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Eariler this week, when the San Fran Fed published a paper that suggested that the recovery would have been stronger if only the Fed had cut rates to negative, we proposed that this is nothing more than a trial balloon for the next recession/depression, one in which the Federal Reserve will seek affirmative “empirical evidence” that greenlights this unprecedented NIRPy step (in addition to QE of course).

Today, in his latest note to clients after returning from a 2 week vacation in Jamaica, SocGen’s Albert Edwards picks up on this point and cranks it up to 11 writing that “as central banks thrash around for new tools, I have long thought the next recession would trigger the adoption of helicopter money and deeply negative Fed Funds. Clients have been sceptical of the latter because of the negative impact on bank margins, but now I am more convinced than ever that we will see negative Fed Funds.”

Predictably, Edwards takes aim at the SF Fed “analysis”, writing that “just because the San Fran Fed has published this paper doesn’t mean the Washington Fed will adopt the policy in the next recession, but with this economic cycle clearly now in its final act, one can sense that a number of trial balloons are being floated on what the Fed might do in the next recession. This is just one of them.“

More to the point, Edwards also focuses on the recent resurgence of interest in Modern-Money Theory, i.e., MMT, or government-mandated helicopter money, which is predictably a “theory” espoused by socialists everywhere most notably Bernie Sanders and his economic advisors…

… and writes that “many of the more radical Democrats in the US seem to be adopting the idea and since I expect the US budget deficit to soar to 15% of GDP in the next recession, the ideas of MMT will surely become even more popular.” Edwards is convinced that “the Fed and other central banks will be desperate enough to adopt outright monetisation (aka helicopter money, that is to say the direct central bank financing of public sector deficits) in the next recession. And as that will coincide with public sector deficits in the mid teens, we will be conducting a live MMT experiment. Welcome to a brave new world!”

As validation of his (not all that controversial) view, Edwards believes that in recent weeks we have seen the Fed “take a large step away from Quantitative Easing (QE) and towards outright monetisation.”

When QE was introduced the central bankers vehemently denied that QE was monetisation as the latter sounded too scary. Their argument was QE is different from outright monetisation because they (the central banks) were absolutely going to unwind QE as soon as practical (aka Quantitative Tightening or QT – remember how they told us it was going to be so easy with minimal consequences!). And as economic agents knew QE would be reversed and did not regard it permanent, QE could not be equated to monetisation. My own view has always been that until QE is actually fully reversed, it is to all intents and purposes the equivalent of outright monetisation, and so the central banks are merely splitting hairs.

Naturally, Powell’s recent commentary which switched off the balance sheet unwind “autopilot” caught Edwards’ attention, and the recent trial balloons by the WSJ – and the Fed – hinting at the like likely abandonment of QT, just as it was getting started- removes any doubt in Edwards’ mind “that what we have seen since 2008 is in fact outright monetization” and asks rhetorically, “does anyone really think these bloated central bank balance sheets will ever be reduced before the next recession brings yet another tidal wave of QE?”

The answer: of course not, especially if it only took a 20% drop in stocks for the Fed to immediately reverse its “autopilot” course.

Which brings us to the topic of the next inevitable recession, in which Edwards expects our “all-knowing” central bankers will pull any and every policy lever they have to hand and that in my view includes the Fed pursuing deeply negative interest rates.”

Here the SocGen strategist concedes that the reason most clients reject this outcome is “the destructive impact negative interest rates would have on bank margins, which might exacerbate any credit crunch. Hence policy makers would therefore shy away from negative rates.”

Needless to say, Edwards himself disagrees, reasoning that unlike in the 2008 Global Financial Crisis he does not expect banks to be at the apex of the next recession, perhaps as a result of an ocean of liquidity thanks to the $1.5 trillion in excess reserves currently in the system.

I have long said that in the next recession the main toxic asset to avoid will be US corporate bonds – most especially Investment Grade. In the next recession, banks will inevitably lose money if commercial and residential property prices decline and corporate and consumer loans default – although we have been reassured that banks are better capitalised than before and that they have been vigorously stress-tested.

But more importantly due to the Volker Rule and other macro-prudent regulations, banks do not sit on mountains of corporate and mortgage paper as they did in 2007. It is pension funds, insurance companies – and via ETFs, mom and pop – who bought the avalanche of US corporate bonds issued since the last GFC.

So the good news, according to the grumpy SocGen permabear, is that banks are unlikely to be a systemic risk as the next crisis drives a rapid unravelling of the global economy, like they were in 2008 (sarcastically, he then notes that he is “not known for seeing a cup half full!”).

That is why he is confident that central bankers will not care if bank profits are squeezed as interest rates are pushed deep into negative territory – including the sort of adverse market reaction towards the banking sector we saw when Japan cut interest rates from +0.1% to -0.1% in early 2016 (Japanese banks fell around 25% relative to the market as did the eurozone banks as the ECB pushed interest rates to minus 0.4%, see charts below).

Addressing just this hot topic, moments ago Dallas Fed president Robert Kaplan said that he is “skeptic about whether that’s a viable option” although he quickly added that the central bank should “not take any option off the table” even as he admitted that deploying negative interest rates in the U.S. could cause problems for the financial system.

Perhaps that’s some advice the Fed could have given the ECB, SNB and BOJ before they launched NIRP, but we digress, especially since Edwards is ultimately right, and with fears about banks off the table, banks will be driven by just one prerogative (the same one that Nomura’s Charlie McElligott hinted at earlier) – doing everything to preserve inflation, and avoid deflation, to wit:

The primary central bank objective will be to avoid outright deflation. The inability of the ECB, in particular, to escape the gravitational pull of zero core inflation, despite its continual predictions of success, has been truly shocking

However, it is not just the eurozone that risks falling into outright deflation in the next recession: according to Edwards, the US is also vulnerable, and while core CPI and core PCE have remained relatively healthy in recent months, and roughly at the
Fed’s 2% target, this has been mostly a function of strong rents and Owner Equivalent Rent, i.e. housing prices, which dominate the core CPI calculation.

However, the risk is that US rent inflation “tends to broadly follow the fortunes of the housing market overall and there is no doubt that the US housing market has begun to unravel quickly over the past six months. New home prices are now actually falling yoy (even with a heavy 9-month moving average, see right-hand chart below). The last two occasions this happened were Nov 1990 and Dec 2007 when the US economy had entered recession! Rent inflation slumped shortly afterwards. In the next recession, the reality of outright deflation will dominate investors’ fears.

Meanwhile, in addition to inflation, central banks will be keeping a close eye on the dollar (recall we noted earlier that only two factors matter for the fate of the current rally: inflation and the dollar).

The reason for that, according to Edwards, is that one key policy lesson from Japan in the 1990s (and the GFC of 2008) when the economy slipped towards outright deflation is that a strong currency must be avoided at all costs as it exacerbated the deflation impulse still further.

Finance 101 dictates that a strong currency means import prices begin to decline and what we found in Japan, was that even where an industry was dominated by domestic Japanese producers, the marginal importer was able to undercut domestic producers and became the price setter for the whole sector. “Economists’ models could just not pick up this behavior and were unable to foresee the strong deflationary pull.”

So while Edwards predicts that the Fed does not want to rush to cut Fed Funds into negative territory, the cost of delaying will be very high if others are doing it (via a strong dollar).

The Fed will be forced to participate as avoiding deflation will be the number 1 priority – not the profitability of the banking sector. Investors should contemplate a brave new world of negative Fed Funds, negative US 10y and 30y bond yields, 15% budget deficits and helicopter money. Sounds ridiculous doesn’t it? What I said in 2006 sounded ridiculous too.

Concluding, as he often does, Edwards says that he hopes he is wrong, but fears that he will be proved right (again… eventually).

via ZeroHedge News http://bit.ly/2UHgCgA Tyler Durden

It appears White House advisor Larry Kudlow is today’s ‘bad cop’ as he just told Fox Business that “there is a pretty sizable distance to go” in US-China trade talks. That has taken the shine off the latest algo BTFD ramp…

Perhaps most critically, having failed twice at the 200DMA, the S&P 5000 has just broken back below the 100DMA…

via ZeroHedge News http://bit.ly/2Djdnox Tyler Durden

Last month, the Financial Times sent shares of German global payments company Wirecard – a market darling which had seen its shares nearly quintuple in a span of less than four years – reeling when it published a story purportedly sourced from company insiders revealing the existence of an internal investigation into widespread accounting fraud. Before the rout was over, Wirecard shares had fallen more than 20%. But analysts backed up the company’s insistence that no wrongdoing had actually taken place, with one calling the report “fake news”.

But refusing to back down, the FT returned on Thursday with another even more extensive story, sourced Theranos-style “whistleblower” company insider who claimed to have been complicit in the alleged fraud. The whistleblower managed to leak a copy of a report compiled by a law firm that examines the alleged malfeasance in great and sometimes stunning detail. And as a result, Wirecard’s shares are moving lower once again.

This time around, investors might find it difficult to ignore the FT’s findings, or find them anything short of compelling. because not only does it cite information from company insiders, but it also includes details from a preliminary report from one of Asia’s top law firms that appear to back up the allegations of wrongdoing. The company, according to the report, committed widespread book-padding as it sought to take over a regional payments business from Citigroup that ultimately granted Wirecard a stretch of territory spanning from New Zealand to India.

The gist is simple: As Wirecard embarked on its quest for globe-spanning domination in the payments space, heads of regional businesses were encouraged to inflate the company’s transaction volume numbers, mainly through the use of a technique referred to by the FT as “round tripping.”

One year ago, Edo Kurniawan, a jovial 33-year-old Indonesian who runs the Asia-Pacific accounting and finance operations for global payments group Wirecard AG, called half a dozen colleagues into a Singapore meeting room. He picked up a whiteboard pen and began to teach them how to cook the books.

His company would soon become one of Germany’s most valuable financial institutions, but as Mr Kurniawan spoke, the immediate task at hand was to create figures that would convince regulators at the Hong Kong Monetary Authority to issue a licence so Wirecard could dole out prepaid bank cards in the Chinese territory. 

The group was seeking to take over payment operations from Citigroup, covering 20,000 retailers in 11 countries stretching from India to New Zealand. Regulatory approvals in every territory were crucial, even if it meant inventing numbers to be used in the Hong Kong licence application. 

Mr Kurniawan then sketched out a practice known as “round tripping”: a lump of money would leave the bank Wirecard owns in Germany, show its face on the balance sheet of a dormant subsidiary in Hong Kong, depart to sit momentarily in the books of an external “customer”, then travel back to Wirecard in India, where it would look to local auditors like legitimate business revenue.

The practice, according to the report cited by the FT, was used to appease regulators throughout Asia, which suggests that the fraud wasn’t merely the work of one rogue employee.

In isolation, Mr Kurniawan’s scheme might have appeared to be the act of a rogue employee in the provincial outpost of a little known financial group. But the account of what happened, in a preliminary report on the investigation by one of Asia’s most eminent legal firms, indicated it was part of a pattern of book-padding across Wirecard’s Asian operations over several years. Documents seen by the Financial Times show two senior executives in the Munich head office had at least some awareness of the round-tripping scheme: Thorsten Holten and Stephan von Erffa, respectively the company’s head of treasury and head of accounting.

The revelations call into question the figures reported by one of Europe’s few technological success stories, a German fintech group that has grown into a €20bn global payments institution. Before the FT exposed the existence of the investigation last week, the group was more valuable than Deutsche Bank or Commerzbank, whose place it has taken in Germany’s main stock market index. Wirecard is a favourite of retail investors, who saw its rapid expansion into Asia as a sign that it can challenge the world’s biggest banks for primacy in the $1.4tn market for payments. 

The “whistleblower” who spoke with the FT helped initiate the internal probe after finding the brazenness of one of the company’s regional managers, who had called a meeting to explain to employees how the fraud would be carried out, almost too shocking to be believed.

This time questions about its Asian operations began internally, prompted by a whistleblower left stunned by Mr Kurniawan’s January meeting last year. Notifying Wirecard’s senior legal counsel in the region on March 26, the whistleblower identified two senior finance executives, James Wardhana and Irene Chai, as accomplices in the book-cooking operation. A separate whistleblower also raised concerns in February, and on April 3 that person supplied the compliance team with a suspect contract they had received via Telegram, the encrypted messaging app. Daniel Steinhoff, Wirecard’s head of compliance in Munich, flew in to Singapore for a briefing. On April 13 he ordered the email archives of these individuals “mirrored”, with copies seized.  Compliance staff, who evidently found the accounts of the whistleblowers credible, soon found enough in the documents to warrant a snap investigation, codenamed Project Tiger. They called in Singapore-based Rajah & Tann, which sent in a team of former prosecutors.

Eventually, much of the behavior that the whistleblower had complained about was borne out by the report, including “forgery and/or falsification” as well as “cheating, criminal breach of trust, corruption and/or money laundering.”

On May 4 R&T submitted a preliminary report, running to 30 pages of bombshell allegations: evidence in the documents of “forgery and/or of falsification of accounts”, as well as reasons to suspect “cheating, criminal breach of trust, corruption and/or money laundering” in multiple jurisdictions.  The trio in Singapore, led by Mr Kurniawan, appears to have been fabricating invoices and agreements to create a paper trail which could be shown to auditors at EY, as if money was moving in and out of Wirecard for legitimate purposes.

And in what was undoubtedly a bad look for the company’s top brass, once the investigation got rolling, the company’s top brass installed a senior employee who had allegedly been involved in some of the fraudulent activities to help oversee the probe, inviting comparisons to the “fox guarding the hen house.”

A briefing document dated May 7 2018 was prepared for a meeting of Wirecard’s four most senior executives. Alexander von Knoop, chief financial officer, thanked the author in an email following the meeting “for the great job you are doing to clarify the circumstances and to prevent Wirecard Group from any financial and reputational damage”.  The email also announced that Jan Marsalek, Wirecard’s chief operating officer, had been appointed to co-ordinate the inquiry, “to get the necessary pressure on the investigation”, Mr von Knoop said.

[…]

Wirecard’s lawyers in Singapore warned Mr Marsalek’s proposed role presented “a perceived and potential conflict of interest.” He was a material witness of fact who had worked closely with Mr Kurniawan on certain projects, they said. 

To sum up, to call Thursday’s FT report “damning” would be an understatement. It suggests that managers throughout the company’s vast global network brazenly and blithely invented money flows and even in some cases fake customers to back them up. The company also reportedly violated AML reporting guidelines. Taken together, the fraud calls into questions not just Wirecard’s recent earnings results, but the very perception of WireCard as one of the Continent’s most successful fintech startups.

Which begs the question: When this is all said and done, will Wirecard be remembered as Germany’s “Theranos?” As the whistleblower put it: “If a payments company can do this, how can we trust the system?”

via ZeroHedge News http://bit.ly/2DZxv0F Tyler Durden

Via OilPrice.com,

The stakes are rising for the Maduro regime, and new U.S. sanctions on the Venezuela’s oil industry may be the point of no return for the country’s troubled leader…

Things have certainly moved into a higher gear in Venezuela, with a genuine diarchy vying for control over the country’s resources and populace. The alleged smuggling of gold reserves, politicized humanitarian aid, rampant disinformation against the background of all-encompassing poverty and deprivation – Venezuela of 2019 bears an uncanny likeness to any stereotypical conflict-ridden Latin American country of the 20th century.

The US sanctions announced January 28 have driven a wedge between PDVSA and the United States, creating a point of no return for President Maduro. There is still no 100 percent certainty that Maduro will be ousted and if he manages to stay (through which, given his political skills and occasional antics, would be tantamount to a miracle), Venezuela could rethink its oil strategy on a grand scale. Let’s, however, look at the developments in Venezuela piece by piece before we jump into any conclusions.

The most evident and palpable consequence of the US sanctions was the almost immediate cessation of activity with US Gulf Coast refiners. The US Treasury has stated that under President Maduro PDVSA has become a “vehicle for embezzlement and corruption” and hence from January 28 onwards all income from the sales of Venezuelan crude should be transferred to escrow accounts in the United States, accessible only by the Guiadó government. Given that PDVSA has been a vehicle for embezzlement every single year of its 43-year old history, it is remarkably naive to believe a transfer of control from Maduro to Guaidó would bring about any structural shift, however, the severeness of the punishment brings across a powerful political message – a message that US refiners cannot shrug off easily.

Statistically, every day two cargoes of Venezuelan crude were being loaded in its ports and setting sail towards market outlets. The odds were that one of these two cargoes is destined for the US market – roughly 44 percent of Venezuelan exports went to American customers in 2018. The initial shipping numbers might bring you a smaller percentage, yet keep in mind that Aruba, Curacao and the Dutch Caribbean islands worked as transshipment hubs towards America for PDVSA. Absent a swift removal of Maduro from office, all of that will be gone after April 28 when the 3-month winding down period for cutting all ties with PDVSA comes to an end. It is difficult not to understate the importance of the US market to Venezuela – as opposed to dealings with China and Russia (where PDVSA was paying back advance payments by the medium of oil), exports to US provided one of the rare opportunities to receive much-needed hard currency, an estimated $1 billion per month.

Given that Venezuela has defaulted on more than $60 billion worth of bond issuances (the only bond that is still intact is the PDVSA 2020 bond), such a lifeline of dollars will be sorely missed. However, it has to be stated that Venezuelan supplies were essential to US Gulf Coast refiners, too.

Despite all the public bravado, refiners will have a hard time replacing Venezuelan volumes with grades of equivalent quality and, most importantly, similar price level. Valero Energy, taking in approximately 90kbpd of Venezuelan crude in Q4 2018, stated it will replace them with Canadian volumes, pretty much the only heavy sour stream that demonstrates healthy USGC coking margins. Yet as we have determined in our previous weekly columns, Canada is struggling to market all of its produced crude (which is not helped by the mandated Alberta production cuts) and will remain to do so until new pipeline capacity and rail tank car additions hit the market in late 2019. There is a high probability that the price of Canadian crudes will increase on the back of USGC refiners’ interest, pushing the margins further down.

Valero’s future travails pale in comparison with those of Citgo, which has become a proxy battlefield between Venezuela’s two rival leaders. First Maduro has ordered all Venezuelan Citgo employees to return home, then Guaidó has urged them to stay where they are, thus now no one really knows what to do. Citgo will become a litmus test of Guaidó’s political prowess – dealing with Venezuelan authorities with the backing of a hawkish US Administration is one thing, finding a compromise with Russian state-owned (and may I add, US-sanctioned) oil company Rosneft is an entirely different one. Citgo’s minority 49.9 percent stake was pledged by Maduro to Rosneft as collateral in return for a 1.5 billion loan provided in 2016, following which the Russian company immediately filed a lien with the Delaware Department of State asserting its right to own those 49.9 percent in case PDVSA defaults.

Guaidó has asserted that both China and Russia would be better off with him in power, pledging to respect the investments both Beijing and Moscow have made in Venezuela. Antagonizing Rosneft would be an unwise thing to do as it effectively operates the 150 kbpd Petromonagas crude upgrader facility, one of three working across the country capable of converting bituminous Orinoco crude into exportable volumes, and has stakes in five upstream projects (Petrovictoria, Petromonagas, Petromiranda, Petroperija, Boqueron). Chevron operates the 210kbpd Petropiar upgrader and envisages that it can keep up the stable operation despite all the political tension. The third upgrader, the 190kbpd Petrocedeno operated jointly by Total, Equinor and PDVSA, was expected to undergo a major maintenance program this quarter, however, seems to be working thus far.

Perhaps a bit wrongly, most of media attention was directed at the trading consequences of US sanctions, even though the most dramatic ramifications will be witnessed in Venezuela’s upstream sector. According to Platts estimates, up to 300kbpd of Venezuelan production might be out of operation amid an all-encompassing dearth of diluent, traditionally used to render the bituminous Orinoco crude transportable. Citgo was heretofore the major supplier of diluent, with some 120kbpd worth of exports effectively barred by the White House to sail to Venezuela under current circumstances. Reliance (having loaded two 2MMBbl VLCCs over the past few days – MT Folegandros I and MT Baghdad), having previously supplied 65kbpd, will most likely cease diluent supplies before April 28 so as not to put its US subsidiary RIL in the line of fire.

With minimal or no diluent to render its crude palatable, the current Venezuelan leadership risks seeing its production fall below 1mbpd on a permanent basis.

Venezuelan Oil Production

Should Maduro retain his post for longer and reroute the majority of Venezuela’s exports from the US to Asia, he would still see his income shrink on the back of falling production. Output decreases would further exacerbate the fuel shortage in the country – if today Paraguana works at 20 percent of capacity, further out it might drop even lower. This only goes on to highlight the complexity of US sanctions, which, despite being applicable for US companies only, have effectively cut off every entity with some interest or equity in the United States (as can be attested by all of Europe stopping PDVSA bond trades). At the same time it goes on to demonstrate the double game behind the humanitarian aid effort – its possibility was floated only when the “bringing Maduro to ruin” strategy reached the endgame.

Oddly enough, the United States keep on (the optimist might say involuntarily) curbing the world’s heavy sour streams. First actively contributing to Venezuela’s production downfall from 2.1mbpd in Jan 2017 to 1.1mbpd in Jan 2019, then making away with 1mbpd of Iranian exports, and now seeming intent on bring Caracas’ exports even lower. This can be, of course, easily explained in political terms, yet ultimately it is the US refiner who bears the economic brunt – whatever replacement there is for Venezuelan crude, be it WCS or Ecuadorian Napo, comes in insufficient quantities and thus would most likely be overpriced.

via ZeroHedge News http://bit.ly/2t9T1tj Tyler Durden

Is the torrid 6-week rally that started on December 26 finally, and led to the best January performance since 1987, finally over?

That is the second lingering question traders would like answered this morning (the first one being just what caused the dramatic plunge in USD libor overnight).

Indeed, after what seems like weeks of calls for a pause and retest of the rebound rally, it looks like stocks are ready to give it a go, according to Bloomberg’s Andrew Cinko who notes that the “turgid growth forecasts for the UK and euro-area are a good enough excuse to step back today and let prices contract” and adds that enthusiasm for equities certainly appears to have waned given “tepid U.S. composite trading volume and the lack of price movement intraday.”

Not that there aren’t tactical reasons for the sudden shift in sentiment, with Nomura’s Charlie McElligott highlighting the latest  “growth scare” pile-on, including:

1. the EC slashes their Euro-Area growth- and inflation- forecasts
2. the RBI shock with a surprise rate cut earlier overnight, just one day after an RBA banker pivoted hard from hawkish to neutral earlier in week, which in turn followed a surprisingly hawkish RBA statement
3. the BoE too cut their forecasts as well, showing the scale of the slowdown fear, permeating global central banks

What does this mean? According to McElligott the tactical implication is that the 2018 “hawkish normalization era” is long-gone, and instead we have resumed the “race to zero” posture, as globally, central banks scramble to be “more dovish” than their neighbor, which is also driving further USD strength, as the by-far “best of an ugly bunch.”

In the meantime, Nomura notes that amid this latest global growth scare, fixed-income has accelerated its rally, with German Bunds making new contract highs after the European outlook cut headlines, while Equities and growth-sensitives (commodities/Risk FX/EM FX) sell-off, tied to this ongoing USD strength. Also of note, the previously discussed – and unexplained – sharp plunge in 3M USD Libor, which saw its biggest fixing drop since Mary 2009.

A few more observations from Nomura on the recent surge in the dollar, which has seen a “a huge reversal to the upside” with the DXY +1.4% since the day following the Fed’s dovish pivot, as the rest of world joins the parade in what looks to be a “race to the bottom” as noted above in bullet 2.

This “TINA” dynamic with US Dollar is, without a doubt, the largest hindrance to “weak USD” consensus view in most 2019 forecasts, McElligott’s  included –as the global slowdown and idiosyncratic issues again “force” Dollar stickiness as “the cleanest dirty shirt” of the bunch.

As such, at least over the short term, the key catalyst to watch closely is the Dollar (and US rates) to determine if the consensus trade of early 2019 disintegrates, resulting in further risk assets weakness, as global economic headwinds force traders to rush into the safety of the greenback.

* * *

While the above may explain the tactical considerations for stocks, and why a drop in the S&P may be in the offering, what about the strategic factors? Here McElligott makes the following key point, whose punchline is that going forward the only thing that matters is inflation, and when it comes back:

• After ruminating on Powell since last week (and Fed speakers since the blackout was lifted), it has become clear to me that the Fed is now a “one trick pony,” with broad “data dependence” a myth in my eyes, and instead, now just a singular focus on INFLATION as their lone mandate
• A point that I have made over the better part of the past year is best expressed through asking a simple question: “What was the catalyst that awoke last year and drove the new cross-asset volatility regime?”
• My answer: “green shoots” on INFLATION is what shook markets and instituted the new volatility paradigm witnessed in 2018, where the “match” of explosive US fiscal stimulus onto an already “full steam ahead” US economy (which was running above-trend growth already) lit the US Rate Vol “fire,” and meant that for the first time in the post GFC regime, traders lost their visibility on the future path of US interest rates…especially as we saw a new Fed Chair enter the arena with perceived “hawkish” chops
• As I have previous made clear, the late December 2017 / January 2018 “spot (S&P) up, VIX up” environment was a rather profound signal for the imminent “tipping over” of risk, and the catalyst of this volatility was the move in US Rate Vol (UST 10Y term premium from at the time near-cycle lows of -60 on Dec 15th 2017 up to just -14bps by Feb 9th 2018 / 3m10Y USD Swaption Vol from 52.3 on Dec 13th 2017 to 74bps on Feb 6th 2018)
• Why did Rate Vol “suddenly” reappear then?  My prior point on Inflation, which had been dismissed as an afterthought over the prior 8+ years…but across the month of January 2018, we saw US CPI MoM beat, a number of very large regional Fed “Prices Paid” beats, and ultimately a shock beat in US AHE YoY
• The final “wage inflation” surprise signaled from the AHE YoY suddenly saw the long-dormant “Philips Curve” argument brought back to life as the seeming “death blow” to the “Goldilocks” narrative—and occurred on February 2nd, which saw the S&P 500 trade -2.4% on the session thereafter and more-glaringly, the leveraged VIX ETN “extinction event” on the trading day following (2/5/18), as S&P turned to dust, -5.4% on the day
• Fast-forward to the “now”—we are seeing “short volatility” positions re-established in earnest (systematic vol strats back in “roll-down” mode / “short vega” again for the first time in 4+ months), along with the general view from fundamental investors that the Fed is “out of the picture” for the next 5-6 months, and with perceived certainty that the next move thereafter is to EASE—all in-light of a group-think view that “INFLATION IS DEAD”
• As such, a reacceleration in inflation is without question the largest downside risk to the stock market—with regards to the view that inflation beat(s) / wages & earnings beat(s) would then see the Fed forced back-into the picture, and mean we are back on the “tighter financial conditions” / 2018 regime hamster-wheel again in that scenario—all tied to this implicit linkage between the reacceleration of “short volatility” positioning and a consensual view on slowing-inflation

With this in mind, and as concerns for a renewed drift lower in stocks bubble up, what could be the catalyst for inflation upside surprise?  As MCElligott explained yesterday, one place where a global reflation wave could emerge from is the Chinese “liquidity- / credit- impulse”, which he is “keenly watching” for signs of continued pivot higher that could bleed-through into global inflation expectations.

To be sure, this sharp rebound in the “Chinese Liquidity- and Credit- Impulse” is currently evidencing itself in Shanghai Commodities Future YTD performance (Nickel +11.6%, Zinc +6.0%, Bitumen 22.9%, Fuel Oil +19.4%, Deformed Bar +6.7%, Wire Steel +8.7% and Qingdao Iron Ore +15.1% YTD).

While it remains to be seen if China can sustain this bounce in credit conditions, if the answer is yes, and if China’s latest reflation attempt spills over across the Atlantic and impacts the US, then watch out below as the Fed will now be truly trapped between the threat of sliding risk assets on one hand, and a tidal wave of new Chinese inflation set to arrive on US shores.

via ZeroHedge News http://bit.ly/2TBMZNP Tyler Durden

Via AlMasdarNews.com,

A new satellite image that was released by Image Sat International revealed on Tuesday that Syria’s S-300 system was ready for service.

According to the image, at least three of the four S-300 batteries were visible, but the picture did show them erected.

Based on the information from previous satellite images, these S-300 batteries are located around the strategic city of Masyaf in the western countryside of the Hama Governorate.

While this may be good news for Syria’s coastal region, it does not provide much relief for the Damascus countryside that is constantly targeted by the Israeli Air Force.

As long as Israel maintains air superiority over Lebanon, repelling the latter’s strikes on Damascus will be very difficult for the Syrian military.

The S-300 system was delivered by the Russian Federation to Syria on October 1st; this move came after a Russian IL-20 reconnaissance aircraft was accidentally downed over the Latakia coast.

Russia accused an Israeli F-16 jet of using the IL-20 for cover as Syrian air defense missiles attempting to down the enemy aircraft in the eastern Mediterranean.

via ZeroHedge News http://bit.ly/2GfidHt Tyler Durden