A.M. Links: Terrorist Attacks in Brussels, Obama Speech in Cuba, Trump and Clinton ‘Viewed Negatively at Historic Levels’

  • Multiple terrorist attacks have struck the Belgian capital city of Brussels. At least 15 people were killed by an explosion at a Brussels subway station and at least 11 people were killed by two explosions at the Brussels airport. Many more people are injured. At least one of the airport explosions is believed to have been the work of a suicide bomber.
  • According to a new poll, “Donald Trump and Hillary Clinton register net negative ratings in double digits, indicating the front-runners for each party’s presidential nominations are viewed negatively at historic levels.”
  • Bill Clinton: Hillary can “put the awful legacy of the last eight years behind us.”
  • Edward Snowden: “I didn’t use Microsoft machines when I was in my operational phase, because I couldn’t trust them.”

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Goldman Says To Sell Risk Assets, Go To Cash Ahead Of “Expected Elevated Volatility”

For the past month, despite the biggest quarterly bounce back from its lows in Dow Jones history, the market skepticism has not only remained but intensified: JPMorgan, Morgan Stanley, Deutsche Bank, SocGen, all have warned that this is a sucker’s “bear market” squeeze, not the start of a real rally. Techniclans have been just as vocal in their skepticism, while the smart money has been selling relentlessly (not in its 8 consecutive week – more shortly). One would say this is your plain vaniilla wall of worry phenomenon, and it would be true if we didn’t know who it is that was buying: another burst of record corporate buybacks, which however are now over for the next 6 weeks as we enter buyback blackout period.

And overnight, the latest to join in the skepticism rally is none other than Goldman Sachs strategist Christian Mueller-Glissmann who in the latest “Global Opportunity Asset Locator” report, writes that the “relief rally across risky assets might fade over the near term”, warns that “sharp declines in oil prices are likely to weigh on risky assets again”, suggests to go to “reduce risk allocation”, warns against holding US HY bonds as “the risk/reward is least favourable if oil prices reverse course” and “go to cash” ahead of “expected elevated volatility.

Key highlights below:

Since February 11, oil prices have rallied together with risky assets, supported by better sentiment on global growth, increasing indication of future supply rationalization, and declines in US oil production. At the same time, bond yields have picked up and US breakeven inflation has started to recover, indicating the market is starting to price US  reflation. While we see potential for reflation to gain steam in 2H, in particular in the US, the current relief rally across risky assets might fade over the near term. We remain Underweight commodities over 3 months and Neutral over 12 months. As supply adjustments take place, we believe commodities will become more attractive. Until then there is risk of a self-defeating rally as supply cuts might be delayed. We expect volatile oil prices in a US$25-45/bl range, which coupled with negative roll yields should result in poor risk-adjusted returns. Sharp declines in oil prices are likely to weigh on risky assets again. In addition, we see several additional risks entering 2Q (e.g. Brexit, migration concerns, US elections, China, rate shocks), which are likely to drive higher volatility across assets. As a result, we reduce risk in our 3-month asset allocation as we enter 2Q.

 

We upgrade cash to Overweight over 3 months to position for and take advantage of more volatility. With the potential for cross-asset correlations with oil to increase again should oil prices decline sharply, the potential for diversification is limited. Similarly, rate-shock risk is difficult to diversify. Within cash we have a preference for the USD. We remain Underweight government bonds over 3- and 12-month horizons as inflation continues to pull yields higher and we still expect three Fed rate hikes this year. Over the near term, central bank easing, the dovish Fed, and lower oil prices might support bonds but we do not think US 10-year yields will trade below 1.75% for long.

 

Our key Overweight remains credit as we believe credit valuations are already pricing a worse growth environment. We continue to prefer EUR IG (and HY) due to a combination of better technicals (especially with ECB credit easing), fundamentals and valuations. Following the strong relief rally in USD HY, over the near term, we think the risk/reward is least favourable if oil prices reverse course. We prefer USD IG to HY near-term. While we expect equities to rebound within a ‘fat and flat’ range once reflation gains the upper hand and as oil prices stabilise, we remain Neutral over 3 months. Until then, equities are likely to remain volatile. Also, equity valuations are not attractive, in our view, having increased further in the rally, with negative earnings revisions. Without a sustained pick-up in growth and inflation, we think equities are unlikely to turn decisively. We retain our preference for Japan and Europe over 12 months, for which we believe valuations are not as stretched and policy remains supportive. However, near term, we are Neutral across equity regions; we like the low US beta and Brexit/migration concerns might weigh on Europe

This is Goldman’s latest tactical asset allocation:

Finally, Goldman points out traders have been all too aware off: everything trades with oil: “Correlations across assets and with oil prices have been high this year to date. The oil price recovery since February 11 (due in large part to China relief and the dovish March FOMC meeting) has come with a broad relief rally across assets.”

And since Goldman believes that the oil “relief rally might lose momentum from here” and “since oil prices will remain volatile, ranging US$25- 45/bbl in 2Q16”, it notes that “with oil prices back to the upper end of our forecast range, we are concerned that declines could again drive elevated volatility for risky assets.”

* * *

Perhaps just this once Goldman will be right?


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Trump Blasts Muslims After Brussels Attack: “We Cannot Let These People Into Our Country”

At the risk of being crass, we’ve said on several occasions that the Paris attacks, the San Bernardino massacre, and the wave of sexual assaults that have swept Western Europe are the best things that ever happened to Donald Trump’s presidential campaign. 

It seems exceedingly likely that Trump had very little conception of what was going on in the Balkans when he stormed onto the political scene last summer with inflammatory comments about Mexican immigrants. As luck would have it, just two months later, Europe’s migrant crisis reached a critical tipping point when Hungarian PM Viktor Orban built a 100-mile razor wire fence in an effort to seal his country’s border with Serbia. Suddenly, Trump wasn’t the only one building walls

Europe’s worst nightmares came true in November when gunmen and suicide bombers killed 130 people in Paris and although the connection with Syrian refugees was tenuous, the tragedy nevertheless served to validate anti-immigration rhetoric. The San Bernardino massacre less than a month later tied it all together for Trump. Muslims. Immigration. Murder. America. It was all there. 

Subsequently, Trump would blast Angela Merkel’s open-door migrant policy and before you knew it, he was being endorsed by the likes of far-right, anti-immigration Dutch politician Geert Wilders and France’s Jean Marie Le-Pen.

In January, Trump called Brussels a “hellhole.”

On Tuesday morning, three explosions ripped through that “hellhole,” killing at least two dozen and injuring many more in an attack that’s likely tied to last week’s capture of Paris fugitive Salah Abdeslam in the Muslim enclave of Molenbeek. 

Needless to say, the media jumped at the opportunity to get Trump’s take and Fox was first up with the GOP frontrunner’s initial reaction this morning. Here’s what Trump said:

“Do you all remember how beautiful and safe a place Brussels was? Not anymore!” 

 

“I would close up our borders.” 

 

“[Muslims] have to be more open with the police. They have to let people know when they see people making bombs on the first floor of an apartment.”

 

“This is just the beginning. It will get worse and worse. It’s out of control.”

 

We cannot allow these people to come into our country. They’re not assimilating into society. There’s something different going on.” 

 

“Muslims have to be checked very, very carefully. Muslims aren’t assimilating easily into other countries. There’s something wrong.”

 

“It’s probably going to happen here.”


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Explosions That Rocked Brussels Airport, Metro Tuesday Appear to Be Terrorist Attacks

A series of Tuesday morning explosions in Brussels, Belgium, has left more than two dozen dead and many more injured. According to the Associated Press, two explosions ripped through the Brussels airport first, followed by an explosion at a subway station near the E.U. headquarters in Brussels. At least one of the blasts is thought to have been caused by a suicide bomber. 

Belgian authorities are calling all three explosions “terrorist attacks.” So far, officials have announced 55 injured and 15 dead in the subway attack and at least one dead in the airport attacks.

The attacks come just a few days after Salah Abdeslam was arrested in Brussels for orchestrating the terrorist attacks in Paris last year. 

Belgian Prime Minister Charles Michel said in a speech: “What we feared has happened, we were hit by blind attacks. … We know there are many dead, many injured … This is a dark moment for our nation. We need calm and solidarity.” 

Meanwhile, French Prime Minister Manuel Valls declared: “We are at war. We have been subjected for the last few months in Europe to acts of war.” 

“This war will be long,” added French President Francois Hollande, who said that while the “terrorists struck Brussels… it was Europe that was targeted.”

All flights in and out of Brussels have been canceled, all subway stations have been closed, and authorities are telling everyone to remain where they are. 

Below is AP footage from the Brussels Airport and metro station attacks:

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Dramatic Video Footage From The Brussels Terrorist Attacks

Tuesday morning will live in infamy for Belgium where the country’s worst fears finally coalesced into a coordinated terror attack that at last count had left more than two dozen people killed and many more seriously injured. 

For months, Belgian authorities were on edge after it became apparent that the Brussels suburb of Molenbeek was used as a staging area for the attacks that killed some 130 people in Paris last November.

Anti-terror raids in the neighborhood became commonplace and last week, Paris suspect Salah Abdeslam was captured in the Muslim enclave after he was shot in the leg in a firefight with police. Officials suspect Tuesday’s bombings are connected to his arrest

And so, as we await the final death toll in the latest example of what is rapidly becoming something of a culture war with dangerous implications for regional and global stability, we bring you the following videos from this morning’s tragedy in Brussels.








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Frontrunning: March 22

  • Brussels Rocked by Deadly Attacks With Blasts at Airport, Subway (BBG)
  • Death count climbs in Brussels blasts (Reuters)
  • Europe on High Alert After Blasts in Belgium (WSJ)
  • Brussels Phone Users Urged to Text Not Call as Networks Jammed (BBG)
  • U.S. Embassy Urges Citizens in Brussels to Shelter in Place (BBG)
  • Oil prices swept lower after Brussels blasts spook investors (Reuters)
  • Democratic Party workers pore over videos in bid to hobble Trump (Reuters)
  • Trump’s Republican Turnout Boost Extends to Battleground States (BBG)
  • Cooperman’s Omega Said to Get Wells Notice Over 2010 Trade (BBG)
  • U.S. Says ‘Outside Party’ Could Unlock Terrorist’s iPhone (WSJ)
  • Gold Trader at Heart of Turkey Graft Scandal Charged in U.S. (BBG)
  • New York Fed Had `Major Lapse’ in Robbery, Bangladesh Says (BBG)
  • With Board Member Who Won’t Leave, Valeant Is at Mercy of Bylaws (BBG)
  • Obama intervened over crumbling Iraqi dam as U.S. concern grew (Reuters)
  • Google’s Greene Hastens Cloud Expansion in Race With Amazon (BBG)
  • New Market for U.S. Shale Gas Opens in Europe (WSJ)
  • Drillers Can’t Replace Lost Output as $100 Oil Inheritance Spent (BBG)
  • Puerto Rico takes restructuring law to U.S. high court (Reuters)
  • Atlantic City Mayor Warns of Shutdown Amid Push for State Rescue (BBG)

 

Overnight Media Digest

WSJ

– Valeant Pharmaceuticals International Inc moved to replace its longtime chief executive, part of a series of steps to regain credibility and show investors it is committed to a fresh start after months of failed attempts. Valeant’s decision to look for a successor to CEO Michael Pearson comes just three weeks after it decided to take him back following an extended medical leave. (http://on.wsj.com/1Mj6BRx)

– A federal magistrate judge postponed a highly anticipated Tuesday hearing over the Justice Department’s request for Apple Inc to help unlock a terrorist’s iPhone, after the government said it may have found another way to view the phone’s contents. (http://on.wsj.com/1o2Y89r)

– Starwood Hotels & Resorts Worldwide Inc said it had agreed to a sweetened $13.6 billion deal from Marriott International Inc that trumps last week’s boosted bid from a group led by China’s Anbang Insurance Group Co. (http://on.wsj.com/1S04EGd)

– Fantasy-sports operators FanDuel Inc and DraftKings Inc agreed to shut down in New York, their largest market, as part of a settlement announced Monday with the state attorney general’s office. (http://on.wsj.com/1RwcK8M)

– FedEx Corp will expand its global e-commerce business in an effort to compete for the growing number of packages shipped to consumers from China and Japan, executives said Monday. (http://on.wsj.com/1ZmHfnS)

 

FT

British car maker TVR will open a new plant in south Wales as the group prepares to return to production after more than a decade’s absence from the market.

Former leader of the opposition, Ed Miliband, will on Tuesday make a significant intervention into the debate over Britain’s place in the EU by repeatedly warning Labour that his party “cannot sit it out” ahead of the referendum in June.

Spanish lender Banco Santander rolls out voice-recognition technology to help its customers using an iPhone to talk to its banking app in a similar way as Apple’s virtual assistant, Siri.

 

NYT

– Andrew Grove, the longtime chief executive and chairman of Intel Corp and one of the most acclaimed and influential personalities of the computer and Internet era, died on Monday at his home in Los Altos, California. (http://nyti.ms/1Mk2AMF)

– Leon Cooperman and his $5.2 billion hedge fund Omega Advisors received a notice from the Securities and Exchange Commission on March 14 outlining the possibility that they could face enforcement action over trading violations, the hedge fund manager told investors. (http://nyti.ms/1Mk2G6Q)

– Analysts at Keefe Bruyette & Woods released a report that urges Citigroup Inc to split up. In the report, the analysts argued that Citigroup’s stock price is being held back by regulations that require big banks to hold large amounts of capital. (http://nyti.ms/1Mk2Mv6)

– BP Plc and the Norwegian oil company Statoil ASA said they were withdrawing employees from two of Algeria’s largest natural gas fields after Islamic terrorists staged the second attack in three years on their installations. (http://nyti.ms/1Mk2ZP3)

 

Canada

THE GLOBE AND MAIL

** Bombardier Inc is defending its plan to outsource more work on its Toronto-built Q400 turboprop aircraft to manufacturing sites outside Canada, saying its goal of cutting costs on the aircraft has nothing to do with its billion-dollar aid request from Ottawa.(http://bit.ly/1SdYmoY)

** Prime Minister Justin Trudeau is promising Tuesday’s budget will deliver “historic investments” to improve the lives of Canada’s indigenous people – funding that will amount to billions of dollars.(http://bit.ly/22tnj89)

** Foreign Minister Stephane Dion is acting illegally by issuing permits to allow the export of combat vehicles to Saudi Arabia, a lawsuit filed in Federal Court on Monday alleges. Opponents of Canada’s C$15-billion ($11.48 billion) arms deal with the Saudis are taking the Trudeau government to court in an attempt to block shipments of the fighting vehicles to Riyadh. (http://bit.ly/1RcSZat)

NATIONAL POST

** Bankers Petroleum Ltd has received a friendly takeover offer that values the Calgary-based company at C$575 million ($440 million), excluding debt obligations. The directors and management of Bankers are fully supporting the offer from Charter Power and a numbered Alberta company, which are affiliates of China-based Geo-Jade Petroleum Corp . (http://bit.ly/22tokx5)

** Valeant Pharmaceuticals International Inc announced Monday morning it was placing the blame for incorrect reporting of financial information on the shoulders of its former CFO Howard Schiller and corporate controller Tanya Carro, though the one-time interim-CEO Schiller says he won’t take the fall. (http://bit.ly/25i6USJ)

 

Britain

The Times

– IHS Inc, the American owner of publications including Jane’s Defence Weekly, will move to London after agreeing to a deal to take over Markit Ltd in an all-share merger that values the combined business at more than $13 billion. (http://thetim.es/1pw9AeK)

– Henri de Castries, chairman and chief executive of Axa SA , announced his retirement yesterday from the company he has led for nearly 17 years, leading to mounting expectations that the French financier is preparing to take the chair at HSBC Holdings PLC. (http://thetim.es/1pw9J1O)

The Guardian

– Sports Direct International Plc’s founder Mike Ashley has challenged the authority of a parliamentary select committee by refusing to appear before MPs investigating pay and working conditions at the retailer, despite being formally summoned. (http://bit.ly/1pw9Muq)

– Britain’s biggest companies could face a credit downgrade – potentially forcing up their borrowing costs – should the UK vote to leave the EU in June, according to a report by a leading ratings agency. (http://bit.ly/1pwdDaR)

The Telegraph

– Five Guys, the U.S. burger chain which counts President Barack Obama among its fans, has overtaken Nandos as the UK’s most popular fast-food chain just two years since arriving in this country. (http://bit.ly/1pwakRg)

– Atlantic Healthcare, a Cambridge-based drugs company, has raised $24 million as it reaches the final stages of developing a drug that could relieve the suffering of people with severe inflammatory bowel conditions. (http://bit.ly/1pwao3e)

Sky News

– Lyndon Nelson, the executive director for UK deposit-takers supervision at the Prudential Regulation Authority (PRA), was among a small number of candidates interviewed about replacing Andrew Bailey as its chief executive. (http://bit.ly/1pwaOXp)

– British sports car maker TVR is to make its new generation of vehicles in south Wales, creating 150 jobs. (http://bit.ly/22AL0YK)

The Independent

– Carmignac Gestion’s head of European equities, Muhammed Yesilhark, departs after investing in barely ever traded scheme run by Tory donor Lars Windhorst, who is advised by the former Business Secretary. (http://ind.pn/1pwfDjp)

 


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Australia’s Thriving Black Market in Weapons: New at Reason

Liberals in America love to point to Australia’s gun control policies, but they never mention its thriving black market in weapons. J.D. Tuccille writes:

Just days ago, Australia’s Peter Dutton, Minister for Immigration and Border Protection, and Michael Keenan, Minister for Justice, held a joint press conference to announce “We don’t tolerate gun smuggling in Australia and we know Outlaw Motorcycle Gangs are engaged in it. We have been keen to send the strongest possible message from Canberra that we’re not going to tolerate people smuggling in guns or smuggling in gun parts. You’d appreciate that even one smuggled gun can do an enormous amount of damage.”

When politicians announce that they don’t tolerate something, it’s a fair bet that the something is completely out of hand.

“Police admit they cannot eradicate a black market that is peddling illegal guns to criminals,” the Adelaide Advertiser conceded a few years ago. “Motorcycle gang members and convicted criminals barred from buying guns in South Australia have no difficulty obtaining illegal firearms, including fully automatic weapons.”

View this article.

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Belgium Cancels All Air, Rail Traffic Into/ Out Of Brussels; Military Deployed

In the wake of the three (and now possibly four) explosions that rocked Brussels on Tuesday morning, Belgium has cancelled all air and rail traffic to the city

Eurostar has suspended all service to Brussels following a deadly explosion at Maelbeek metro station were more than 20 were reportedly killed this morning. 

Meanwhile, all flights from the Brussels airport are cancelled. 

The airport says it will remain closed until at least Wednesday. “The blasts add to the woes of the travel industry in Europe, the Middle East and Africa, which already has seen tourism drop after two terrorism attacks in Paris last year, the destruction of a Russian airliner in Egypt, bombings in Ankara and Istanbul in Turkey, and a deadly assault on tourists on a Tunisian beach,” Bloomberg notes.

Meanwhile, the Belgian army will deploy an additional 275 troops to Brussels as the city will once again come to resemble a war zone in the aftermath of an apparent coordinated suicide attack that authorities believe may well be linked to last week’s anti-terror raid that ended with the capture of Paris fugitive Salah Abdeslam.

Expect more trouble in Molenbeek over the next 24-48 hours.


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Global Markets, S&P500 Futures Fall After Brussels Bombings

This morning’s Brussels bomb attacks have led to risk-off sentiment across European asset classes, with Bunds higher and equities firmly in the red, although if the Paris terrorist attacks of November are any indication, today’s tragic events may be just the catalyst the S&P500 needs to surge back to all time highs. FX markets have also been dominated by events in Brussels, with USD and JPY strengthening, while EUR and GBP softening throughout the European morning.

Losses today would disrupt a five-week rally bolstered by improving economic data, rising crude prices and “optimism that central banks around the world will continue to support growth” as Bloomberg puts it clearly not aware of the irony that the world is no longer able to grow precisely due to decades of central bank “stimulus.”

This is where global markets stand as of this morning.

  • S&P 500 futures down 0.4% to 2034
  • Stoxx 600 down 0.9% to 338
  • FTSE 100 down 0.6% to 6149
  • DAX down 0.9% to 9854
  • German 10Yr yield down 3bps to 0.2%
  • Italian 10Yr yield down less than 1bp to 1.25%
  • Spanish 10Yr yield up 2bps to 1.46%
  • S&P GSCI Index down less than 0.1% to 336
  • MSCI Asia Pacific up 0.7% to 130
  • Nikkei 225 up 1.9% to 17049
  • Hang Seng down less than 0.1% to 20667
  • Shanghai Composite down 0.6% to 2999
  • S&P/ASX 200 down 0.3% to 5167

Global top news

  • Brussels Rocked by Deadly Attacks With Blasts at Airport, Subway: Two explosions ripped through Brussels airport departure hall, third hit a downtown subway station on Tuesday morning; VTM news put toll at 11, citing local fire department.
  • IPhone Hearing Canceled as FBI Tests Hack Without Apple Help: Court hearing was canceled at DoJ’s request, as govt said in Monday court filing that it wanted to test a possible method for accessing phone data.
  • Apple Unveils Smaller IPhone SE, New IPad Pro to Aid Sales: iPhone SE has a 4-inch-screen, incorporates faster A9 processor that also runs larger iPhone 6S handsets.
  • Cooperman, Omega Said to Get Wells Notice Over 2010 Trade: Leon Cooperman said regulators are considering taking action against both him, Omega Advisors over certain trades, according to person familiar.
  • Express Scripts Incoming CEO Wants Anthem to Stay Amid Suit: Incoming CEO Tim Wentworth trying to keep its biggest customer, after health insurer Anthem sued to recoup billions.
  • Carnival Wins Cuban Government’s OK to Begin Cruises to Island: Decision allows co.’s Fathom division to become first U.S. cruise line to dock there in >50 years.
  • Ackman Said to Address Valeant Side-by-Side With Pearson: Ackman, with chairman Ingram, outgoing CEO Pearson answered questions, made proclamations about co.’s future.
  • BlackRock Says There Won’t Be a U.S. Recession, Cut Treasuries: “Economic indicators this week may show the U.S. economy experienced a mild slowdown but is not headed for a recession,” Richard Turnill, global chief investment strategist, wrote in a report Monday.
  • Boeing Likely to Miss Delivery Date for Tankers: Pentagon: Co. likely to miss first major requirement of its $51b tanker program for U.S. Air Force; delivering firrt 18 aerial refueling planes by August 2017.
  • Apache Unlikely to Seek M&A Until More Restructuring Occurs: Co. has higher bar for purchasing assets, given that it already has deferred activity, CEO John Christmann said Monday.?Transocean, Schlumberger See Oil Industry Recovery Delayed ?National Oilwell Considering Billion-Dollar Deals in Oil Slump

Looking at regional markets, Asian stocks traded mixed despite the mild positive lead from Wall St., as commodities retreated and demand for risky assets remained subdued ahead of the Easter season. Nikkei 225 (+1.9%) outperformed on return from a long weekend to snap a 4-day losing streak with JPY weakness driving price-action, while ASX 200 (-0.3%) saw indecisive trade as losses in financials and materials capped upside momentum. Elsewhere, Chinese markets were subdued with the Shanghai Comp (-0.6%) on course for its first loss in 8 days following weakness in commodity-related sectors, while there were also reports that China’s regulator urged banks to reduce their risk and curb dividend pay-outs. Finally, 10r JGBs traded relatively flat despite the heightened risk-appetite in Japan as real money accounts were seen to be mostly side-lined, while there was also notable curve-flattening as yields in the super-long-end dropped to fresh record lows. BoJ’s Nakaso said would like to watch for some time to evaluate how negative rates work throughout the Japanese economy and added that it is technically possible for the BOJ to go deeper into negative territory.

Top Asian News

  • Hong Kong Property Crash Averted, If Stock Traders Are Right: Hang Seng Properties Index has climbed 18% from January low.
  • Ringgit Gains to Seven-Month High on 1MDB Asset Sale Report, Oil: Currency’s break of 4/$ puts 3.9 in sight, Macquarie says.
  • China’s Rising Sway Seen in Korea Bonds as Holdings Top U.S.: Chinese funds are now biggest holder of won- denominated debt.
  • Botched Rules Trip Modi Dream of Shipping Hub Rivaling Singapore: Curbs, costs mean shippers prefer Colombo, Singapore, Dubai.
  • ANZ Bank Plans to Eliminate 12 Positions in its Markets Division: Unit includes foreign exchange, syndicated loans, fixed income.

The price action in Europe has been dictated by the tragic events in Belgium, in which explosions at the Brussels airport and metro stations has prompted risk off sentiment. As such, equities (Eurostoxx -0.40%) are deeply entrenched in negative territory with underperformance seen in airline names such as IAG (-4.2%) and Ryanair (-4.3%), this comes alongside other tourist related names feeling the brunt such as Accor (-4.4%). The risk off tone has seen Bunds move higher with volume also spiking, while yields continue to bull flatten across the curve with peripheral spreads slightly wider.

Top European News

  • European Hotel Stocks Fall After Explosions at Brussels Airport: Bloomberg Europe Lodging Index, composed of seven leading lodging stocks, fell 4.1%, most since Feb. 11.?Air, Train Travel Slows in Europe After Brussels Airport Blasts
  • Bank Drops as Moody’s Signals Risk of Cut Amid Overhaul: “Since changing leadership last June and recalibrating its strategic plan last November, the operating environment has worsened for Deutsche Bank,” ratings firm said in statement late Monday.
  • German Business Confidence Rebounds on Resilient Domestic Demand: Indicator improved for the first time in four months.
  • Wal-Mart Loses Everyday Low Price Edge as Aldi Opens Across U.S.: Family-owned German grocery-store chain is beating WMT at its own game: selling food at rock-bottom prices.
  • Bang & Olufsen in Takeover Talks With China’s Sparkle Roll: Several elements in the discussions remain to be resolved, B&O said Tuesday in statement.
  • OMV Said in Talks to Hire Morgan Stanley for Turkey Disposal: Sale may raise as little as $1.3b, according to Bloomberg Intelligence calculations.

In FX, this morning’s FX trade has also been dominated by the confirmed suicide attacks on Belgium. All the familiar risk currencies were hit, with spot and cross JPY taking a dive; the USD rate falling to lows around 111.36 having pushed through to 112.20 highs prior to this. GBP/JPY was a key loser on the day, as Cable was hit hard prior to news of the above — pre 1.4400 pounced up as London players came in. EUR/GBP was also edging higher, but with EUR/USD also coming under fire, the USD won out against all currencies with the exception of the JPY. AUD and CAD were slow to react, and were only marginally weakened in the risk off climate — as was NZD. The CHF made some progress against the EUR, less so against the USD. Limited impact on emerging FX. German Ifo (106.7 vs. Exp. 106) beat expectations on all counts although with ZEW (4.3 vs. Exp. 5.4) lower and UK inflation (Y/Y 0.30% vs. Exp. 0.40%) was softer than forecast.

In commodities, gold has seen the biggest move in commodities, rising USD 9.00/oz after the terror attacks in Brussels, meanwhile WTI and Brent are trading relatively flat for the day. In Base metals, copper and iron ore prices declined amid weak sentiment in China, with Dalian iron ore futures further pressured by profit-taking after prices hit limit-up in the prior 2 consecutive days.

On the US calendar today, markets will focus on the latest Markit manufacturing flash PMI for March (51.9 expected; 51.3 prior) and the Richmond Fed Manufacturing index (0.0 expected; -4 prior). We also get more housing data with the FHFA house price index for January due (+0.5% expected) ahead of the manufacturing data as well as API Crude Oil Inventories data.

Bulletin Headline Summary From Bloomberg

  • Treasuries slightly higher in overnight trading, global equity markets drop, gold rises; Brussels airport and subway system hit by explosions in possible terrorist attacks.
  • The pound suffered the biggest impact in the currency market of the Brussels explosions amid speculation the tragedy boosts the case of campaigners who want Britain to quit the European Union
  • The U.K.’s inflation rate was unexpectedly unchanged in February, remaining far below the BOE’s 2% goal. Annual consumer-price growth was at 0.3%; economists had forecast an acceleration to 0.4%
  • Deutsche Bank extended declines after Moody’s Investors Service signaled it may cut the German lender’s credit rating amid concern that it will struggle to restructure businesses
  • German business confidence improved for the first time in four months in a sign that domestic demand is helping shield companies in Europe’s largest economy from slowing global growth
  • The Australian central bank’s attempts to talk the local currency lower last year ran afoul of the U.S. Treasury, which chided officials by reminding them of their commitment to a freely floating exchange rate
  • Prime Minister Justin Trudeau will put the Canadian government back in business when he introduces a debut budget Tuesday that reverses a decade of restraint
  • In 2016, for the first time in years, drillers will add less oil from new fields than they lose to natural decline in old ones
  • $2.7b IG corporates priced yesterday; MTD $132.505b, YTD $426.755b; $1.75b HY priced yesterday, MTD 17 deals for $9.965b, YTD 42 deals for $24.82b
  • Sovereign 10Y bond yields mostly steady; European, Asian equity markets lower; U.S. equity-index futures drop. WTI crude oil and copper fall, gold rallies

US Event Calendar

  • 9:00am: FHFA House Price Index m/m, Jan., est. 0.5% (prior 0.4%)
  • 9:45am: Markit US Manufacturing PMI, March P, est. 51.9 (prior 51.3)
  • 10:00am: Richmond Fed Mfg Index, March., est. 0 (prior -4)
  • 11:30am: U.S. to sell $55b 4W bills
  • 12:30pm: Fed’s Evans speaks in Chicago
  • 7:00pm: Fed’s Harker speaks in New York


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“Pfandbriefe”, or “It Wasn’t Me!”: Why Nobody Realizes That Germany Is the Biggest Systemic Risk in the EU

I grew up in a small town in Long Island with some very funny people, Howard Stern and Eddie Murphy. Eddie had a skit in his stand-up comedy “Raw” which is a reminiscent of the macro scene of the modern day EU. Let me know if you get it…

 

“This is a quote from myriad analyst, “It is hard to believe that while banks in Euro area are plagued with asset write downs and massive losses, while the German banks are untouched. If any of the German banks fail, it would cause wide spread tumbling down of the entire banking sector in the  Euro Area.” You see, Germany is that dude that Eddie Murphy is talking about. Their major trading partners are either in recession, or entering recession. Their real estate is super duper, uber bubbly (but of course will go much higher, so now is the time to buy), and their banks have highly leveraged assets that literally dwarf the economy that their domiclied in – thus making a cash bailout arithmetically impossible. Despite all of this, when investors look over there and say “Hey, you look like your in some pretty hot water and the ECB is obviously acting to protect somebody in troube!”, what do the Germans say? “Hey, it wasn’t me!”

Yep, it’s not them. Right…. Some background first.

The ECB started buying Covered bonds issued by commercial banks at the end of 2014. Covered bonds, which generally have high credit ratings, are bonds where the payments of principal and interest are backed by both the bank’s balance sheet and a pool of assets, such as mortgages and public-sector loans.

Covered bonds are known as “Pfandbriefe” in Germany, where an early form of the bonds were introduced by Frederick the Great of Prussia – in 1769 to make it easier for owners of large agricultural estates to get cheap credit. Groups of land-owners guaranteed individual members’ loans against the risk of individual default. As part of its asset purchase program, the ECB has bought covered bonds worth about 158 billion euros. The consistent purchase of covered bonds by the ECB sent the yield of these bonds into negative territory during the past 18 months, with Germany having the highest share. A city research report states that 97% of German Pfandbriefe with a maturity of five years or less have a negative yield. That’s practically all of it.

In this context, German lender Berlin Hyp issued €500m of euro-denominated zero-coupon covered bonds, yielding a return of negative 0.162% on March, 2016 marking it the first time a non-government bond offering a negative yield. The issue came ahead of European Central Bank’s policy meeting that authorized the purchase of corporate securities via the QE program – what a coincidence, no? Dig a little deeper and you’ll find it also happened when Berlin Hyp became significantly more risky…

Berlin Hyp Real Estate Exposure

They’re betting the house on German real estate, and why not? This is the time to buy. Prices have went up likely more than anytime on record, and if prices soar more than anytime in history, then first thing anyone should do is pile on after the fact, right?

German property pricesData from globalpropertyguide.com 

Notably, Berlin Hyp’s new covered bond yields around 40 basis points more than equivalent three-year German government debt. Given the crowding of negative yield bond in the market and ECB’s obligation to hit its monthly target of Euro 80 billion, Berlin Hyp’s covered bonds hold a buying appeal from a purely yield perspective if one really insists on buying German debt. From a fundamental investor’s perspective, this makes very little practical sense, given the significantly higher risk profile of Berlin Hyp and its cover relative to the German government… 

In the same week when Berlin Hyp launched its negative yield bond, ECB announced the inclusion of non-banking corporate bond in its buying program (again, one hell of a coincidence). Although the details of CSPP are still not known (but I’ll betcha Berlin Hy executives know it), the announcement of ECB entering in the non-state corporate bond market has been cheered by the investors. European corporate bond indices rallied, driven by the new stimulus measure. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies posted what looks to be a record decline – including the biggest single day drop in more than three years.

 German corportate CDS

This begs the question, is Berlin Hyp truly (a bank that had to be bailed out of the last financial crisis) more credit worthy than nearly all of the sovereign states in Europe and nearly as credit worthy as Germany itself. Is this bank worthy of paying for the privilege of lending them money – essentially “Return Free Risk”? Can you still say that knowing they have bet the from on what looks very seriously to be a real estate bubble in their local markets with negative rates everywhere (in other words the direction of least resistance for rates is up, meaning cap rate direction of least resistance is down)?

Part two of the Veritaseum Macro Research introduction is out, and available for purchase here. I believe it should open some eyes. Every report after this point will be about identifying those banks, brokers and entities that we believe are at risk of going bust, and attempting to narrow a timeframe as to when. We will also elavorate heaving on the Peer-to-Peer economy and how embracing it can do more to isolate you from the coming crisis than nearly anything else. We’re not playing here. For those that don’t know my track record…

For those of you who don’t see the bigger picture…

 


via Zero Hedge http://ift.tt/1XJxJJV Reggie Middleton