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Prime Minister Boris Johnson is riding high on Wednesday following a meeting with President Trump, one of his closest political allies.

Enjoyed my meeting with Prime Minister @BorisJohnson of the United Kingdom at @10DowningStreet last night. Talked about numerous subjects including @NATO and Trade.

— Donald J. Trump (@realDonaldTrump) December 4, 2019

With UK election polls showing the Tories with a sizable lead over Labour, an analyst at UBS quipped that the UK snap election is now “Boris Johnson’s to lose,” according to the FT.

Though many of Johnson’s political opponents have spent the last couple of weeks complaining about the corrupting influence of ‘YouGov’, which many claim is biased in favor of the Tories, it appears that the Conservatives’ lead is being reflected across polling companies.

A YouGov poll released last night showed both the Tories and Labour down one point at 42% and 33%, though it wasn’t the only poll to show a sizable conservative lead.

Not just me old fruit…
Current Tory Lead by Pollster:

Opinium: +15
DeltaPoll: +13
Kantar: +11
Survation: +11
ComRes: +10
YouGov: +9
Panelbase: +8
ICM: +7
BMG: +6

Polls from 23rd November or later only.

— Freddie Scovell Esq. (@FreddieScovell) December 4, 2019

These numbers drove cable to its highest level since May, with Neil Jones, the head of FX sales at Mizuho Bank, attributing the move to traders’ cutting back their sterling short positions and hedges as a Tory victory looks increasingly likely.

In a continuation of its gains from Tuesday’s session, the pound broke above $1.30 Wednesday morning.

According to Bloomberg and the FT, investors see a decisive conservative majority as the best possible outcome for the snap vote on Dec. 12 because it would enable Johnson to push his Brexit deal through Parliament before the January deadline, allowing the UK to finally begin is split from the EU. To be sure, after the deadline, the negotiations over the substance of a future UK-EU trading relationship will begin, which is where some see problems. Many analysts suspect that Johnson’s pledge not to extend the Brexit transition period beyond the end of next year has already set up the UK for another round of gridlock and last-minute extensions.

We’ve seen these headlines before…

Equity futures in Europe and the US jump on “trade optimism” headlines around 4 am est. The headlines were published by Bloomberg, citing unnamed sources, who said the US and China are moving closer to the number of tariffs that would be rolled back to complete a phase-one trade deal.

The unnamed sources said President Trump’s comments on Tuesday “shouldn’t be understood to mean talks were stalling, as he was speaking off the cuff.”

Sources added a phase-one deal with China is expected to be completed before the next round of tariffs begins on Dec. 15.

E Mini S&P500 jumps 60bps on unnamed sources saying both sides are closer to a deal. We’ve heard these headlines before…

Considering unnamed sources and timing of the pump, this was more fake trade news to save equity futures from a further correction.

Protect E Mini S&P500 3100 at all costs, even if that means pumping a “trade optimism” article that had zero substance to it.

And there it’s, Global Times calling out President Trump and Bloomberg for pumping fake trade news… 

I predict there is a high probability that President Trump or a senior US official will openly say in a few hours that China-US trade talks have made a big progress in order to pump up the US stock markets. They’ve been doing this a lot.😀

— Hu Xijin 胡锡进 (@HuXijin_GT) December 4, 2019

 

 

Authored by Christopher Dembik, head of Macro Analysis at Saxo Bank,

Today, we have published our Outrageous Predictions for 2020. The overall theme is: Engines of Disruption. Frankly speaking, I think the ones we have written this year are among the best.

That being said, I am thinking it is certainly the right moment to share with you my macro calls for next year. I haven’t covered everything, but it think the below list is a good sum up of what we should expect in 2020:

The death of free markets

Please, remember QE is not QE. In order to fix the broken monetary transmission mechanism, the Federal Reserve has already injected $324 billion in the repo market. Central banks don’t want you to know it, but this is the death of free markets. In some market segments, central banks are becoming market makers. This is especially the case for the European sovereign bond market. Based on our calculations, central banks own around 80% of German’s debt. Central bank interventions have led to mispricing, misallocation, complacency and muted volatility. This is clearly the case on the forex market, notably the EUR/USD cross. Nothing is able to move the cross and implied volatility is at an historically low point. However, we cannot live without central bank interventions as it would mean higher rates and lower liquidity which would have disastrous economic and financial consequences in a world of high indebtedness.

The Warren trade is trendy

My belief is that no matter what will happen in the coming months, the next US president will be a populist. In this context, one of the most popular trades in 2020 could be a put option on the S&P 500 index for March expiry. It would be the right way to hedge against Warren risk (in case she wins in Iowa, New Hampshire and on Super Tuesday) but also against new US tariffs against China if negotiations derail.

Old monetary policy debates are coming back

The ECB’s strategic review is likely to address the issue of inflation and the way it is calculated. This is a very old debate and there are a lot of conflicting viewpoints on the topic. The ECB, under Draghi’s leadership, seemed in favor of including housing prices in HICP but, in 2018, the EC advised against it due to the lack of timeliness of the new OOH Index (Ower-Occupied Housing Index). More basically, the ECB might need to bring some clarity about what the objective of inflation really means. It could get rid of the “below, but close to” 2% inflation target and it could adopt a more flexible approach, i.e. a range of 1-3% for instance.

And new ones are emerging

Reviewing the framework will be the best opportunity to include climate change. In that sense, Lagarde’s letter to EP was bright clear: “The intended review of the ECB’s monetary policy strategy…will constitute an opportunity to reflect on how to address sustainability considerations within our monetary policy framework”. In the United States, the economist Stephanie Kelton is justifying MMT with climate change. We should get ready to a huge monetary and fiscal climate package but more likely in 2021 than in 2020.

Economists are good to forecast rolling recession

If recession does not happen in 2019, it will happen in 2020…or in 2021. As a matter of fact, it has become more and more complicated to understand how economic cycles work, partially due to the financialization of the economy. However, as long manufacturing weakness contagion to the service sector is limited, our base case scenario is that we are at the start of a mini-cycle recovery, fueled by central banks, in the context of a late-cycle expansion.

The car market is still a disaster, especially in China

In 2018, the car market was hit hard by the expiration of key tax breaks. In 2019, sales were down due to new emissions standards and the withdrawal of consumer subsidies for electric vehicles. In 2020, the car market will remain sluggish as risks on consumption and global trade will stay elevated.

In 2018 we detailed the shocking story of an Iraqi Yazidi woman who was kidnapped by ISIS as a teenager in her native Iraq in 2014 and held for three months as a sex slave by the terror group, eventually managing to escape and later resettled as a refugee in Germany after the harrowing ordeal.  But astoundingly, two years after her escape, she unexpectedly encountered her ISIS kidnapper while walking the streets of Stuttgart, Germany. The man she identified as Abu Hamam was living in Germany as a free man, and the police did nothing. 

“She told police and asylum officials about the encounter and although they identified the man from CCTV they said there was nothing they could do because the man was also registered as a refugee,” The Times reported in 2018. But now the Kurdish Yazidi woman Ashraq Haji Hamid (previously identified as Ashwaq Ta’lo) has bravely confronted her prior captor — the very man who bought her and violently raped her “several times a day” — on Iraqi TV in a rare, intense moment.

“Abu Humam, look up. Why did you do this to me? Why? Because I’m Yazidi?” she said to the prisoner now back in Iraqi custody, Abu Hamam. “I was 14 years old when you raped me. Look up. Do you have feelings? Do you have honor?” she asked him. 

“I was 14 years old, as old as your daughter, your son, or your sister,” she continues. “You destroyed my life. You robbed me of all my dreams. I was once held by Isis, by you, but now you will feel the meaning of torment, torture, and loneliness.”

“You’ve destroyed my life. You took everything from me. Everything I dreamed of,” she angrily told her prior ISIS abuser.

Now 20-years old, the young woman actually faints near the end of the intense encounter. The unusual interview recorded by the Iraqi National Intelligence Service and broadcast on Al-Iraqiya news channel in late November.

The idea behind the arrangement was to give a sense of closure to Hamid’s ordeal, and for a sense of national acknowledgement and healing in terms of what happened to thousands of Iraqi women after they were kidnapped by the Islamic state.

Former Yazidi Slave Girl Confronts Captured ISIS Terrorist Who Had Held Her Captive, Violently Raped Her When She Was 14: You Destroyed My Life pic.twitter.com/mCazC4o7j1

— MEMRI (@MEMRIReports) December 1, 2019

“Now you will feel the meaning of torment, torture, and loneliness,” she tells the Iraqi prisoner while sobbing. He’ll likely spend the rest of his life in Iraqi prison following his arrest by Iraqi authorities when he left Germany; or he possibly faces execution like many former Islamic State fighters detained by Iraq.

According to The Independent, after previously accidentally coming face-to-face in Germany with the man who had in Iraq been her ISIS captor, she had fled the country back to her native Iraq, fearing European authorities would do nothing. She feared for her life despite having made it from a war zone to the supposed ‘safety’ of Europe. 

In 2018 she told the full story of bumping into her ISIS captor of the streets of Stuttgart where he was enjoying life as a free man.

This is Ashwaq, a Yazidi girl who was kidnapped by ISIS in 2014 when the terrorist group attacked Kurdistan-Iraq. After her escape and her migration to Germany, she met the man who had bought her as a slave, walking around freely in Germany. This is unacceptable! pic.twitter.com/rIYYhP9nmQ

— Polla Garmiany ☀️ (@PollaGarmiany) August 14, 2018

However, Abu Hamam was later “handed over to Iraqi security services when he returned to the country as well.” It’s unclear precisely how or by what arrangement he had returned to Iraq. 

What’s shocking about the case, and what drove outrage when the story first came to light, is that Germany had previously given the ISIS terrorist “refugee” status. And who knows how many other escaped ISIS terrorists are now living freely in Europe under the protection of ‘refugee’ status? 

Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,

The crisis in Europe will come from Germany. Germany has entered a period of political crisis that, as yet, has not exploded.

But the pyre is built, the torches lit and all that remains is dragging Chancellor Angela Merkel up and setting the whole thing on fire.

For those that want to understand the fundamental impulses which have led the European Union to where it is today and Germany’s central role one really needs to read Bernard Connolly’s “The Rotten Heart of Europe.”

It’s a book that damns pretty much everyone in their monomaniacal drive for the European Project but, Germany, in particular, to me, comes across the worst.

Because the design of the euro, as a currency, was guided by German industrialists looking for the advantage a single currency would bring them.

This is a point I’ve made many times that the single exchange rate underprices the value of Northern European industrial entities while overpricing Southern Europe’s productive capacity.

Moreover, it raised the effective quality of the debt of those countries far above the market rate. This allowed them to borrow at far lower rates than they would ever have been able to.

This has led to exactly where we are today with massive internal imbalances which have hollowed out these economies, further eroded their productive capacity and competitiveness and left them with a mountain of unpayable debt which is then used as a further means to extract the last of the country’s real wealth when the inevitable crisis hits and the debt has to be restructured.

And to think that this point wasn’t understood by the people who designed the euro is to be terminally naive. This is a point not only made by Connolly but also by Gyorgy Matolcsy, the President of the Hungarian Central Bank.

Thanks to a very generous regular reader I’m reading his book, “The American Empire Vs. the European Dream” right now. And Matolcsy opens the book with a scathing attack on the euro and how it never should have been introduced in the first place.

Because the effects of the single currency have been wholly predictable. But he makes an even larger point than Connolly did in his book. Germany, through wealth extraction and collecting rent thanks to the exchange rate arbitrage.

It may anger my German readers to hear this but, again, if you didn’t think this was the plan by some all along, to colonize countries like Greece that couldn’t be conquered militarily in WWII, then you can’t also see why the rest of Europe is becoming angry.

But Matolcsy goes one step further in his criticism of Germany, saying that if that wealth extraction had been distributed throughout the EU over the twenty-plus years of the euro via investment then things would be far better today.

But Germany never gave up its mercantilist mindset, preferring instead to sell Spanish and Greeks BMWs and Porsches while lending them the money at suppressed interest rates to do so.

And then when the bills come due demand austerity to pay them back and call them deadbeats in the process.

That’s why Germany, today, is the rotten center of a crumbling European would-be empire. And why everyone, including Germans, will now be impoverished as the mountain range of unpayable debt collapses.

Empires always rot from within.

The American empire is facing the exact same problem, but because it is the world’s reserve currency and has the biggest synthetic short against it will simply get hit later.

This is why the Dow Jones Industrials and the S&P500 are trading at all-time highs despite President Trump’s latest trade war salvos at China and the German DAX is struggling to best its 2018 high.

The Dow is sniffing out the differences in the political and economic uncertainties between the U.S. and Germany. Because …

The big news is that Angela Merkel’s coalition partner, the Social Democrats (SPD), just elected new leadership that is hostile to the governing coalition as they blame Merkel for their collapse as a political force nationally. That puts Merkel’s political future in jeopardy or, at a minimum, ensures she has even less control over a mostly gridlocked German government.

For the past couple of months we’ve seen the markets in general breath a sigh of relief after the Fed and ECB stepped in to provide liquidity.  But that doesn’t fix the underlying problems, it only delays them for a few more months by reflating the yield curve, in this case the U.S.’s and Germany’s.

But is the reflation trade the new dominant one or simply a lull between crises, as Jeff Snider at Alhambra Partners suggests?

My guess is the latter as the Fed keeps piling term Repos onto its balance sheet, now more than $207 billion since September, and another 42-day repo operation yesterday that was 2x oversubscribed.

Sure that could be normal quarter-end shenanigans but why? And will we be asking these same questions when these 42-day repos expire in late January?

The bigger questions is what is causing U.S. banks to need so many dollars to keep the money markets liquid? And why is everyone struggling with this dollar shortage?

Because everyone is feeling the same thing, something is going to change in a big way and when it does they want dollars, not euros, pounds, yen or yuan.

The German economy is slowing. It has been for more than a year.

And when the reflation trade is over, markets that haven’t made new highs will be much more vulnerable to collapse. Germany’s multi-generational mercantilist empire has reached its zenith. It can’t push it any further without conceding political ground to the rest of Europe or abandoning the very thing that created the empire in the first place, the euro.

That’s the central problem which sits at the heart of the European Project. And it can’t be papered over much longer.

*  *  *

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A Turkish diplomat has revealed a map which delineates waters in the Mediterranean claimed by Turkey, amid an ongoing months-long standoff with Cyprus and Greece over Turkish oil and gas exploration and drilling inside Cyprus’ Exclusive Economic Zone (EEZ).

“After signing deals with its own puppet state in occupied northern Cyprus and with the pseudo-government in Libya’s Tripoli, Turkey declares that it owns half of the eastern Mediterranean,” Aron Lund, an analyst at The Century Foundation, observes of the newly published map.

New map outlining Turkey’s claimed continental shelf and the borders of its Exclusive Economic Zone (EEZ), via Hurriyet Daily. Meanwhile the entire eastern side of Cyprus is claimed by the internationally disputed “Turkish Republic of Northern Cyprus.”

And Turkey’s Hurriyet Daily explains: “With the chart, Çağatay Erciyes showed the outer boundaries of Turkey’s continental shelf and EEZ, designated in a 2011 agreement between Turkey and the Turkish Republic of Northern Cyprus (TRNC), the median line between Egypt and Turkey’s mainlands and a recent memorandum with Libya.”

Over the past year Turkey has sent both oil and gas exploration ships, as well as military transport vessels, into Cypriot waters in the East Mediterranean related to expanded claims based on the Turkish occupation of northern Cyprus (since 1974), earning the condemnation of both Nicosia and top EU officials, who have defended EU-Cyprus’ interpretation of the conflict. 

In nearby Libya, as Turkish military advisers continue to play a key role in support of the Tripoli-based Government of National Accord (GNA) against an offensive led by Gen. Khalifa Haftar’s Libyan National Army (LNA), Turkey is also busy expanding maritime defensive operations off North Africa.

“On Nov. 27, Turkish President Recep Tayyip Erdoğan held a closed meeting in Istanbul that lasted over two hours with Fayez al-Sarraj, chairman of the Presidential Council of Libya,” Hurriyet Daily reports further.

In that meeting the two leaders reportedly struck a deal which is seen as key to expanding Turkey’s maritime claims:

Stressing that Turkey has the longest continental coast line in the eastern Mediterranean, [Turkish Foreign Ministry spokesman] Aksoy said: “The islands which lie on the opposite side of the median line between two mainlands cannot create maritime jurisdiction areas beyond their territorial waters and that the length and direction of the coasts should be taken into account in delineating maritime jurisdiction areas.”

This follows boiling tensions since the early summer after Turkey laid claim to waters extending a whopping 200 miles from its coast, brazenly asserting ownership over a swathe of the Mediterranean that even cuts into Greece’s exclusive economic zone.

After signing deals with its own puppet state in occupied northern Cyprus and with the pseudo-government in Libya’s Tripoli, Turkey declares that it owns half of the eastern Mediterranean. https://t.co/Yvmpi7PA9t pic.twitter.com/N41ERkTTt3

— Aron Lund (@aronlund) December 3, 2019

So far Ankara has responded to threats of EU sanctions by reaffirming its rights to waters of all parts of Cyprus’ coast. 

Should the Turkish military attempt to enforce its drilling claims and run up against Cypriot and Greek vessels, it could spark a deadly encounter which would force the EU and reluctant NATO to finally weigh in more forcefully.