It’s A “Sea Of Red” As Global Stocks, S&P Futures Tumble

Monday’s selloff, which spared the US cash market which was closed for MLK day, has stretched for a second day, with US traders walking in to a sea of red in Asian and European markets, while S&P futures are down over 20 points following a pessimistic economic assessment by the IMF, renewed trade concerns after the US submitted a formal request to extradite the Huawei CFO from China and “very poor” results from UBS.

“The appetite for risk is exceptionally low,” Ajay Kapur, head of Asia-Pacific and global emerging market strategy at Bank of America Merrill Lynch, told Bloomberg Television. “Most of the time, when you buy when sentiment is this depressed, you tend to make money,” unless there’s a recession, he said. “If you’re confident there will be no recession in the next year or so, I think this is a good indicator.”

Europe’s Stoxx 600 Index pared an early drop after Swiss banking giant UBS reported disappointing results and $13 billion in outflows, compounding what had been a catastrophic 2018 for Europe’s banking sector which lost nearly 30 percent of its value over the year, and sending UBS stock sliding while setting up a pessimistic tone for the continent’s banks which are set to begin reporting Q4 earnings.

After stocks rallied to the strongest start of the year since 1938, investors now find their conviction tested anew as a familiar litany of concerns weigh on sentiment. Adding to the sense of gloom, on Monday in its World Economic Outlook report, the IMF downgraded the global economy for the second time in three months when it predicted the global economy would grow at 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage point respectively from last October’s forecasts.

In the latest confirmation that Europe’s economy is on the verge of a recession, today’s German ZEW Current Situation report printed at 27.6, a huge miss to the 43.0 exp. and the lowest in 4 years.

The downgrades heavily reflected weakness in Europe though, with Germany hurt by new car emission rules, Italy under market pressure due to Rome’s recent budget standoff with the European Union and Brexit worries aplenty too.  As a result, European stocks struggled to stay positive as U.S. futures pointed to a sharply lower open after Monday’s holiday.

“We have seen a little bit of a pull back, but whether it’s the IMF growth downgrade or China related is neither here nor there,” said CMC Markets’ senior analyst Michael Hewson. “We are at the top end of the range for this year and given the global uncertainty investors are probably taking the view that it is probably wise to take a bit of profit off the table.”
Earlier in the session, shares declined across Asia, with losses led by Chinese shares, as the Shanghai Composite slumped 1.2%, while Japan’s Nikkei skidded 0.5 percent, Hong Kong’s Hang Seng index closed down 0.8 percent and Sydney faltered 0.5 percent.  Without any direction offered from American markets that were shut Monday for a holiday, the focus turned to comments from Chinese President Xi Jinping stressing the need to maintain political stability and news that the U.S. will move forward with a formal request to extradite Huawei CFO from Canada, sending Chinese equities and the yuan lower. The Offshore yuan weakened 0.20% to 6.8145 per dollar, the weakest level since Jan. 10

In another sign of risk aversion, the Australian dollar, often used as a liquid proxy for China investments, eased 0.3 percent to $0.7134, putting it on track for a third straight session of losses. The same worries had also sent copper, used in electrical wires and vehicles, drifting lower in the metals markets.

In FX markets, the dollar climbed for a sixth day, holding at a near three-week high as investors sought the relative safety of the U.S. currency. That knocked the euro and most emerging market currencies, many of which have had a decent start to the year. Sterling was slightly higher at $1.29 after data showed British workers’ pay growth hit a new 10-year high and employment had grown by much more than expected in the three months to the end of November. There was demand too for the safe-haven yen with the Japanese currency last buying at 109.41 per dollar. The euro was near the floor of its recent trading range at $1.1358. Against a basket of currencies, the dollar was barely changed at 96.393.

Otherwise traders were still waiting to see whether UK Prime Minister Theresa May can push her Brexit plans through the country’s bitterly divided parliament.  May had offered tweaks on Monday by seeking further concessions from the European Union on a backup plan to avoid a hard border between the British-administered province of Northern Ireland and the Irish Republic. But she had also refused to rule out leaving the EU at the end of March without any deal.

In bonds, Bunds traded a round-trip back to unchanged on the day, cash 10s stalling around 0.23% early in the session before rebounding. UST yields are ~2bp lower across the curve, with 10s grinding lower after Monday’s market closure as curves flatten. Peripheral bonds tighten slightly to core. The 20Y Gilt auction was well received, bouncing off session lows are robust auction metrics.

In commodities, the global growth worries pulled oil prices lower with Brent down 55 cents at $62.19 and U.S. crude futures off 39 cents at $53.41. Euro zone government bond yields also fell. Most 10-year yields were down two basis points on the day with Germany’s at 0.225 percent compared to Friday’s one-month high close to 0.28 percent. The European Central Bank holds its first meeting of the year on Thursday.

Expected data include existing homes sales. J&J, Prologis, Travelers and IBM are among companies reporting earnings.

Top Overnight News

  • U.K. Prime Minister Theresa May’s Brexit Plan B turns out to be a re-run of her Plan A — seeking EU concessions on the deal she’s already negotiated with Brussels. But even if she succeeds, it’s not at all clear she could get the modified terms through Parliament
  • The U.K.’s main opposition party is backing a plan that could open the door to a second EU referendum, bringing the possibility of stopping Brexit a step closer
  • At a meeting of euro-zone finance ministers on Monday, the Irish central-bank governor Philip Lane became the first nominee to replace Peter Praet on the ECB’s Executive Board in June. That puts him in prime position to take on Praet’s powerful role of overseeing economic projections and writing monetary-policy recommendations
  • CME Group Inc. will move its FX forwards and swaps venue, which has trading volumes of about $15b a day, from London to Amsterdam, while Cboe Global Markets Inc. will shift most European equities trading to its market in the Dutch capital after Brexit
  • Confidence across the energy industry is now where it was in 2010, when Brent soared to $95 a barrel, according to a survey by Det Norske Veritas, incorporating the views of 791 senior oil and gas industry professionals between October and November
  • German Jan. ZEW Current Situation 27.6 vs 43.0 est; Expectations -15.0 vs -18.5 est
  • China CSRC Vice Chair doesn’t see China significantly cutting U.S. bond holdings
  • Trump says China should stop “playing around,” do “real” trade deal
  • U.S. to proceed in seeking Huawei CFO extradition, Globe says
  • China’s Xi warns of ’serious dangers’ to stability as risks mount

Market Snapshot

  • S&P 500 futures down 0.7% to 2,654.00
  • Lebanon’s Debt Urgency Prompts Moody’s Downgrade on Default Risk
  • Chinese Stocks Decline as Investors’ Outlook on Economy Darkens
  • Saudi Arabian Energy Minister Al-Falih Set to Cancel Davos Trip
  • Philippines Central Bank Governor Takes Indefinite Medical Leave
  • STOXX Europe 600 up 0.02% to 356.42
  • German 10Y yield unchanged at 0.255%
  • Euro down 0.02% to $1.1363
  • Brent Futures down 1.3% to $61.93/bbl
  • Italian 10Y yield rose 2.8 bps to 2.4%
  • Spanish 10Y yield fell 1.4 bps to 1.352%
  • Brent futures down 1.5% to $61.81/bbl
  • Gold spot up 0.3% to $1,284.41
  • U.S. Dollar Index little changed at 96.35

Asian equity markets were negative as the region lacked impetus following the non-existent lead from the US due to Martin Luther King Jr. Day and as the slowest growth in China in nearly 3 decades continued to reverberate across risk sentiment. ASX 200 (-0.5%) was led lower by underperformance in its largest weighted financials sector and with miners dampened following softer output numbers by BHP, while Nikkei 225 (-0.5%) was also pressured with losses later exacerbated by currency flows. Hang Seng (-0.7%) and Shanghai Comp. (-1.2%) conformed to the downbeat tone in the aftermath of the recent Chinese growth figures which some expect to further deteriorate this year and after the PBoC refrained from open market operations for a 2nd consecutive day which resulted to a net daily drain of CNY 80bln, while there were also reports the US is to proceed with the formal extradition of Huawei’s CFO. Finally, 10yr JGBs were underpinned amid the uninspiring risk tone in the region and as yields also declined in the super long-end in which the 40yr yield drop to its lowest since 2016.

Top Asian News

  • Lebanon’s Debt Urgency Prompts Moody’s Downgrade on Default Risk
  • Chinese Stocks Decline as Investors’ Outlook on Economy Darkens
  • Saudi Arabian Energy Minister Al-Falih Set to Cancel Davos Trip
  • Philippines Central Bank Governor Takes Indefinite Medical Leave

Major European equities extended losses [Euro Stoxx 50 -0.6%] after briefly pairing back opening losses as the risk sentiment continued to deteriorate. The European banking sector is underperforming, with the sector weighed on by UBS (-4.3%) following poor results; with this dragging other banking names down in sympathy such as Credit Suisse (-1.0%) and Deutsche Bank (-3.6%). Deutsche Bank also impacted by reports that they, alongside another bank, have been accused of fraud with a EUR 11bln lawsuit filed against them. Other notable movers include IG Group (-6.7%) who are at the bottom of the Stoxx 600 after stating that their HY net revenue and profit are down by 6% and 18% respectively. At the other end of the Stoxx 600 are Hugo Boss (+5.0%) who reported a beat on their Q4 sales.

Top European News

  • Deutsche Bank Sued for $12 Billion by Sabet Over Lost Lawsuit
  • U.K. Wages Grow at Fastest Pace Since 2008 in Tight Labor Market
  • Italy’s Populists Make France Nemesis Ahead of European Vote
  • Thiam Says Things Looking Up After ‘Difficult’ Fourth Quarter
  • Auchan May Pay Up for Bond as French Unrest Adds to Challenges

In FX, the DXY is relatively flat on the day but choppy within a 96.300-480 range following an uneventful Asia-Pac session. The buck experienced a bout of Dollar demand in earlier European trade which coincided with comments from the Chinese Foreign Ministry regarding the extradition of Huawei’s Executive Meng wherein China strongly opposed the decision by the US and stated they will retaliate in accord with US lawmakers’ decisions. This saw the DXY push higher to intraday highs and levels just shy of 96.500 before a tweet by China’s Global Times Editor stating that China will not yield to an unequal deal from the US sent the index lower to around the middle of today’s range. On the States-side data front, today sees a scarce calendar with the release of existing home sales scheduled.

  • GBP – Mixed trade as the Pound benefits from the pullback in the buck alongside optimistic jobs data in which headline average earnings beat expectations while the ILO unemployment rate ticked lower. Cable showed some strength in the run-up to the release and as the numbers provided further impetus for the Sterling, GBP/USD extended gains and breached its 100 DMA to the upside at 1.2891 to reclaim 1.2900 and print session highs of 1.2930. On the Brexit front, in yesterday’s statement PM May said she will to head back to the EU for dialogue, while The Telegraph reported that her chief Brexit negotiator is privately doubtful on her ability to renegotiate the Irish backstop. Furthermore, she dismissed the idea of extending Article 50 with reports emerging by BBC’s Assistant Political Editor Smith stating that Ministers will have to sit through the February recess and weekends to achieve in deal in by the Brexit date, which markets could perceive as a positive as it potentially gives them more time to achieve an appropriate deal. Meanwhile, Tory lawmaker Rudd warned that the Premier could face a dozen resignations if Tory MPs get no vote on plans to stop a no-deal Brexit, though analysts at JPM see the likelihood of a no-deal at 5%.
  • EUR – Little changed against the Dollar as the single currency fails to benefit from the receding buck as gains are capped by the Sterling-induced decline in EUR/GBP following the aforementioned UK jobs data and Brexit developments, while the release of mixed ZEW number did little to move the single currency. EUR/USD remains flat around 1.1360 while EUR/GBP resides close to session lows under 0.8800 with no notable option expiries today.
  • JPY – A positive day for the Yen amid overnight strength from the risk-averse tone and as the BoJ began their 2-day policy meeting (full preview available on the Research Suite). USD/JPY hovers under 109.50 (vs. low of 109.34) with the pair’s 50 and 200 DMAs poised to form a death-cross.

In commodities, Brent (-1.9%) and WTI (-1.8%) extended losses as the complex is impacted by the negative risk tone and US absence from market yesterday. The energy complex saw another leg lower after Saudi Energy Minister Al Falih has reportedly cancelled his trip to Davos; Al Falih was due to speak on Wednesday on the New Energy Equation but more importantly, the Energy Minister was due to hold talks on the recent OPEC+ production cuts with the Russian Eenergy Minister. Elsewhere, the Canadian province of Alberta is expected to announce a CAD 2bln oil sector investment plan. Separately, as yesterday was a US holiday API weekly data will be released tomorrow. Gold (+0.3%) is in the green, trading towards the top end of the sessions range as markets continue to be impacted by the negative risk tone and a receding dollar. Elsewhere, China’s top steel-making city of Tangshan has issued a level 2 smog alert; to be effective until January 25th. BHP, the world’s biggest miner, reported a 9% fall in iron ore production, as well as highlighting USD 600mln impact due to iron and copper operations disruptions.

Looking at the day ahead, the lone release is December existing home sales which is expected to show a small decrease (-1.5% mom) during the month. Elsewhere the annual Davos shindig kicks off today while the earnings highlights include Johnson & Johnson and IBM in the US, and UBS in Europe.

US Event Calendar

  • 10am: Existing Home Sales, est. 5.24m, prior 5.32m; MoM, est. -1.5%, prior 1.9%

DB’s Jim Reid concludes the overnight wrap

Well we hope you survived Blue Monday yesterday, supposedly the most depressing day of the year. The guy who decided upon this used the following equation to denote it where W = weather, D = debt, d = monthly salary, T = time since Christmas, Q = time since failing our New Year’s resolutions, M = low motivational levels, Na = the feeling of a need to take action. If there are any quants out there that would like to tighten up this equation then feel free. For it to work for me I may need to add days since I was last injury free and days since our builder last increased the price of our renovations. These would be T-0 and T-1 respectively.

((W + (D – d)) x T^Q) / (M x Na)

To be fair Blue Monday was very quiet with the US on holidays. The latest Brexit developments were the focal point but in truth nothing much happened on that front. In her House of Commons speech yesterday, May ruled out a second referendum, which was largely as expected, and reiterated the greater role for parliament on the future relationship, as well as making assurances over EU worker rights. May specifically said that she will be “more flexible, open and inclusive in the future” as to how the government engages Parliament showing a slight move to embrace wider views. However in essence this is Plan A, but with hope that the Tories and DUP can coalesce around a better solution for the Irish problem and then persuade Brussels (and of course the Irish) to accept it. So not a huge amount of new news. What will be important now is what amendments get tabled ahead of Tuesday’s vote and whether or not they get a majority when voted on. That may give us a guide as to what Parliament can agree on and what is a non-starter. I can’t help feeling that if Parliament takes over this process it might actually give the two main parties a way of saving face. At the moment it’s difficult for either to back down for various reasons (splits within their parties) but if Parliament chooses the path for them and takes over it may allow for blame to shift.

The latest news in today’s Times suggests that the government divisions remain. Cabinet minister Amber Rudd has apparently warned No 10 that it could face 25-40 resignations from the government if Tory MPs are banned from voting for a plan that helps stop a no-deal Brexit. This is based on an amendment drafted by Labour’s Yvette Cooper and the Tory backbenchers Sir Oliver Letwin and Nick Boles. Ms Rudd is trying to persuade the PM to allow a free vote to allow a consensus to form. This perhaps fits with my view that Parliament taking over might be the best way of saving face and getting a deal. It’s worth noting that overnight opposition leader Corbyn has proposed the amendment of a second referendum.

May’s comments did at least help to lift Sterling marginally as it touched an intraday high of $1.291 before it settled down to trade broadly flat overnight at $1.288. Gilts were actually stronger through much of yesterday and ultimately finished -2.9bps lower in yield while the FTSE 100 and FTSE 250 finished a rather tepid +0.03% and -0.01% respectively. Overnight, sentiment more broadly in Asia is weaker with the majority of bourses in the red as we go to print. That’s the case for the Nikkei (-0.56%), Hang Seng (-1.01%), Shanghai Comp (-0.73%) and Kospi (-0.58%). Futures on the S&P 500 are also down -0.72% with the US market set to reopen today following yesterday’s holiday while EM FX is also struggling. Comments from China’s Xi (more below) appears to be playing a part while Bloomberg is also reporting that the US is to proceed in seeking the extradition of Huawaei’s CFO from Canada.

That US holiday meant it was predictably quiet for markets in Europe yesterday with equity bourses limping to small losses for the most part during a low volume session. That was the case for the STOXX 600 which ended -0.19% and so brought to an end a four-day winning run. Banks (-0.46%) – hot on the heels of four straight weekly gains – struggled as did utilities (-1.08%). The DAX (-0.62%), CAC (-0.17%), IBEX (-0.17%) and FTSE MIB (-0.35%) also closed lower while in contrast it was a slightly stronger day for cash credit – albeit modestly so – with IG and HY spreads both 1bp tighter. Bond markets were similarly unexciting. Bunds closed -0.7bps lower in yield while the periphery was 1bp to 3bps higher. Elsewhere WTI oil touched the highest level in two months intraday yesterday before fading overnight to trade down -0.69% versus Friday’s close.

While there might have been an element of the lull before the storm in markets yesterday with a packed rest of the week calendar ahead of us, if you did have to point the finger then the ever so slight risk-off tone could be attributed to comments made by China President Xi Jinping at a seminar of provincial leaders and ministers in Beijing. He said that “the (Communist) Party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment”. The President also said that “the party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt”. To counter all this Xi signalled that China will maintain economic operations “within a reasonable range”. This all appeared largely consistent with previous comments but adds to the slew of slowdown concerns coming from China now. On that note, post yesterday’s data, our Chinese economists reiterated their forecasts for GDP growth to fall to as low as 5.9% in Q2 before rebounding post policy loosening in March. See their report here.

Elsewhere, the IMF’s latest global growth forecasts were released yesterday. The Fund now expects 2019 growth to be 3.5% which compares to the 3.7% forecast made in October. That would also mark the slowest rate of growth in three years while the 2020 forecast now is for 3.6%, a small downward revision of one-tenth. At a regional level the forecast for emerging markets was revised down two-tenths this year to 4.5% while advanced economies are expected to grow 2.0% (one-tenth downward revision). The US is expected to grow 2.5% and 1.8% this year and next (both unrevised) which is broadly in line with the consensus on Bloomberg.

Finally, as for the day ahead, it’s a busy morning for data here in the UK with November and December employment stats due out (no change in the 4.1% unemployment rate or 3.3% yoy average weekly earnings prints expected) and December public sector net borrowing data. Also due out is the January ZEW survey in Germany. This afternoon in the US the lone release is December existing home sales which is expected to show a small decrease (-1.5% mom) during the month. Elsewhere the annual Davos shindig kicks off today while the earnings highlights include Johnson & Johnson and IBM in the US, and UBS in Europe.

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Overnight Clashes Follow Venezuelan Officers’ Failed Attempt To Lead Anti-Maduro Coup

Venezuela remains on edge after in the pre-dawn hours of Monday morning a small group of soldiers attempted to launch a military coup against the Maduro regime, but failed, resulting in the arrests of 25 members of the Venezuelan National Guard who temporarily gained control of a police station located a short distance from the presidential palace in Caracas, and the apprehension of two others at another location, in total 27 detained — all of which sparked riots in local neighborhoods, some of which appear to have continued throughout the night. 

Barricade erected during a protest Monday near to a National Guard outpost in Caracas, Venezuela. Image source: Reuters

Following the mutiny and subsequent successful government crackdown, which further involved the rebellious unit briefly kidnapping several officials and stealing weaponry in the Cotiza neighborhood, pockets of anti-Maduro protests were sparked in the capital city demanding the release of the detained soldiers, whose actions the government condemned as “treasonous” and “motivated by the dark interests of the extreme right,” according to a statement announced on state TV. Maduro’s right-hand man, Diosdado Cabello, also boasted on Twitter while speaking of the rebels: “They were neutralized, surrendered and captured in record time.”

Hours prior to the crackdown on the coup attempt, a series of videos were published to social media showing what are purported to be the coup leaders standing in darkness with a spokesman demanding that Venezuelans rise up to support the coup. In one video a man who identified himself as Luis Bandres said, “You all asked that we take to the streets to defend the constitution. Here we are. Here we have the troops, it’s today when the people come out to support us.”

And in another video a heavily armed man appeals to the public with “You wanted us to light the fuse, so we did. We need your support.” This appears to have driven at least some in the vicinity of where the military rebellion was launched to the streets, angry at what’s being called President Nicolas Maduro’s “illegitimate” election to a second six-year term, as the AP reports:

At daybreak in the adjacent neighborhood of Cotiza, a group of shirtless young men, some with their faces covered, built a barricade across the street with a burning car, heavy sewer grates and a large chunk of concrete.

An angry group of women shouted that they have lived for too long without running water and tear gas fired by security forces choked their children.

“Freedom! Freedom!” they chanted. “Maduro has to go!”

“We must defend our homeland,” Maria Fernanda Rodriguez, a 36-year-old manicurist, told The Associated Press, her eyes welling from the tear gas.

International reports suggest some of these initial protests were snuffed out by riot police, but sporadic clashes continued in some places through the evening.

But the socialist country, currently suffering from what’s being widely described as “inflation approaching 2 million percent” and a shortage of everything from food to medicine to diapers and baby formula, remains on edge as opposition leaders are now calling for mass protests in the coming days in the wake of the defeated attempt at triggering a broader military revolt.

Clashes appeared ongoing through the night in the neighborhood in which the military revolt began. 

Specifically, opposition leaders in the legislature have called for nation-wide protests to be held Wednesday following the government-stacked Supreme Court declaring it would throw out recent measures by the National Assembly that declared Maduro’s presidency illegitimate.

But thus far the brief military uprising appears to have been a very isolated event as the officers involved are low-ranking with little sway to start a domino effect of defections, which would have to dent the higher ranks first. The televised government statement following the arrests emphasized that the military remains loyal to the state with the words, “The armed forces categorically reject this type of action…”.

Unconfirmed videos circulating on social media throughout Monday evening appear to show citizens erecting barricades in Cotiza and possibly other neighborhoods while setting fires to objects amidst a continuing police crackdown seeking to tame the unrest. But the unrest could grow as opposition congressional leader Juan Guaido becomes bolder in his denunciations of Maduro. 

Throughout the night their appeared intermittent violence on Caracas’ streets between protesters, police, and what some say are the “colectivo armado” — fiercely loyal pro-regime militias that typically move in packs on motorcycles targeting anti-Maduro opposition activists.

According to the AP, Guaido is fanning the flames while stopping short of condoning any violent acts, however he’s appealing straight to the military ranks:  

Juan Guaido, a 35-year-old newly seated as president of congress, appealed to the military, urging them to demand Maduro abandon power in a nationwide protests Wednesday — a historic date commemorating the end of Venezuela’s military dictatorship in 1958.

“We are not asking you to mount a coup. We are not asking you to shoot,” Guaido said in a video circulated on social media. “On the contrary, we are asking you not to shoot at us, but rather to defend together with us the right of our people to be heard.”

Earlier this month Guaido was arrested and briefly detained by secret police following a speech wherein he implied he was the only legitimate authority in Venezuela.

This comes after months of both the Trump administration and US Congressional leaders becoming increasingly unrestrained in publicly calling for outright regime change.

After Monday’s coup attempt Florida Senator Marco Rubio went so far as to encourage more such military defections. 

Rubio claimed military forces have been deployed to the streets amidst protests and internet access had been cut across parts of the country. 

Meanwhile Venezuelan Foreign Minister Arreaza just days ago told Democracy Now that “Nothing that the opposition does is without the permission or authorization of the State Department… They say, ‘We have to make consultations with the embassy. We have to make consultations with the Dept of State.'”

Monday’s short-lived mutiny was not the first time the Maduro government has faced military insurrection. There’s been a series of significant incidents over the past few years, including last August’s explosive-laden drone attack as Maduro addressed a military parade in Caracas, and a firefight between three rebel military members and security forces at Fort Paramacay in the northern city of Valencia in 2017. 

Perhaps the most extreme and notable attack came in June of 2017, when ex-policeman Oscar Perez dropped grenades on the regime loyalist-dominated Supreme Court while flying above in a stolen helicopter.

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UBS Tumbles On “Very Poor” Results As Clients Pull $13 Billion

The parade of weak bank earnings continued on Tuesday when UBS, one of the first major European banks to report, announced that it had missed analysts’ profit estimates (though it did record a rise in full-year profits) due to outflows from its key global wealth management division.

UBS

Here’s a summary of its earnings report courtesy of Bloomberg:

  • UBS reports $7.9b in net new money outflows in global wealth management in 4Q, while asset management business saw outflows of $4.9b.
  • UBS says seen some normalization in markets in early 2019
  • Expects 1Q client activity affected by volatility, geopolitics, trade disputes
  • Market volatility remains muted, which is less conducive to client activity
  • 2018 dividend CHF0.70/shr
  • Targets to buy back $1b worth of shares in 2019 vs CHF750m in 2018
  • 4Q adj. pretax profit (excl. litigation costs) $1.01b vs company- compiled est. $1.04b
  • Global wealth management adj. pretax $912m vs est. $943m
  • Investment bank adj. pretax $30m vs est. $229m
  • Challenging markets affected equities, corporate client solutions revenues
  • 4Q adj. cost/income ratio 97%
  • Personal & corporate banking adj. pretax $375m vs est. $397m
  • Asset management adj. pretax $134m vs est. $119m
  • Investment bank adj. pre-tax profit $30 million vs $229 million company compiled est.
  • 4Q net $696m vs est. $729m
  • End-Dec. CET1 capital ratio 13.1%; CET1 leverage ratio 3.8%

The bank’s net profit attributable to shareholders for 2018 was $4.897 billion, compared with $969 million in 2017. That’s compared with a Reuters estimate of $4.906 billion. The bank warned about further weakness in its wealth management unit as it expects investors will continue to pull money out due to rising protectionism, increased market volatility and geopolitical tensions. Withdrawals at the bank’s global wealth management unit totaled almost $8 billion in Q4, while another $5 billion flowed out of it asset-management business.

UBS shares (-4.7%) led a drop in European bank shares…

UBS

…after its earnings report, which Citigroup analysts described as “very poor.”

“These are very poor results, and come as somewhat of a negative surprise so soon after the upbeat investor day,” analysts including Andrew Coombs at Citigroup wrote in a note to investors. In wealth management “the fourth quarter is usually seasonally weak, but this is disappointing.”

UBS CEO Sergio Ermotti, who is expected to face questions on succession planning on Tuesday, said the “normalization” in markets in early 2019 could benefit the bank’s bottom line for Q1.

“We have seen sine normalization in markets early in 2019, we will stay focused on balancing efficiency and investments for growth, in order to keep delivering our capital return objectives while creating sustainable long-term value for shareholders,” Sergio Ermotti, UBS chief executive officer, said in a statement Tuesday.

In an attempt to boost its sagging share price, the bank also announced its plans to purchase $1 billion of its shares in 2019, above the $751 million purchased in 2018.

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China Threatens Retaliation As US Confirms Plan To Extradite Huawei CFO

Despite China’s demands that the US government use the shutdown as an excuse not to make a formal extradition request for Huawei CFO Meng Wanzhou, DOJ officials have reportedly told a Canadian diplomat that the DOJ will submit its formal extradition request by the Jan. 30 deadline (the US has 60 days from the day of Meng’s arrest in Vancouver to formally ask for extradition).

The news, which was first published Tuesday by Canadian newspaper Globe and Mail, sent the offshore yuan lower as Chinese officials accused the US of “abusing” the extradition system in the Meng case. According to the report, David MacNaughton, Canada’s ambassador to the US, met with senior White House and State Department officials about the Meng case.

Meng

MacNaughton also reportedly expressed to Washington Canada’s unhappiness that it had been drawn into the dispute, and that several of its citizens are now facing retaliation from Beijing.

“We do not like that it is our citizens who are being punished,” he was quoted as saying. “[The Americans] are the ones seeking to have the full force of American law brought against [Meng] and yet we are the ones who are paying the price. Our citizens are.”

He also said the US had expressed its appreciation that Ottawa would honor the extradition agreement, and said that Canada would continue to press Beijing about releasing Michael Spavor and Michael Kovrig, the two Canadian nationals arrested on vague “national security” charges in the wake of Meng’s arrest.

In a warning issued after the report, Chinese Foreign Ministry spokeswoman Hua Chunying threatened that China would “take action” in response to the US’s decision, adding that the extradition convention was “an abuse” of power.

“Everyone has to be held responsible for their own actions. Both the US and Canada should be aware of the seriousness of the case and take steps to rectify the mistake.”

A Huawei executive speaking in Davos also vaguely accused the US of trying to exercise “supremacy”. Deputy Chairman Ken Hu told a panel that no one country should exercise “supremacy” in the global economy, a comment apparently directed at the US and its attempts to push Huawei out of Western markets.

“We are at the turning point of the restructuring of the global economy…the current globalization is the result of competition and cooperation based on comparative advantage. It’s not the pursuit of any single country for absolute primacy.”

Meng’s next court appearance is set for Feb. 6, which will be to set a date for her extradition hearing. Once the US submits its formal extradition request, the Canadian Department of Justice will have 30 days to decide whether to approve the request and begin extradition proceedings.

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Anti-Trump Frenzy Threatens To End Superpower Diplomacy

Authored by Stephen Cohen via The Nation,

Baseless Russiagate allegations continue to risk war with Russia…

The New Year has brought a torrent of ever-more-frenzied allegations that President Donald Trump has long had a conspiratorial relationship – why mince words and call it “collusion”? – with Kremlin leader Vladimir Putin.

Why the frenzy now? Perhaps because Russiagate promoters in high places are concerned that special counsel Robert Mueller will not produce the hoped-for “bombshell” to end Trump’s presidency. Certainly, New York Times columnist David Leonhardt seems worried, demanding, “The president must go,” his drop line exhorting, “What are we waiting for?” (In some countries, articles like his, and there are very many, would be read as calling for a coup.) Perhaps to incite Democrats who have now taken control of House investigative committees. Perhaps simply because Russiagate has become a political-media cult that no facts, or any lack of evidence, can dissuade or diminish.

And there is no new credible evidence, preposterous claims notwithstanding. One of The New York Times’ own recent “bombshells,”published on January 12, reported, for example, that in spring 2017, FBI officials “began investigating whether [President Trump] had been working on behalf of Russia against American interests.” None of the three reporters bothered to point out that those “agents and officials” almost certainly included ones later reprimanded and retired by the FBI itself for their political biases. (As usual, the Times buried its self-protective disclaimer deep in the story: “No evidence has emerged publicly that Mr. Trump was secretly in contact with or took direction from Russian government officials.”)

Whatever the explanation, the heightened frenzy is unmistakable, leading the “news” almost daily in the synergistic print and cable media outlets that have zealously promoted Russiagate for more than two years, in particular the Times, The Washington Post, MSNBC, CNN, and their kindred outlets. They have plenty of eager enablers, including the once-distinguished Strobe Talbott, President Bill Clinton’s top adviser on Russia and until recently president of the Brookings Institution. According to Talbott, “We already know that the Kremlin helped put Trump into the White House and played him for a sucker…. Trump has been colluding with a hostile Russia throughout his presidency.” In fact, we do not “know” any of this. These remain merely widely disseminated suspicions and allegations.

In this cult-like commentary, the “threat” of “a hostile Russia” must be inflated along with charges against Trump. (In truth, Russia represents no threat to the United States that Washington itself did not provoke since the end of the Soviet Union in 1991.) For its own threat inflation, the Timesfeatured not an expert with any plausible credentials but Lisa Page, the former FBI lawyer with no known Russia expertise, and who was one of those reprimanded by the agency for anti-Trump political bias. Nonetheless, the Times quotes Page at length:

“In the Russian Federation and in President Putin himself you have an individual whose aim is to disrupt the Western alliance and whose aim is to make Western democracy more fractious in order to weaken our ability…to spread our democratic ideals.”

Perhaps we should have guessed that the democracy-promotion genes of J. Edgar Hoover were still alive and breeding in the FBI, though for the Times, in its exploitation of the hapless and legally endangered Page, it seems not to matter.

Which brings us, or rather Russiagate zealots, to the heightened “threat” represented by “Putin’s Russia.” If true, we would expect the US president to negotiate with the Kremlin leader, including at summit meetings, as every president since Dwight Eisenhower has done. But, we are told, we cannot trust Trump to do so, because, according to The Washington Post, he has repeatedly met with Putin alone, with only translators present, and concealed the records of their private talks, sure signs of “treasonous” behavior, as the Russiagate media first insisted following the Trump-Putin summit in Helsinki in July 2018.

It’s hard to know whether this is historical ignorance or Russiagate malice, though it is probably both. In any event, the truth is very different. In preparing US-Russian (Soviet and post-Soviet) summits since the 1950s, aides on both sides have arranged “private time” for their bosses for two essential reasons: so they can develop sufficient personal rapport to sustain any policy partnership they decide on; and so they can alert one another to constraints on their policy powers at home, to foes of such détente policies often centered in their respective intelligence agencies.

(The KGB ran operations against Nikita Khrushchev’s détente policies with Eisenhower, and, as is well established, US intelligence agencies have run operations against Trump’s proclaimed goal of “cooperation with Russia.”)

That is, in the modern history of US-Russian summits, we are told by a former American ambassador who knows, the “secrecy of presidential private meetings…has been the rule, not the exception.” He continues, “There’s nothing unusual about withholding information from the bureaucracy about the president’s private meetings with foreign leaders…. Sometimes they would dictate a memo afterward, sometimes not.” Indeed, President Richard Nixon, distrustful of the US “bureaucracy,” sometimes met privately with Kremlin leader Leonid Brezhnev while only Brezhnev’s translator was present.

Nor should we forget the national-security benefits that have come from private meetings between US and Kremlin leaders. In October 1986, President Ronald Reagan and Soviet leader Mikhail Gorbachev met alone with their translators and an American official who took notes—the two leaders, despite their disagreements, agreed in principle that nuclear weapons should be abolished. The result, in 1987, was the first and still only treaty abolishing an entire category of such weapons, the exceedingly dangerous intermediate-range ones. (This is the historic treaty Trump has said he may abrogate.)

And yet, congressional zealots are now threatening to subpoena the American translator who was present during Trump’s meetings with Putin. If this recklessness prevails, it will be the end of the nuclear-superpower summit diplomacy that has helped to keep America and the world safe from catastrophic war for nearly 70 years—and as a new, more perilous nuclear arms race between the two countries is unfolding. It will amply confirm a thesis set out in my book War with Russia?—that anti-Trump Russiagate allegations have become the gravest threat to our security.

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Caterers At UK Airports Are Stockpiling In-Flight Meals To Prepare For ‘No Deal’ Brexit

In the days after the UK’s chaotic no-deal Brexit, as companies scramble to re-engineer supply chains to account for time-consuming customs checks on goods entering the country from the EU, air travelers leaving the UK (passport in hand) can rest assured that, even if their flights linger on the runway for hours, at least they will have a tasty in-flight meal to enjoy as they lash out at Theresa May and her government on Twitter.

That’s because the world’s biggest caterer of airplane meals, snacks and beverages has already stockpiled enough supplies to last about ten days in a warehouse in Peterborough, England, Bloomberg reports.

Brexit

Following the historic defeat of her Brexit withdrawal deal last week, Theresa May has apparently reasoned that winning over intransigent Tories and members of the DUP would be her best shot at winning support for a “Plan B” deal, which she is expected to introduce on Monday (to be sure, “Plan B” is expected to include only minor differences from “Plan A”).

With the way forward as muddled as ever, May has little choice but to keep fostering scary headlines about the possible fallout from a ‘no deal’ Brexit – a strategy we have dubbed “Project Fear” – in the hope that, once their backs are against the wall and their alternatives have been whittled down to ‘her deal or no deal’, MPs will do the “sensible” thing and back May’s deal.

Brexit

And now, Gate Gourmet, an airline services company that supplies 10 airports in the UK, has filled warehouses across the country with enough supplies to give them a 10-day buffer following a hard Brexit, which the company’s executives fear could be disruptive to their supply chain.

Gate Gourmet, which serves 20 airlines at 10 U.K. airports, is accumulating enough pizza, ice cream and roast duck (for business class) to see passengers through about 10 days of disruption. Chilled items are being held at a warehouse in Peterborough, England, while mountains of snack boxes, peanuts and toilet rolls are piling up at a room-temperature facility in London.

“Companies could be in difficulty if they haven’t prepared themselves and ensured a continuity of supply,” Stephen Corr, the Zurich-based firm’s managing director for Western Europe, said in an interview. “We’ve been gradually increasing inventory levels of products from the European Union to ensure that any initial disruption at the U.K. border can be covered.”

Companies across the UK are already stockpiling everything from autoparts, plane wings, newsprint, beer and cancer drugs at specialist warehouses. Gate Gourmet produces most of its meals in Spain and Germany, which could create problems if the trading relationship between the UK and the EU suddenly reverts to WTO rules. Because of this pre-Brexit Day rush, one of the warehouses used by Gate Gourmet is already 98% full.

That means using the Calais-Dover sea crossing that’s expected to become a pinch-point following the introduction of time-consuming customs checks if Britain exits the EU without a deal. Before being sent to the airport for reheating aboard the plane, the cooked food is stored in Peterborough.

The site, run by a Chiltern Cold Storage, is now 98 percent full with everything from frozen meat for restaurants to vegan meals and dog food, as suppliers the length and breadth of Britain call on its services, according to Operations Director Tom Lewis.

With Brexit Day just 75 days away, more companies are triggering their ‘hard Brexit’ contingency plans. And with May about as close to passing a deal as she was last summer (that is to say, not close at all), we can’t help but wonder if all of this stockpiling could create some distortions in the UK’s PMI numbers if Brexit Day comes and goes without a catastrophe.

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Adamowicz’s Assassination Is Being Exploited To Politically Polarize Poland

Authored by Andrew Korybko via Oriental Review,

Gdańsk mayor Paweł Adamowicz of the Civil Platform (or PO) opposition party died after being stabbed in the heart by a deranged assailant at a charity concert on Sunday, who deceived security in order to get onstage and then give a crazed rant after the attack attempting to justify his crime on the alleged grounds that the mayor’s party wrongly imprisoned him.

All of Poland is mourning Adamowicz’s death and even his political rivals made speeches denouncing his assassination, but there are already some voices that are trying to make this into a partisan issue in order to score points ahead of this May’s European Parliamentary elections and besmirch the credibility of the ruling Law & Justice Party (also known by its Polish abbreviation as PiS).

The Washington Post published a provocative piece titled “Polish mayor and opposition leader dies after a stabbing, prompting fears of further divisions”, which advances the narrative that the rhetoric being espoused by some members of the ruling party and their supporters contributed to this tragedy.

This is almost the exact same storyline that the US Mainstream Media promotes whenever a mentally ill American goes on a killing spree and any faint trace of a political motive could be found or manufactured. It’s probably not a coincidence that the Washington Post’s political victim of this innuendo-filled smear piece is a party allied to Trump, with whom the outlet’s owner Jeff Bezos is in a heated ideological rivalry and who his paper never tires of attacking.

People in Poland are gathering for solemn vigils to honor Gdansk Mayor, 53-year-old Pawel Adamowicz. who died Monday after being stabbed at a fundraising event the night before.

PiS’ “grey cardinal” Jaroslaw Kaczynski also just entered into a EuroRealist alliance with Italy’s Salvini that threatens to politically shake up the EU if they and their allies come out on top in this May’s European Parliamentary elections, so they and Trump’s enemies have a motivation to try to discredit them ahead of the vote by implying that the Polish ruling party’s rhetoric and that of their supporters played a role in Adamowicz’s assassination.

It’s regrettable that the American style of unprincipled partisan politics is now being imposed on Poland and it says a lot about the unethical means to which some of the opposition’s proponents will go in order to undermine their rivals, making Adamowicz’s assassination a dark moment in Polish history for more reasons than one.

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“Our Name Is Our Soul” – Greek Protesters Hurl Molotov Cocktails At Police Over Macedonia Name

In one of the most violent protests on the streets of Athens since the Greeks last narrowly avoided an all-out economic collapse back in 2015, thousands of angry Greeks gathered outside the Parliament in Athens on Sunday to protest an agreement between the Greek government and the government of Macedonia that aimed to put to rest a long-simmering conflict between the two neighbors over – of all things – the formal name of the former constituent of Yugoslavia.

Fire

In an accord that will help clear the way for Macedonia to potentially join the EU, Macedonia has agreed to change its name from the “Republic of Macedonia” to the “Republic of Northern Macedonia” under a deal between the two countries that was ratified in both Athens and Skopje.

Protesters tossed Molotov cocktails and attacked police, who responded by tear gassing the crowd.

Greece

Greece

Greece

Greece

But nationalist Greeks, who have long objected to Macedonia claiming the name “Macedonia” (which is also the name of a province in Northern Greece), have been infuriated by the deal. Many believe that the use of the name Macedonia implies a territorial claim on the Greek province, according to CNN.

“Giving away the name Macedonia means giving away our land. The aim of the protest rally is to send a message to politicians. Our name is our soul,” Giorgos Tatsios, a member of the rally’s organizing committee, said.

The protesters waved flags and chanted slogans including “Macedonia is Greece” and “Hands off Macedonia.”

Giorgos Golas, 46, who traveled to Athens for the day to attend, said living in the northern Greek town of Ptolemaida made him feel “vulnerable.”

“We don’t want an agreement that does not protect us from minority issues being raised or territorial claims.”

Greek police said 60,000 people took part in the rally, which was held ahead of a vote in Parliament that could take place as early as next week. The agreement is widely expected to be ratified, despite all opposition parties opposing the deal. Prime Minister Alexis Tsipras said he believes its his “patriotic duty” to ratify the agreement, despite its unpopularity.

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The Vatican Surrenders To China

Authored by Lawrence Franklin via The Gatestone Institute,

  • The Vatican may learn the hard way that the Communist Chinese government does not honor its agreements. Beijing may attempt to extort even more concessions from the Vatican, just as the Chinese regime demands ever more surrender of sovereignty from western companies that do business in China.

  • It is also highly dubious that the Vatican will purchase peace by this pact: the regime will continue to persecute the Church. If the Communist regime is true to form, thousands more crosses will be taken down from Christian churches, especially in areas that have a high Christian population.

  • The courageous elders of Chinese Catholicism, who have endured decades of government persecution and regime efforts to divide the Church, may be seen by their flocks as having been bypassed by the Vatican. Many, if not most, Chinese Catholics are likely to view this agreement as a cynical political betrayal by the Vatican rather than a faith-based decision.

  • “In light of this dismal record, it seems that prudence and caution would seem to be the order of the day in Vatican negotiations with the totalitarians in charge in Beijing, at whose most recent Party Congress religion was once again declared the enemy of Communism.” — George Weigel, Catholic author and political analyst.

Pictured: The Sacred Heart Cathedral in Guangzhou, China. (Image source: Zhangzhugang/Wikimedia Commons)

Pope Francis has surrendered partial control of the Chinese Catholic Church to the Chinese Communist Party (CCP). His Holiness agreed to grant the Party considerable authority over personnel matters. After decades of refusing to give China the right to appoint Catholic bishops, as a condition for normalization of relations, the Vatican finally conceded to the regime’s demand to allow the CCP a decisive role in the selection of bishops to head Catholic dioceses.

The Vatican’s concession came despite the CCP’s continued persecution of the unofficial, independent, underground Catholic Church in China. Yet the Vatican probably does not view this as a defeat but rather as a means to an end. The diplomatic hierarchy of the Catholic Church may be confident that the truth of its spiritual message will endure long after the CCP dissolves into the same historical trash bin as other totalitarian ideologies have done.

The Church’s consenting to fold its independent political posture into the Chinese regime’s Communist Party apparatus gives Beijing the authority to appoint bishops politically acceptable to the CCP. In granting China this right, the Vatican implicitly is recognizing the legitimacy of the regime’s CCP instrument to infiltrate and control Roman Catholicism in China, which is the Chinese Patriotic Catholic Association (CPCA).

Pope Francis has also reinstated several pro-regime bishops whom the Vatican had once excommunicated because they willingly agreed to follow Communist China’s directives, while forsaking their loyalty to the Church in Rome. Finally, the Holy See’s bureaucracy also accepted Beijing’s demand to reduce and restructure the Catholic Church’s 137 dioceses across China.

This last Vatican concession may shred the religious authority of several bishops secretly appointed to some of these eliminated dioceses by Pope Francis and previous popes. For almost 70 years, after the CCP’s successful takeover in China, Catholics have either attended churches approved by the government’s Chinese Patriotic Catholic Association or churches aligned with the Vatican. Some Catholics even attend Mass in private homes to avoid surveillance by agents of the regime.

After a series of recent meetings between the Holy See and China’s State Administration for Religious Affairs, Pope Francis dispatched a delegation in mid-December to meet with leading bishops of the pro-Vatican “Underground Church” and Chinese government officials. The delegation was ostensibly in China to pursue “practical steps” to implement the provisional agreement the Holy See had reached with China.

In reality, the Papal delegation may have been sent to China to make certain that the agreement’s final implementation proceeded smoothly. The delegation included the Vatican’s President-Emeritus of the Pontifical Council for Social Communications, Archbishop Claudio Maria Celli. The Archbishop carried a document signed by the Holy See’s Secretary of State, Cardinal Pietro Parolin and by Cardinal Fernando Filoni, Prefect of the Vatican’s Congregation for the Evangelization of Peoples.

The delegation’s Papal directive instructed at least two prominent Catholic bishops of the “Underground Church” to retire or share their official duties with bishops approved by the CCP. While the exact wording of the Holy See’s letter remains secret, some Vatican observers, presumably reflecting the Pope’s decision to reverse years of resisting Beijing’s demands, cited a few reasons for giving in. First, the Church probably needs to eliminate confusion among Catholics in China over the schism between Vatican-approved and regime-approved bishops. Another possible reason for the Vatican’s apparent flexible stance is that a Church-state compromise would be necessary to improve pastoral care for existing Catholic faithful. The decision by the Vatican not to publish the letter, however, may suggest that the regime is also demanding that the Holy See break relations with Taiwan before it can normalize diplomatic ties to China. This supposition is based on the character of Beijing’s previous agreements establishing bilateral relations with other countries, including Panama. Other countries that cut ties to Taiwan in order to open up embassies in China include the tiny African country of São Tomé and Príncipe as well as El Salvador. The prerequisite that states desiring formal ties with China must first sever formal diplomatic relations with Taiwan rests on Beijing calls its “One China” policy.

Communist China considers Taiwan an integral part of China, and thus rejects Taiwan’s claim that it represents the legitimate government of China.

The Vatican’s public relations officers seem to have tried to put the best face on the agreement with Beijing. Gregory Burke, the recently resigned Director of the Holy See’s Press Office, suggested that this pact with the CCP was designed to be pastoral, not political, implying that it would help unify Chinese Catholics. The Vatican, however, in a seeming effort to douse speculation, has refused to reply to inquires whether the agreement is a first step in establishing diplomatic relations between the Holy See and the People’s Republic of China. About half of the 98 dioceses have no Vatican-approved bishops, thereby often leaving their parishes without clerics to administer to believers. It is clear from Beijing’s anti-Catholic harassment campaign that the Communist Party leadership is determined to co-opt, if not destroy, the independence of the Church in China. Regime harassment includes the dispatch of internal security police to strip churches of their statues, and the removal of crosses from steeples. Sometimes bibles are confiscated if seen in public. Masses are often celebrated in private homes to avoid being monitored by the state. On one occasion in early 2018, an entire Catholic Church was demolished, prompting a street demonstration by parishioners.

Perhaps the Vatican might be privately concerned that the CCP’s continued opposition could complicate evangelization efforts among the Chinese people. The Vatican’s desire to reach an agreement with Beijing may also be, in part, a reaction to the regime’s efforts to sow dissent in the Church by supporting the Chinese Patriotic Catholic Association as an alternative church. With President Xi Jinping’s endorsement, at the October’s 19, 2018 Chinese Communist Party Congress, Beijing launched a “Sinicization” campaign to bring all religions in line with Chinese culture and values. This government tactic is probably designed to co-opt or to curb the growth of an independent Catholic Church, thereby enhancing Communist Party control of religion in China. One report alleges that Catholic evangelization of the Chinese people is stagnating in marked contrast to the rapid expansion of Protestant Christianity in the country. This disparity underscores the significance of Cardinal Filoni’s presence in the Vatican delegation to China’s Catholic Bishops: Filoni is responsible for the Vatican’s worldwide evangelizingcampaigns.

The Vatican’s pact with Beijing is evoking a good deal of intense criticism from both leading Catholic intellectuals and human rights crusaders. Retired Cardinal of Hong Kong Joseph Zen bitterly critiqued the agreement as “an incredible betrayal,” tantamount to giving “the flock to the wolves.” The China Director of Human Rights Watch, Sophie Richardson, stated that “the Pope has effectively given Chinese leader President Xi Jinping a stamp of approval when the latter’s hostility to religious freedom couldn’t be clearer.”

Even while Beijing and the Vatican were negotiating the future status of the Catholic Church in China, the Communist regime continued its pressure on the Underground Catholic Church to go along with its efforts to get the Vatican to comply with the state’s wishes on the administration of the Catholic Church in China. The government harassed and arrested Bishop Joseph Guo Xijin during the years-long negotiations between the Holy See and China. During the talks, another Catholic prelate, 88 year-old pro-Vatican Bishop Peter Zhuang, was hauled before China’s State Administration for Religious Affairs. Although Bishop Zhuang was released into the custody of a Vatican delegation, the event was held in the presence of Chinese Party officials, where he was coerced to retire in light of the Vatican-China deal.

Perhaps the true intention of the Communist regime was best characterized by Jesuit China expert at Santa Clara University, Father Paul Mariani, in December, 2018:

“The government has not given up its hope for control. They want the Church to be another tool of the state. That’s common in China, across labor unions or NGOs – they all have to fall under the party at some level.”

The Vatican may learn the hard way that the Communist Chinese government does not honor its agreements. Beijing might well attempt to extort even more concessions from the Vatican just as the Chinese regime demands ever more surrender of sovereignty from western companies that do business in China. These demands can include a requirement to form joint ventures with a Chinese company, with China holding a majority interest, the demand that all critical data be stored locally, and scrubbing any language to which Beijing objects.

It is also highly dubious that the Vatican will purchase peace by this pact: the regime will continue to persecute the Church. If the Communist regime is true to form, thousands more crosses will be taken down from Christian churches, especially in areas that have a high Christian population. In 2015, in Zhejiang Province, in the southeastern city of Wenzhou, where one in eight citizens are Christian, approximately 1,200 crosses were forcibly torn from their moorings.

The only likely benefit that the Vatican could derive from this Munich-style pact with the Chinese regime may be an official invitation to Pope Francis to visit China. That privilege, however, might well be outweighed by the potential harm for the future of Catholicism in China. The courageous elders of Chinese Catholicism, who have endured decades of government persecution and regime efforts to divide the Church, may be seen by their flocks as having been bypassed by the Vatican. Many Chinese Catholics, realizing that their hierarchy was reluctantly fused by the Vatican into a union with the state-controlled church, might retreat into private homes to attend Catholic services. Many, if not most, Chinese Catholics are likely to view this agreement as a cynical political betrayal by the Vatican rather than a faith-based decision.

The eminent American Catholic author George Weigel sums up the Vatican’s past failed policies of negotiation with totalitarian regimes:

“In light of this dismal record, it seems that prudence and caution would seem to be the order of the day in Vatican negotiations with the totalitarians in charge in Beijing, at whose most recent Party Congress religion was once again declared the enemy of Communism.”

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