What If Donald Trump Wins?: New at Reason

What if Donald Trump wins the Republican nomination? There are many potential outcomes, writes David Harsanyi, and every one of them is a disaster for conservatives.

Fact is, Trump fans will not be placated. Not if they lose, and definitely not if they win. Unless unforeseen events alter the dynamics of American politics, it’s difficult to imagine conventional Republicans and Trump fans inhabiting the same space after this is all done. Me? I look forward to loathing three major political parties.

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Macy’s Slashes Guidance Again, Twice In One Month

Less than 4 weeks ago, on January 6, we reported of the “Macy’s Massacre: Thousands Fired; Guidance Slashed (Again); Weather Blamed“, where in addition to the massive layoffs announced by the iconic retailer, we learned that as a result of the “historically warmer weather”, the company’s prior guidance was no longer valid. Here is what it said in early January:

Macy’s, Inc. is not expecting a major change in sales trend in January and expects a comparable sales decline on an owned plus licensed basis in the fourth quarter of 2015 to approximate the 4.7 percent decline in November/December (from previous guidance of down between 2 percent and 3 percent for the fourth quarter). This calculates to guidance for comparable sales on an owned plus licensed basis in the full-year 2015 to decline by approximately 2.7 percent (from previous guidance of down 1.8 percent to 2.2 percent).

 

Earnings per diluted share for the full-year 2015 now are expected in the range of $3.85 to $3.90, excluding expenses related to cost efficiencies announced today and asset impairment charges associated primarily with spring 2016 store closings. This compares with previous guidance in the range of $4.20 to $4.30. Updated annual guidance calculates to guidance for fourth quarter earnings of $2.18 to $2.23 per diluted share, excluding charges associated with cost efficiencies and store closings. This compares with previous guidance for earnings per diluted share of $2.54 to $2.64 in the fourth quarter. Earnings guidance for 2015 includes an expected $250 million gain on the sale of real estate in downtown Brooklyn.

Well, moments ago Macy’s issued a press release in which it announced that as a result of the completion of a “real estate transaction with Tishman Speyer that will enable the re-creation of its Brooklyn store on Fulton Street” (there is always something), it has just cut guidance once again:

Given this timing change in accounting for the transaction, Macy’s management has revised its earnings guidance for the fourth quarter and full-year 2015, which previously has assumed the entire gain would be booked in the fourth quarter of 2015. Earnings per diluted share for the full-year 2015 now are expected in the range of $3.54 to $3.59, excluding expenses related to cost efficiencies announced earlier in January and asset impairment charges associated primarily with spring 2016 store closings. This compares with previous guidance in the range of $3.85 to $3.90. Updated annual guidance calculates to guidance for fourth quarter earnings of $1.85 to $1.90 per diluted share, excluding charges associated with cost efficiencies and store closings. This compares with previous guidance for earnings per diluted share of $2.18 to $2.23 in the fourth quarter.

At least Macy’s didn’t blame the “historical snow storm” in January for this latest cut.

And just like that, in the span of several months, with the January 6 interim step, Macy’s has lowered its full year outlook by 16% from $4.25 to $3.57. And since the stock is now trading near the highest levels since early November when the guidance cuts began, we can only imagine that all those betting on multiple expansion will be richly rewarded at a time when the US consumer is starting to finally feel to full impact of the manufacturing, at first, recession that is spreading across the nation.


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Bond Yields Are Collapsing Around The World

Kuroda’s decision to go full NIRP-tard is benefitting investors worldwide… in bonds. JGB yields hit record lows, 5Y Bunds are trading below the -30bps ECB deposit rate, and US Treasury yields are collapsing across the curve with 10Y below August’s Black Monday lows back to 9 months lows…

US Treasury yields are plunging… 10Y broke below Black Monday lows…

 

And 5Y rejected the top end of its range once again…

 

JGB yields hit record lows…

 

With German and Japanese bond yields negative to 8Y and 9Y respectively…


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Movie Review—The Finest Hours Starring Chris Pine and Casey Affleck

The Finest Hours is a film in which just about everything goes right—the production design, the photography, the technical effects. But the movie itself doesn’t really go anywhere. The picture is impressive on one or another level from beginning to end, but it begins to recede from memory before the house lights come up,” writes Kurt Loder. “It’s a remarkable true story about the 1952 sinking of an oil tanker, the SS Pendleton, several miles off of Cape Cod, and the against-all-odds U.S. Coast Guard mission that rescued 32 of its surviving crew members.”

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Calif. Legislators Want Civil Fines for Agency Chiefs That Provide Bad Info: New at Reason

From Bay Bridge reconstruction to California’s high-speed rail project, government spending in the Golden State often lacks any meaningful accountability or transparency, writes Steven Greenhut.

The state tries in various ways to oversee the officials who spend tens of billions of tax dollars each year, but it’s often a cumbersome process. Even when misbehavior is spotlighted by a news story or an inspector general report, it’s rare to see individual officials get punished.

Now, two assembly members are trying to revive a bill Gov. Jerry Brown (D) vetoed in 2013 that would require the heads of state agencies to certify the information their agencies were providing were true and institute fines of up to $20,000 for agency heads knowingly passing false information.

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FBI Releases Video Of Shooting Death Of Oregon Occupier

On Tuesday, the FBI and state troopers arrested Ammon Bundy, his brother Ryan, and several others on their way to a speaking event some 20 miles north of Burns, Oregon.

Robert “LaVoy” Finicum – the self-styled “spokesperson” for the militiamen occupying the Malheur National Wildlife Refuge – was shot and killed by authorities in the arrests.

In the wake of Finicum’s death there were conflicting accounts as to what exactly led police to shoot the 55-year-old Arizona rancher. Some suggested he was shot while his hands were in the air.

On Thursday, the FBI sought to dispel any misconceptions by releasing the following footage of the incident.

Edited version:

Full version:

While there’s no sound and the video is shot from an FBI plane making it difficult to discern exactly what happened, it certainly appears as though Finicum reaches into his pocket – twice. 

It’s true that he emerges from the truck (which had careened into a snow bank after swerving to avoid a police roadblock) with his hands raised, but for whatever reason, he reaches for his hip on two seperate occasions. The second time he reaches down, police open fire. “As state troopers trained their guns on Robert ‘LaVoy’ Finicum along a secluded eastern Oregon highway, he reached twice for a pocket that police say contained a 9 mm semi-automatic handgun,” The Oregonian writes. “That’s when they fatally shot Finicum, a video released Thursday by the FBI appears to show.” Here’s more: 

It began as Oregon State Police officers and FBI agents stopped a Jeep and a white pickup as they traveled north on U.S. 395 toward John Day.

 

Finicum, an Arizona foster parent and rancher who acted as a spokesman for the occupation, drove the truck. It and the Jeep carried key leaders of the occupation that began Jan. 2. They were headed to a community meeting in John Day, with plans to spread their message against federal land control.

 

Instead, at 4:26 p.m., they were pulled over about 20 miles north of Burns.

 

Three occupants of the Jeep — including Ammon Bundy, the son of controversial Nevada rancher Cliven Bundy and a leader of the refuge takeover – got out.

 

In another frame, the video shows another occupation leader, Ryan Payne, getting out of the truck driven by Finicum, with his hands up. Three others remained in the pickup with Finicum, Greg Bretzing, a special agent with the FBI said.

 

As police stood by with guns trained on the truck, Payne was arrested. Finicum and his passengers remained in the idle truck for about four more minutes as officers hollered for them to surrender, Bretzing said. 

 

That period was blacked out in the [edited] video, which resumed with footage of Finicum’s truck speeding away from the scene. As officers trailed in a black SUV and fired shots at the truck, it rounded two bends in the road, then rammed into a snowbank to avoid a police roadblock.

 

As it came to a stop, the truck nearly hit an officer who was standing alongside the road.

 

His hands raised, Finicum ran out of the car and toward the snowbank, yelling at police. Then, as police approached with guns drawn, he reached toward the left side of his waist. He began to put his hands back up, then reached down again.

 

Bretzing said Finicum was reaching toward a jacket pocket that contained a loaded 9 mm semi-automatic handgun.

 

The video shows Finicum being shot, then falling on his back. He raised his arm, then lay still.

“Actions have consequences,” the FBI said, and “as the video clearly shows, it was a reckless action.” 

“On at least two occasions, Finicum reaches his right hand toward a pocket on the left inside portion of his jacket. He did have a loaded 9 mm semiautomatic handgun in that pocket,” special agent Bretzing continued.

There were two loaded .233 semi-automatic rifles and one loaded .38 special in the truck. Although police wouldn’t specify how many times they shot Finicum, they did say it was “in the single digits.” He received medical attention once all of the truck’s occupants had surrendered. 

Finicum’s death prompted calls from other armed militias for members to go by the “thousands” to Harney County where five occupiers remain holed up in the bird sanctuary. 

Four of the five are free to go, while one is facing charges. The group says they’ll leave if those charges are dropped. 

“If they’re not willing to do that, we’re all just kind of willing to stay here and see what happens,” one of the holdouts said. “Are they really going to kill five people for refusing to drop a charge on a man?”

We don’t know, but based on the video shown above, it’s probably not a risk the men should take.


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Frontrunning: January 29

  • World shares heat up as Bank of Japan goes sub-zero (Reuters)
  • Stocks Rally With Bonds as BOJ Ends Grim January on High Note (BBG)
  • Japan Follows Europe Into Negative Interest Rate Territory (WSJ)
  • Decision On Oil Cut Only Possible If All Exporters Agree, Russian Energy Minister Says (BBG)
  • Trump overshadows Republican debate even as he sits it out (Reuters)
  • Trump skips debate, wins on social media (Reuters)
  • January Is Turning Out to Be the Kindest Month for Treasuries (BBG)
  • For Mining Chiefs, Doomsday Scenarios Could Become Reality (WSJ)
  • PBOC Cash Injection Hits Weekly Record (WSJ)
  • Margin calls a fresh threat for China’s battered stock markets (Reuters)
  • HSBC says internet banking services down after cyber attack (Reuters)
  • Silicon Valley North Fuels Canada Condo Boom as Google Moves In (BBG)
  • Xerox to split into two, Icahn to get board seats in one (Reuters)
  • The Shipping News Says the World Economy Is Toast (BBG)
  • Norway to Buy Record Amount of Kroner as Oil Crash Stings (BBG)
  • China Steel Production Has First Annual Drop Since 1981: Chart (BBG)

 

Overnight Media Digest

WSJ

– Officials in Cincinnati, Pittsburgh and other U.S. cities are taking steps to examine more closely potential risks to their water systems. Some cities are raising the costly prospect- put off for decades – of digging up and removing miles of lead service lines that run from main water lines to millions of homes and businesses across the country. Utilities will have to pay some of the costs and property owners will have to pick up the rest. (http://on.wsj.com/1NELe6U)

– Takata Corp’s chief executive has said he intends to resign, in hopes that auto makers would offer aid to the maker of tens of millions of recalled air bags. Shigehisa Takada, the CEO of Takata and grandson of the air-bag maker’s founder, is expected to meet auto makers on Friday, when the company will discuss its financial conditions and business plans. (http://on.wsj.com/23x97Jn)

– Xerox Corp will split itself in two and give several board seats to activist investor Carl Icahn, reversing an effort by the century-old company to marry business services with its copiers and printers. Xerox will divide into two publicly traded companies: one containing its office machines and another housing its services operations. (http://on.wsj.com/23x9eVa)

– The Army general in line to take over as the new U.S. and allied commander in Afghanistan John Nicholson said that as the security in Afghanistan worsens, the number of American forces should only be reduced if conditions allowed. (http://on.wsj.com/23x9fZp)

– Retailers report a surge in sales of gun silencers since the start of the year, a trend attributed to a forthcoming Obama administration regulation expected to create roadblocks for the most popular way of buying the devices. (http://on.wsj.com/1NEJwCp)

 

FT

Amanda Staveley’s PCP Capital Partners has sued Barclays PLC for about 1 billion pounds ($1.44 billion) over the bank’s emergency fund raising 5.8 billion pounds in 2008.

Xerox Corp, best known for its photocopiers, has bowed to pressures from activist investor Carl Icahn, and decided to split itself into hardware and services business.

Latin America’s biggest bank BTG Pactual, in a regulatory filing on Thursday, said that it is eliminating 305 of the 1,653 staff it employs in Brazil to reduce costs by about 25 percent.

Russia’s energy minister Alexander Novak said he is ready to sit and discuss a cut in oil production with the Organization of Petroleum Exporting Countries next month.

 

NYT

– A Volkswagen AG lawyer said the company might have to buy back some of the tainted cars because it would take too long to bring them into line with emissions standards. (http://nyti.ms/1JKow2q)

– A peek under the hood of three new cars from Volvo, Buick and Cadillac will not reveal a Made in China label. But those cars are breaking new ground in the auto industry, becoming the first to be manufactured in the People’s Republic of China and exported to the United States. (http://nyti.ms/1JKoAPP)

– The Bank of Japan said on Friday it would lower its benchmark interest rate to minus 0.1 percent beginning Feb. 16, surprising investors and giving the country’s markets a midday bounce. (http://nyti.ms/1P19UZl)

– Xerox Corp, whose name has long been synonymous with office copiers, is said to have agreed to spin off its services business to its shareholders by the end of the year, separating it from the legacy hardware side. (http://nyti.ms/1KenV93)

 

Canada

THE GLOBE AND MAIL
** The average weekly pay in Alberta fell 2.4 percent to C$1,130 in the year ended November, according to Statistics Canada’s survey of employment, payrolls and hours released on Thursday. (http://bit.ly/1RQzhCE)

** Potash Corp of Saskatchewan has slashed its dividend for the first time in the company’s history, highlighting the tension between generous shareholder payouts and dismal commodity prices across the resource sector. (http://bit.ly/1RQzmX5)

** Chinese authorities have accused Kevin Garratt of “accepting tasks” to gather intelligence on China for Canadian spy services, China’s central state-run Xinhua News Agency said in a two paragraph update late on Thursday. (http://bit.ly/1RQzvK8)

NATIONAL POST

** The spike in financial market volatility around the world will not leave Canada unscathed, said CIBC World Markets, as it downgraded its outlook for the country’s economic growth this year. (http://bit.ly/1m01Jnz)

** Canadian adoption rates of financial services products developed by non-bank online firms, which operate under the umbrella of fintech, could triple in a year, according to a report on Thursday from Ernst and Young. (http://bit.ly/1m01ZmI)

** TransCanada Corp and Kinder Morgan Inc, the two companies proposing the Energy East and Trans Mountain pipelines, were diplomatic in their responses to the new approval rules announced on Wednesday, saying they had “concerns” about the delays. (http://bit.ly/1m02BbU)

 

Britain

The Times

To previous warnings in recent months about the effects of lost rail franchises and the vagaries of the US school year, FirstGroup has added the British weather, terrorism in Paris and a shortage of American bus drivers.(http://thetim.es/1P0PHTn)

TalkTalk is preparing for the launch of a mobile phone network after hiring the head of a Dutch telecoms start-up. (http://thetim.es/1PDXjdL)

The Guardian

Google’s 2,300 staff in the UK earned an average wage of £160,000 each last year, despite the group’s insistence that its British operation is a modest outpost of the company’s global empire. (http://bit.ly/1QvRWR3)

City regulators are to investigate the role of HBOS’s senior management in the near-collapse of the bank during the financial crisis more than seven years ago. (http://bit.ly/1Vu2IZn)

The Telegraph

TSB’s profits dived in 2015 as it offered customers attractive deals to switch banks in its campaign to grow into a serious challenger to the biggest lenders in the country. (http://bit.ly/1SeHqkW)

Darrell Read, an ex-ICAP broker accused of helping the convicted trader Tom Hayes rig Libor, has been found not guilty by a London jury, a day after the panel acquitted five other men in a major setback to the Serious Fraud Office. (http://bit.ly/1ZXqjmC)

Sky News

The private equity group which owns Dr Martens is turning its attention to another fashion brand with an offer to buy a stake in Reiss, the high street retailer. (http://bit.ly/1WQhgE7)

The Chancellor has delayed the sale of a final chunk of Lloyds shares this spring, blaming the move on “market turbulence”. (http://bit.ly/23wQTrb)

The Independent

Apple is recalling some of its wall plug chargers, after rare cases when the chargers break and can cause electric shock. (http://ind.pn/1ZXr2nH)

A company behind ground-breaking image recognition software dubbed “the Shazam for clothes” has signed up John Lewis as its first big British high-street customer. (http://ind.pn/1SlFMfy)

 

 


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This Is Why “Everyone Was Shocked” By The BOJ Announcement

There is just one phrase to explain the market’s reaction to last night’s BOJ announcement that it would join the ECB, Sweden, Denmark, and Switzerland into negative territory: stunned shock.

As the WSJ writes, “many investors had anticipated an expansion of the bank’s asset-purchasing program this year, but few expected Japan to join the European Central Bank and central banks of Sweden, Denmark and Switzerland in negative territory on Friday.

Reuters add that “there’s a significant surprise factor: almost no economist was calling for this,” according to Alex Dryden, global market strategist at JP Morgan Asset Management.

And so on.

But if nobody expected negative rates out of the BOJ last night, there’s a good reason for this: just one week ago Kuroda himself said on the record that he has “no plan to adopt negative rates now

This was reported by Reuters on January 21, exactly one week before the BOJ announcement:

Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now, signalling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying programme.

 

“There are pros and cons of adopting negative interest rates … The Federal Reserve didn’t adopt negative interest rates and yet, its policy succeeded in stimulating the U.S. economy,” he told parliament on Thursday.

 

Kuroda has maintained his optimism on Japan’s economy, saying that it continues to recover moderately and is helping keep inflation on a broad uptrend. But he identified the recent global market rout as among risks to Japan’s economic outlook, stressing the central bank’s readiness to expand monetary stimulus if needed to ensure achievement of its 2 percent inflation target.

It seems someone made an urgent phone call into the BOJ over the next 7 days, because the next Reuters headline is the following:

From the piece:

The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

 

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

 

“What’s important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” BOJ Governor Haruhiko Kuroda told a news conference after the decision.

We disagree: what is far more important is that the BOJ, just like the Fed which admitted one week ago it hikes rates just as the economy was slowing, has demonstrated it has absolutely no clue either what it is doing, and certainly no idea how to properly communicate with the markets. For now the response is positive. We give the BOJ’s action of sheer panic and desperation a half-life of a few days before the euphoria fully fizzles as China is forced to retaliate to this latest bomb explosion in an increasingly more violent global currency war.


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Ted Cruz Abandons Criminal Justice Reform on His Way to the White House

In a collection of essays on criminal justice reform published last April, Ted Cruz criticized “draconian mandatory minimum sentences” and bragged about supporting a bill that would cut them in half for federal drug offenders. Six months later, the Texas senator warned his colleagues on the Senate Judiciary Committee against voting for a bill that would let drug offenders seek shorter sentences, saying “every one of us who votes to release violent criminals from prison prior to the expiration of their sentence can fully expect to be held accountable by our constituents.” In my latest Forbes column, I argue that Cruz’s presidential ambitions led him to abandon a cause he once championed:

A year ago, Senate Judiciary Committee Chairman Chuck Grassley condemned a sentencing reform bill backed by Ted Cruz as “lenient” and “dangerous.” Eight months later, it was Cruz’s turn. Explaining his opposition to a sentencing reform bill backed by Grassley, Cruz described it as dangerously lenient.

When the Senate Judiciary Committee approved Grassley’s bill by a 3-to-1 margin in October, Cruz joined four other Republicans in voting no. The Texas senator—once a leading Republican critic of excessively harsh criminal penalties, especially for nonviolent drug offenders—had effectively traded places with Grassley, a law-and-order Iowa Republican who has long resisted efforts to reduce those penalties.

The switch was especially puzzling because the bill Cruz supported was more ambitious than the one he portrayed as unacceptably lax. Worse, Cruz’s explanation for his vote featured the sort of demagoguery that politicians like Grassley have long deployed against attempts to make our criminal justice system less mindlessly punitive. It is hard to escape the impression that Cruz, who is running second to Donald Trump in the race for the Republican presidential nomination and still has a shot at winning the Iowa caucus on Monday, decided to abandon a cause that might alienate conservative primary voters.

Read the whole thing.

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Global Stocks, Bonds Jump On BOJ NIRP Stunner; Rally Fizzles After Crude Fades Gains

It is safe to say that nobody expected the BOJ stunner announced last night, when Kuroda announced that Japan would become the latest country to unleash negative interest rates, for one simple reason: Kuroda himself said Japan would not adopt negative rates just one week ago! However, a few BIS conference calls since then clearly changed the Japanese central banker’s mind and as we wrote, and as those who are just waking up are shocked to learn, negative rates are now a reality in Japan.

The immediate reaction was to send the USDJPY surging by nearly 200 pips, back to levels seen… well, about a month ago.

 

“The Bank of Japan gave markets a nice surprise to end the month,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. “It’s a bit too early to say whether we’ll finally get that long-lasting rebound.”

Actually no it isn’t: it is virtually certain that the BOJ action will exacerbate global currency wars as it forces China to retaliate once more, in turn accelerating capital outflows from China, depressing asset prices and not only adding to global volatility but also depress both the Japanese and global recovery as we explained earlier.

Then again, central banks really have no choice at this point: they have to keep pushing or face systemic collapse. As SocGen’s Kit Jukes points out, whether or not it works matters less than fact that “disinflationary forces in the global economy are so entrenched” that central banks feel need to “set off on this path at all” He notes that one should “feed on the symbolism” as Germany, Switzerland and Japan, “three great current account powers of the post-Bretton Woods era,” are being told “in no uncertain terms to stop saving.

However, for now the post-BOJ euphoria still lingers, but while stocks and bonds rallied around the world, the biggest impact was on the bond market where the yield on 10Y has tumbled to a just 1.92% as Japanese institutions will clearly be forced to buy even more US paper, in the process flattening the US curve – that all important recession signal – even more.

Curiously, the stock rally, which started off strong, has lost much of its earlier spark driven by the latest episodes in the Russian-OPEC “headline” fiasco, when this time the Russian energy minister Novak admitted he may have skewed reality a little yesterday, saying there was no confirmed meeting with OPEC or non-OPEC countries, adding Russia hasn’t begun internal discussions on how any cuts would work but that it is ready to at least discuss issue of output cuts, even if it is not ready for a decision. He concluded that coordinated cuts would only be possible after detailed talks.

In other words, all Russia did was conduct a trial balloon on reaction to oil supply cut headlines. The only problem is getting the Saudis on the same page.

The result is that after spiking another 2% in overnight trade, dropped into the red before rebounding modestly, which in turn is capping gains on US equity futures.

The focus on the US calendar will be the Q4 GDP print while we will also get the quarterly ECI and PCE readings. The January Chicago PMI and ISM Milwaukee are also due before the final revision to the January University of Michigan consumer sentiment print. It’s a quieter day for earnings reports with just 18 S&P 500 companies due to give their latest quarterlies, with Chevron (pre-market) the highlight of the bunch. We’re also due to get comments from the Fed’s Williams (due at 8.30pm GMT) – the first Fedspeak since the FOMC meeting this week.

Where markets stand now:

  • S&P 500 futures up 0.7% to 1894
  • Stoxx 600 up 0.8% to 338
  • FTSE 100 up 0.8% to 5981
  • DAX up 0.5% to 9693
  • German 10Yr yield down 5bps to 0.36%
  • Italian 10Yr yield down 6bps to 1.45%
  • Spanish 10Yr yield down 7bps to 1.55%
  • MSCI Asia Pacific up 1.6% to 121
  • Nikkei 225 up 2.8% to 17518
  • Hang Seng up 2.5% to 19683
  • Shanghai Composite up 3.1% to 2738
  • US 10-yr yield down 5bps to 1.93%
  • Dollar Index up 0.5% to 99.01
  • WTI Crude futures up 0.4% to $33.37
  • Brent Futures up 0.5% to $34.07
  • Gold spot down 0.1% to $1,114
  • Silver spot up 0.1% to $14.26

Asian equity markets traded higher following the gains on Wall St., where strong earnings coupled with a rally in crude boosted risk sentiment, while volatility was observed with the BoJ initially jolting markets after unexpectedly announcing negative rates. This saw volatile trade in the Nikkei 225 (+2.8%) while the ASX 200 (+0.6%) was supported by outperformance in energy names. Shanghai Comp (+3.1 %) outperformed after the PBoC announced to conduct OMO every working day around the new year holiday as it seeks to avoid a liquidity crunch while also today injecting CNY 80bIn via 28-day reverse repos and CNY 20bIn via 7-day reverse repos. 10yr JGBs soared by over a point as Japanese bond yields fell to record lows following the BoJ announcement of negative rates with tenure declining to as low as 0.09%

Asian Top News

  • Sony Profit Beats Estimates as PlayStation Trumps Sensor Slump: 3Q oper. profit 202.1b yen vs est. 173.6b yen
  • Japan Bonds Biggest Winners as Stocks Soar, Yen Tumbles on BOJ: Benchmark 10-year yields plunge to record low of 0.09%, yen heading for its biggest decline in more than a year
  • Mizuho Quarterly Profit Falls on Loan Income, Bond Trading: Net falls to 135.3b yen from 167.9b yen y/y, est. 137b yen
  • Docomo to Buy Back $4.1b in Shares as Profit Climbs: To repurchase as many as 220m shares, or 5.7% of non-treasury stock outstanding, from Feb. 1 to Dec. 31
  • PetroChina Sees 2015 Profit Falling as Much as 70% on Oil Slump: Net profit will fall because of the slump in oil and drop in domestic natural gas prices, co. said
  • China Life Expects FY Net Income to Rise About 5%-10% on Year: Co. cites rising investment return for the net income increase
  • Alibaba’s Reliance on China Spooks Investors as Economy Cools: Jack Ma seeking out new businesses from cloud to services
  • Paper Trail of Fraud Shows Flaws in Booming China Funding System: China’s bank regulator pushing lenders to tighten controls
  • Waiting for Ambani Tests Patience of Billionaire’s Bondholders: No major asset sales completed since September announcement

European equities (Eurostoxx 600 +0.7%) gapped higher taking their lead from Asia whose indices closed firmly in the green following the shock decision by the BoJ to introduce negative rates . Consequently, financials outperform in Europe as a result of more monetary easing. Energy is the second best performing sector, with speculation of production cuts doing the rounds as Brent and WTI hold the USD 33.00 level, which is not demonstrative of overtly bearish sentiment given this weeks lows.

Gains are broad based however in the Eurostoxx 600, with the majority of all 20 subsectors trading higher. The Italian FTSE MIB continues to be extremely choppy, as are its counterparts, with Banco Populare and Monte Pashe swinging wildly in European trade.

European Top News

  • Euro-Area Inflation Accelerates in Temporary Reprieve for ECB: Consumer prices rose annual 0.4% in Jan., most since 2014
  • James Murdoch Returns as Sky Chairman After Four Years: James Murdoch, 43, Rupert Murdoch’s son, replaces Nicholas Ferguson, who is stepping down after 12 years on the board
  • Monte Paschi Posts Yearly Profit After Restating Accounts: Without restatement, bank would have suffered loss for 2015
  • Gamesa Jumps as Siemens Said to Talk to Iberdrola on Making Bid: Siemens has hired Deutsche Bank to explore a purchase of Gamesa and has discussed options with Iberdrola, the Spanish utility that owns a 19.7% stake, El Confidencial reported
  • Spain Maintained Growth in Fourth Quarter, Showing Momentum: Spanish economy grew 3.2% in 2015 with 10 quarters of growth
  • French Growth Slows at Year End as Terrorism Hurts Spending: GDP grew 0.2% in the final three months of 2015, vs 0.3& in the previous qtr
  • Norway to Buy Record Amount of Kroner as Oil Price Crash Stings: Will buy NOK900m ($104m) a day in Feb. as it converts its oil income into local currency to cover budget needs

In FX, all the action this morning as centred on the JPY pairs, after the BoJ surprised the markets by cutting the deposit rate to a negative 0.10%. Spot and cross/JPY rallied hard, with USD/JPY tearing through 120.00 to hit a high of 121.35. The yen fell 1.6 percent versus the dollar, its biggest loss since December 2014. Against the euro, it dropped 1.1 percent.

“They previously rejected taking rates to negative, so that was the surprise element in the announcement,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “It weakened the yen, as it should.”

The recovery settled in the mid 120.00’s at the start of London trade, but has been trying to push higher since. The crosses have been tempered by their respective spot rates easing off — Cable underperforming, but the CAD not too far behind as Oil prices tail off. More from the Russian energy minister, but this time saying no scheduled meetings between OPEC and non OPEC nations. CHF still on the back foot as equities buoyant all round — healthy KoF (100.3 vs 96.6 prey) ignored. EU CPI marginally higher at 1 %, but EUR/USD sticking close to 1.0900.

A gauge of 20 developing-nation currencies rose 0.3 percent in its
fourth day of gains. It’s 1.1 percent advance this week has help trim
January’s loss to 1.7 percent.   Russia’s ruble added 0.4 percent,
paring earlier gains with a pullback in oil. The central bank kept rates
on hold, in line with analysts estimates.

In commodities, the on-going will-they-won’t-they saga surrounding an OPEC meeting to decide upon production cuts, continues to dictate price action in oil markets. The latest headline to this effect has been two OPEC delegates commenting that no decision has been made on whether to hold a meeting between OPEC and non-OPEC countries . They added that if such a meeting were to happen, it would occur February or March. They went onto say that any meeting should be on an expert level, as oppose to a ministerial one.

OPEC nations, with a few notable exceptions, are reluctant to make any production cuts without their non-OPEC counterparts. Furthermore, Russian Energy Minister Novak stated earlier there are no confirmed meetings between OPEC and non-OPEC nations, after the latest comments both WTI and Brent have drifted lower, Brent breaking the USD 34.00 level to the downside.

Gold was volatile in Europe overnight with the safe-haven initially declining as stocks surged following the BoJ’s decision to unexpectedly introduce negative rates. Price action reversed however, once the 1110.00 level was hit, and the market rejected a move lower . Of note, the 1110.00 level seems to have emerged as a significant level of support over the past week. Furthermore, spot gold is still on course for its best month in a year, having benefited from stock market volatility in January and expectations of a shallower fed hike path. However some analysts have noted that the BoJ’s move to stoke inflation may strengthen the USD, and therefore diminish golds potential gains in coming months.

Global Top News:

  • Xerox Said to Split in Two; Icahn Gets Board Seats, WSJ Says: Will divide itself into a co. grouping its hardware operations and another that will house its services business, Carl Icahn will be given 3 board seats on the services company’s board
  • Japan Adopts Negative-Rate Strategy to Aid Weakening Economy: Central bank continues its record asset-purchase program. Bank of Japan’s Negative Interest Rate Decision Explained
  • Microsoft’s Cloud-Fueled Revival Persists as Azure Sales Jump: Results bolstered by Web-based services, Office 365 software; FY2Q adj. EPS 78c vs est. 71c, up 6% post-mkt on >1m shares
  • Amazon’s Jeff Bezos Steps Up Spending Again to Chase Growth: 4Q EPS $1.00 vs est. $1.55, 4Q net rev. $35.7b vs est. $35.9b; sees 1Q oper. income $100m-$700m vs est. $731.7m
  • Honda Profit Misses Estimates as Takata Air Bag Recalls Mount: 3Q net income 124.2b yen vs est. 149.3b yen
  • Takata CEO Said Prepared to Resign Amid Crisis; Shares Rise
  • Russia Sees Decision on Oil Cut Only If All Exporters Agree: A decision on cutting oil production is possible only if all crude exporting nations are in consensus, and there is no timing for talks yet: Russia’s Energy Minister Alexander Novak
  • Visa Profit Tops Estimates as Customer Card Spending Rises: 1Q adj. EPS 69c, est. 68c, shrs up ~3.9% post-mkt
  • Apple Said Developing Wireless-Charged Phone for as Soon as 2017: Said trying to overcome technical challenge of distance
  • GE Said to Plan More Than $760m of Investment in Italy: The deals may be signed as soon as this weekend or early next week when GE Chairman Jeff Immelt visits the country
  • Merck Prices Hepatitis C Drug Lower Than Rivals in Crowded Field: FDA says Merck drug is approved for genotypes 1 and 4
  • Carlyle Sweetens Lending Terms for Banks Funding Veritas Buyout: Under the changes, the banks will have more flexibility to boost yields and offer discounts on the loans when they try to sell them to capital-market investors
  • Freeport’s Grasberg Mine Still Working as Export Permit Expires
  • Stock Investors Mind the Bounce as S&P 500 Rebounds Take Longer: Benchmark gauge posts weakest rebound of the bull market
  • Congress Juniper Probe to Cover Possible NSA Involvement: Rtrs

 

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities (Eurostoxx 600 +0.7%) gapped higher, taking their lead from Asia whose indices closed firmly in the green following the shock decision by the BoJ to introduce negative rates
  • All the FX action this morning has centred on the JPY pairs, after the BoJ surprised the markets
  • Looking ahead, highlights include US and Canadian GDP, Chicago PMI, University of Michigan sentiment and comments from ECB’s Costa and Fed’s Williams
  • Treasuries higher overnight as the Bank of Japan sprung another surprise on investors, adopting a negative interest-rate strategy to spur banks to lend, sparking demand for USD assets; economic data today includes 4Q GDP and Core PCE.
  • Decision to charge Japanese banks to park cash at the central bank will put pressure on loan profitability that’s already among the weakest in the world
  • In the event of “further nasty global financial or economic shocks,” expect more central banks, “perhaps even the Fed,” to consider negative policy rates, Oxford Economics economists wrote in note yesterday
  • Lloyds Banking Group and other big U.K. retail lenders face higher capital requirements as the Bank of England moves to bolster the industry’s ability to withstand shocks without hurting the economy
  • The Federal Reserve said it will analyze in its annual stress tests how 33 large banks, including Bank of America and JPMorgan, would withstand a severe global recession, a doubling of the U.S. unemployment rate to 10% and moderate deflation
  • Russia’s central bank left its benchmark interest rate unchanged for a fourth consecutive meeting, warning it may tighten policy if inflation risks intensify
  • A decision on cutting oil production is possible only if all crude-exporting nations are in agreement and there’s no timing for talks, Russia’s Energy Minister Alexander Novak said
  • Two years after it was formed by Marxist university professors and student activists, anti-austerity group Podemos is making most of the running in Spain’s search for a government, shaping the policy process before they’ve even got a hand on the reins of power
  • Sovereign 10Y bond yields lower led by Japan. Asian, European stocks rise; U.S. equity-index futures rise. Crude oil and copper rise, gold drops

US Event Calendar

  • 8:30am: Employment Cost Index, 4Q, est. 0.6% (prior 0.6%)
  • 8:30am: Advance Goods Trade Balance, Dec., est. -$60b (prior -$60.5b)
  • 8:30am: GDP Annualized q/q 4Q A, est. 0.8% (prior 2%)
    • Personal Consumption, 4Q A, est. 1.8% (prior 3%)
    • GDP Price Index, 4Q A, est. 0.8% (prior 1.3%)
    • Core PCE q/q, 4Q A, est. 1.2% (prior 1.4%)
  • 9:00am: ISM Milwaukee, Jan., est. 50 (prior 48.53)
  • 9:45am: Chicago Purchasing Manager, Jan., est. 45.3 (prior 42.9)
  • 10:00am: U. of Mich. Sentiment, Jan. F, est. 93 (prior 93.3)
    • Current Conditions, Jan. F (prior 105.1)
    • Expectations, Jan. F (prior 85.7)
    • 1 Yr Inflation, Jan. F (prior 2.4%)
    • 5-10 Yr Inflation, Jan. F (prior 2.7%)

DB’s Jim Reid concludes the overnight wrap

It’s straight to Japan this morning where the BoJ have given the plates another spin after the announcement that the Bank is to adopt negative interest rates. The benchmark rate has been slashed by 20bps to -0.1% having last been cut in 2010. Details are still coming through but it appears to be in the form a three-tier system with negative rates to be applied on deposits over a certain amount. There was no change in the current level of BoJ asset purchases of ¥80tn per year. Headlines are suggesting it was a close call after being passed by a majority vote of 5-4. It’s caught the market by surprise however with only 6 of 42 economists forecasting for any sort of easing (all 6 economists forecasting for more QE and just 1 expecting a rate cut).

At the same time, the BoJ has delayed its target date of reaching its 2% inflation goal by six months, aiming for the first half of fiscal 2017 now (March to October 2017) while also downgrading current year forecasts. Markets have been super volatile in the aftermath and by the time you read this may have moved even more. The Yen initially plummeted over 2% only to then rally back to close to unchanged on the day (around ¥119), but has since resumed a sell off past ¥120 (-1.47% weaker). There’s been similar price action for equity markets where the Topix and Nikkei were up over +3% initially, then tumbled to losses of -1.6% and -1% respectively, but have now bounced back with strong gains (+2.49% and +2.58%). Other Asian bourses have rallied with gains of 2-3% across the region. The JGB market appears to be the only asset class moving in one direction with yields heading south in a hurry. 2y, 5y and 10y JGB yields have all struck record all-time lows of -0.050%, -0.066% and 0.100% respectively.

This morning’s announcement also came post some softer than expected data in Japan overnight. Headline CPI during the December fell one-tenth to +0.2% yoy (as expected) with the ex food and energy reading down one-tenth but unexpectedly to +0.8% yoy (vs. +0.9% expected). The significant miss came in last month’s industrial production number which fell -1.4% mom in December (vs. -0.3% expected).

It’s hard to pinpoint the huge swings in risk post the BoJ announcement as we digest the headlines but with Governor Kuroda due to speak as we go to print its worth keeping a close eye on the price action.

Ahead of the US GDP data today, yesterday’s very soft durable and capital goods order numbers raised the prospects of further downside risk to activity levels in the quarter. Headline durable goods orders for December printed at -5.1% mom which was well below expectations for a more modest -0.7% decline. The ex-transportation reading was also weak (-1.2% mom vs. -0.1% expected) while core capex orders fell -4.3% mom (vs. -0.2% expected) which was the largest monthly decline since October 2014. On the surface of it, the data shows that there is significant downward momentum in private domestic demand. DB’s Joe Lavorgna warned yesterday that while durable goods data are notoriously volatile and it is possible business spending will rebound this quarter, the ongoing weakness in oil prices and sharp plunge in CEO confidence makes him doubt that this will occur. Importantly the data wasn’t in isolation with the November data also revised down. The nondefense capital goods shipments ex aircraft are the important data used to estimate GDP output and post yesterday’s numbers, the -5.8% annualized drop last quarter was the lowest since Q3 2013. This implies significant pullback in Q4 capital spending which we should see in today’s data.

Along with the data, Oil once again dominated the newsflow as headlines (which appeared to be eventually played down) reverberated suggesting that Russia and OPEC were looking at setting up talks to discuss production cuts (up to 5% according to the WSJ). WTI peaked at just shy of $35/bbl (and up 7% on the day) following the news before settling down to close at $33.22/bbl (+2.85% on the day). That now makes it 22% off last Wednesday’s intraday low and so technically speaking in a bull market. In any case, the leg up for oil helped the S&P 500 (+0.55%) close in positive territory after a fairly rocky early session post a mixed batch of earnings releases (more below). US credit had a slightly better day too while US Treasuries chopped around before eventually finishing a smidgen lower (10y -2bps to 1.979%). Prior to this we’d seen European risk assets shrug off the moves in oil and instead focus on some weaker than expected earnings reports in the region. The Stoxx 600 closed yesterday -1.57%.

In terms of the rest of the data yesterday, in the US we saw initial jobless claims decline 16k last week to 278k which was slightly better than expected (281k expected). The latest housing market data was less supportive however with pending home sales only up +0.1% mom last month (vs. +0.9% expected) while the only other release of note was the Kansas City Fed manufacturing activity index which was unchanged at a still lowly -9. In Europe we saw the preliminary CPI print for Germany come in line at -0.8% mom, with the YoY rate nudging up a couple of tenths to +0.5%. Euro area confidence indicators all generally surprised to the downside while in the UK there were no surprises in the Q4 GDP print of +0.5% qoq (and +1.9% yoy) which met market expectations.

Back to the earnings, yesterday saw 51 S&P 500 companies report with just 22 beating sales expectations (43%) but 42 coming ahead of earnings forecasts (82%) – albeit estimates that have been beaten down in recent weeks. The latter was in-line with what we’ve seen so far this quarter but the number of revenue misses was weaker (averaged 50% so far). Aside from the market digesting those contrasting numbers from tech giants Facebook and eBay which we touched on yesterday, Caterpillar numbers also garnered some attention and more so as an indicator for what looks set to be another bleak year ahead for industrials. The latest quarterly earnings came in ahead of expectations (thanks to impressive cost control) but the company highlighted that they expect sales in the resource industries to fall between 15 to 20% this year, while sales in construction are expected to fall 5 to 10%.

Looking now at what’s set to be a busy day ahead. In the European session this morning, the main highlights are French Q4 GDP, CPI and PPI data along with German retail sales numbers for December. This will be closely followed by the Euro area advanced CPI core reading for January along with an estimate of the headline number. The focus this afternoon in the US will of course be on the Q4 GDP print while we will also get the quarterly ECI and PCE readings. The January Chicago PMI and ISM Milwaukee are also due before the final revision to the January University of Michigan consumer sentiment print. It’s a quieter day for earnings reports with just 18 S&P 500 companies due to give their latest quarterlies, with Chevron (pre-market) the highlight of the bunch. We’re also due to get comments from the Fed’s Williams (due at 8.30pm GMT) – the first Fedspeak since the FOMC meeting this week.


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