate, where witnesses such as Joe and Hunter Biden, Devon Archer, John Kerry’s Stepson and Ukrainian officials would be fair game as Republicans slow-walk America through allegations that the former Vice President and his son were engaged in a pay-for-play political racket.
Base will melt if they don’t impeach. But it’s a political boondoggle if they do.
Mexico Pushes Back Against Trump Plan To Label Cartels Terror Groups
Mexican officials are sounding the alarm after President Trump told Bill O’Reilly during a radio interview that he would “absolutely” designate Mexico’s drug cartels as terror groups.
During the interview, which aired for the first time last night and will re-air on Thanksgiving Day, Trump told O’Reilly, who first raised the issue, that he has been working on getting the cartels designated a terror group for the past 90 days, which means the project began before the murder of 9 US citizens in a drug-cartel ambush that killed three mothers and six young children.
Here’s a clip from the interview:
After the attack on members of the LaBaron family – a Mormon community that has been living in Mexico since the 1940s – Trump tweeted an offer of assistance to Mexco’s president, saying the US would be happy to supply troops or ‘whatever it takes’ to wipe out the cartels once and for all.
Now, Trump is weighing a terrorist designation for the cartels, which could open the door for American cross-border attacks on cartel infrastructure and cartel personnel.
According to the Washington Post, under US law, any violent foreign group or individual who “threatens American security” can be designated a terror group and be subjected to sanctions that, in this case, could seriously disrupt commerce between American and Mexican companies.
It’s also a huge problem for the banks, as anybody who remembers the $900 million money laundering scandal involving UK-based HSBC back in 2012, when the bank got caught laundering money for the drug cartels (the incident is now the subject of a Netflix documentary) and paid a massive fine (the bank has also been subjected to several civil suits).
A terror designation would seriously raise the stakes for any banks who risk handling cartel money.
Unsurprisingly, Mexico is less than thrilled about the prospect of an American crackdown on the cartels.
Mexican Foreign Minister Marcelo Ebrard tweeted the government’s “position”: “Mexico will never accept any action that violates our national sovereignty…We will act firmly. I have sent our position to the US as well as our resolution on combating transnational organized crime.”
That’s hardly surprising, since turning to the Americans to fix Mexico’s problems would almost certainly be extremely politically unpopular for AMLO, whose popularity has already taken a dive since he took office. But with Mexico’s murder rate about to hit a new record high – a stunning development, since AMLO’s decision to end the government’s war on the cartels was supposed to lead to a deescalation of violence – the pressure is on for him to do something.
Of course, this wouldn’t be the first time President Trump has threatened to crack whip on Mexico (remember his threats to close the border, or his decision to send US troops to provide more support for border agents?).
