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While it’s a holiday shortened week in the US, the focus for markets is likely to stay with the UK with Brexit and the implications of the result of a likely confidence vote on PM May. Outside of that, DB’s Craig Nicol notes that we will also get the flash PMIs around the globe, and the European Commission’s opinions on the budget plans of Euro Area countries, possibly including Italy.

To be sure, it is hard to look past Brexit developments as being the centre-piece for the focus in markets next week. Following a turbulent last few days, much will rest of on whether or not there is a confidence vote on PM May. The latest headlines suggest this is likely and could happen at any moment. DB’s Oliver Harvey believes that the implications of May losing are very negative. Unlike 2016, Oliver believes that there is a strong probability that a full Conservative leadership contest results, with an ultimate vote taken to the Conservative Party membership, likely including a hard Brexiteer. The winner of the contest is likely to run on a no deal platform. He anticipates that the EU27 will make a no deal outcome their base case and both sides step up no deal planning.

The flipside of this is that May staying on would be a market positive as the tail of a hard Brexit would be reduced. The dilemma for Brexiteers voting against May’s Withdrawal Agreement is that this may lead to a series of events which brings a second referendum and the possibility of no deal at all. DB’s house view remains that PM May is likely to stick with the current deal and attempt to weather the political storm. Oliver Harvey’s indicative probability of this at 35% with the indicative probability of a second referendum raised to 30% after events of this week. May losing a confidence vote and resigning with the risk of an early election is assigned 20%, while a pivot to a soft Brexit is given a 15% probability in Oliver’s view.

Outside of Brexit, the data highlight next week are the global flash November PMIs on Friday. Following the – albeit less than expected – decline in the composite PMI for the Euro Area in October to 53.1, expect there to be plenty of focus on whether or not we get some stabilization in the data, or if there’s any further signs of deterioration in Q4. At the time of writing the consensus is for a 52.9 print for the composite with the manufacturing reading expected to slide further to 51.7 (from 52.0), and the services reading to fall a smaller 0.2pts to 53.5.

In the US, the PMIs are expected to improve slightly. The manufacturing print is expected to rise 0.2pts to 55.9 and the services reading rise 0.2pts to 55.0. Outside of that, given the holiday shortened week there isn’t a huge amount of data due. The preliminary October durable and capital goods orders data on Wednesday will help to further firm up Q4 growth expectations. On Tuesday we also get October housing starts and building permits data while also due on Thursday will be the final University of Michigan consumer sentiment survey revisions and October leading index.

In Asia it’s a fairly thin calendar next week too with nothing of note in China, while the highlights in Japan will be the October CPI report on Wednesday and the manufacturing PMI on Friday. Japan core CPI is expected to remain steady at +1.0% yoy but the core-core measure to slip one-tenth to +0.3% yoy. DB notes that one condition for a change in the BoJ’s 10y JGB yield target is steady core CPI above 1% for three to six months.

As for central banks next week, we’ll get the ECB meeting minutes from the October meeting on Thursday. As a reminder this wasn’t the most exciting of meetings with the ECB largely treading water and buying time ahead of next month’s meeting when we get updated forecasts and the latest decisions on QE and reinvestments. Away from that next week’s ECB speakers include Mersch, Weidmann, Knot and Visco all on Thursday, and de Guindos on Friday. Over at the Fed the only scheduled speaker is Williams on Monday while the BoJ’s Kuroda will also be speaking on Monday. The BoE’s Carney then appears before the UK Parliament’s Treasury Committee on Tuesday to discuss the Inflation Report.

Also worth noting next week are the European Commission’s opinions on the budget plans of the Euro Area countries on Wednesday. While the EC formally has three weeks to provide an opinion on Italy’s new fiscal plan following Italy’s submitted budget plan this week, it’s possible that the EC will issue an opinion on Italy also on Wednesday. This raises the possibility of the EC informing the Eurogroup that in its view, an EDP exists for Italy. A Eurogroup meeting is scheduled for December 3rd which raises the possibility of an EDP being launched at the beginning of next month, depending on whether or not the EC opines on Italy on Wednesday.

Other things to keep an eye on the Euro Area finance ministers gathering on Monday to seek to make progress on Franco-German plans to shore up the currency union, the latest OECD economic forecasts on Wednesday, and German Chancellor Merkel speaking on the German economy on Thursday.

With Thanksgiving Day in the US on Thursday, both equity and bond markets in the US will be closed. The day after also marks the traditional start of the US holiday shopping season with Black Friday, so expect plenty of focus on how retailers have fared over the weekend.

Breaking down key events in the week ahead by day, courtesy of Deutsche Bank:

• Monday: It’s a fairly quiet start to the week on Monday with the only data of note being November house price data for the UK, September construction output data for the Euro Area and the November NAHB housing market index reading in the US. Away from that, the Fed’s Williams is due to speak in the afternoon, while BoJ Governor Kuroda, Bank of France Governor Villeroy de Galhau and his predecessor, Noyer, will all speak at the Europlace Financial Forum. Euro Area finance ministers are also due to gather in Brussels to seek to make progress on Franco-German plans to shore up the currency union.
• Tuesday: The main data highlight on Tuesday is October housing starts and building permits data in the US. Prior to this in Europe we’ll get Q3 employment data in France and October PPI in Germany. Meanwhile, BoE Governor Carney will appear before the UK Parliament’s Treasury Committee to discuss the Inflation Report.
• Wednesday: The data releases pick up on Wednesday, especially in the US where we’ll get preliminary October durable and capital goods orders, the latest weekly initial jobless claims print, October leading index, October existing home sales and final November University of Michigan consumer sentiment survey revisions. In the UK we’ll get October public finances data while late in the evening in Japan we get October CPI. Away from all that, the European Commission is due to publish its opinions on the budget plans of Euro Area countries, including Italy. The OECD is also due to present new economic forecasts.
• Thursday: With it being Thanksgiving Day in the US on Thursday, equity and bond markets in the US will remain closed. Data releases are also fairly sparse with November confidence indicators in France and the November consumer confidence reading for the Euro Area the only scheduled releases. The minutes of the latest ECB policy meeting are also due, while the ECB’s Mersch, Weidmann, Knot and Visco are all due to speak. German Chancellor Merkel will also speak on the economy to the BDA employers’ federation in Berlin.
• Friday: It’s a busy end to the week as we get a look at the flash November PMIs around the world. Overnight, we get the flash manufacturing PMI for Japan followed by the release of flash manufacturing, services and composite PMIs for France, Germany and the Euro Area, before the US PMIs are out in the afternoon. We’ll also get Germany’s final Q3 GDP revisions. Away from that, ECB Vice President de Guindos is due to speak.

Finally, looking at the US alone, Goldman notes that the key economic release this week is the durable goods report on Wednesday. New York Fed President Williams will speak on Monday.

Monday, November 19

• 10:00 AM NAHB housing market index, November (consensus 67, last 68)
• 10:45 AM New York Fed President Williams (FOMC voter) speaks: New York Fed President John Williams will speak in a moderated Q&A session in the Bronx in New York City. Audience Q&A is expected.

Tuesday, November 20

• 08:30 AM Housing starts, October (GS 2.7%, consensus 1.6%, last -5.3%); Building permits, October (consensus -0.8%, last 1.7%): We estimate housing starts increased 2.7% in October after a decline in September (-5.3%). We expect a modest drag from Hurricane Michael, but starts look somewhat low relative to building permits. Over the next few quarters, we expect higher interest rates and tax reform to continue to weigh on homebuilding.

Wednesday, November 21

• 08:30 AM Durable goods orders, October preliminary (GS -3.5%, consensus -2.5%, last +0.7%); Durable goods orders ex-transportation, October preliminary (GS +0.1%, consensus +0.4%, last flat); Core capital goods orders, October preliminary (GS +0.1%, consensus +0.2%, last -0.1%); Core capital goods shipments, October preliminary (GS +0.4%, consensus +0.2%, last -0.1%): We expect durable goods orders to decrease in the October report, given a sharp decline in commercial aircraft orders. We expect stagnant growth in core capital goods orders given trade tensions and slowing global growth. Manufacturing production growth was slightly above expectations in October, with significant growth in the capex-sensitive business equipment category of industrial production. Accordingly, we see scope for a 0.4% increase in core capital goods shipments, especially after two consecutive months of declines.
• 08:30 AM Initial jobless claims, week ended November 17 (GS 215k, consensus 215k, last 216k); Continuing jobless claims, week ended November 10 (consensus 1,652k, last 1,676k): We estimate jobless claims edged down by 1k to 215k in the week ended November 17, following a 2k increase in the prior week.
• 10:00 AM Existing home sales, October (GS -0.3%, consensus +1.0%, last -3.4%): We look for existing homes sales to decline by 0.3% in October based on regional housing data, following a 3.4% decline in September. Existing home sales are an input into the brokers’ commissions component of residential investment in the GDP report.
• 10:00 AM University of Michigan consumer sentiment, November final (GS 97.9, consensus 98.3, last 98.3): We expect the University of Michigan consumer sentiment index to edge down 0.4pt from the preliminary estimate for November due to renewed stock market declines and the potential impact of midterm election results on sentiment. The report’s measure of 5- to 10-year inflation expectations stood at 2.6% in the preliminary report for November.

Thursday, November 22

• Thanksgiving holiday. NYSE closed. SIFMA recommends bond markets also close.

Friday, November 23

• NYSE will close early at 1:00 PM. SIFMA recommends an early 2:00 PM close to bond markets.
• 09:45 AM Markit Flash US manufacturing PMI, November preliminary (consensus 55.8, last 55.7); 09:45 AM Markit Flash US services PMI, November preliminary (consensus 55.0, last 54.8)

Source: Deutsche Bank, Bank of America, Goldman Sachs

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In recent months we have covered extensively the threat to the credit market that is the downgrade of over a $1 trillion in BBB-rated investment grade bonds – most extensively in “The Next Bond Crisis: Over $1 Trillion In Bonds Risk Cut To Junk Once Cycle Turns” – with recent sharp moves wider by GE, PG&E and Ford bonds confirming that the credit market is starting to crack, and prompting a deluge of media coverage on this topic which we first discussed would be a major threat to the financial system last November.

Overnight, Deutsche Bank’s credit strategist Jim Reid shared a good summary of his thoughts on the ongoing repricing in both investment grade and high yield, putting the recent moves in a broader context.

Below we excerpt his key thoughts from his latest Morning Reid publication.

From Deutsche Bank’s Jim Reid:

There was lots in the press this weekend about Brexit but interestingly for me as a credit strategist by day, there was also a fair bit of negative press about credit with some of the more sensational articles suggesting that credit could soon blow up financial markets due to (amongst other things) the weight of US BBBs about to swamp the HY market, record levels of Cov-lite issuance  and due to record high US corporate leverage. For us there needs to some perspective.

We have been on the underweight side of credit all year, more weighted to a US underweight of late but that’s been more of a valuation play than over too much concerns about immediate credit quality. The US economy remains strong and credit deterioration is likely to remain idiosyncratic until it rolls over.

At that point we will have big problems though and last week’s activity made us more confident liquidity will be bad when the cycle turns as we moved a fairly large amount on nervousness as much as anything else.

GE, PG&E, plunging oil and the factors discussed above provided a jolt but we don’t think this is enough for now to impact the economy so credit will probably stabilise. However once there is actual broad economic weakness, this last week will be a dress rehearsal for the problems ahead and there will be little two-way activity with spreads gapping wider.

However that’s for further down the cycle. For now credit’s main problem has been it hadn’t responded enough to the pick up in vol.  The good news is that this is starting to catch-up and correct. Last week, EU non-fin. IG spread widened by 13bps and HY by 45bps while those on US IG by 14bps and HY by 49bps.

Big moves relative to a small down week in equities.

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, I touched on the issue of corporate profits and tax cuts. While the promise was that tax cuts were going to a massive boost to economic growth, the reality has been quite different. To wit:

“The benefit of a reduction in tax rates is extremely short-lived since we compare earnings and profit growth on a year-over-year basis.

In the U.S., the story remains much the same as near-term economic growth has been driven by artificial stimulus, government spending, and fiscal policy which provides an illusion of prosperity. For example, the chart below shows raw corporate profits (NIPA) both before, and after, tax.”

“Importantly, note that corporate profits, pre-tax, are at the same level as in 2012.  In other words, corporate profits have not grown over the last 6-years, yet it was the decline in the effective tax rate which pushed after-tax corporate profits to a record in the second quarter. Since consumption makes up roughly 70% of the economy, then corporate profits pre-tax profits should be growing if the economy was indeed growing substantially above 2%.”

The reality is that what earnings growth there has actually been, as shown above, was indeed derived from tax cuts but also through the extensive use of share buybacks. While the mainstream media, and the Administration, initially rushed to claim that tax cuts would lead to surging economic growth, wages, and employment, such has yet to be the case. Instead, companies have used their tax windfall to repurchase shares instead.

The lack of corporate profit since 2012 is just another version of the same story we have previously discussed when analyzing quarterly earnings. As noted in our recent report following the end of the Q2-2018 reporting period:

“Since the recessionary lows, much of the rise in ‘profitability’ has come from a variety of cost-cutting measures and accounting gimmicks rather than actual increases in top-line revenue. While tax cuts certainly provided the capital for a surge in buybacks; revenue growth, which is directly connected to a consumption-based economy, has remained muted.”

Here is the real kicker. Since 2009, the reported earnings per share of corporations has increased by a total of 391%. This is the sharpest post-recession rise in reported EPS in history. However, the increase in earnings did not come from a commensurate increase in revenue which has only grown by a marginal 44% during the same period. This is an important point when you realize only 11% of total reported EPS growth actually came from increased revenues.

While stock buybacks, corporate tax cuts, and debt-issuance can create an illusion of profitability in the short-term, the lack of revenue growth the top line of the income statement suggests a much weaker economic environment over the long-term.

More importantly, as stated, the benefit of tax cuts lasts just one year before it is absorbed by annual comparisons. As shown below, when the effective tax rate dropped during the Bush administration from 31.48% to 19.87%, an 11.61% decline,  the surge in corporate profits faded after the first year. During the Obama Administration, the effective tax rate fell again from 24.01% to just 13.73%, a reduction of 7.28%, providing a short-term profit surge as the economy began to recover from the “Financial Crisis.”

Interestingly, the most recent tax cut from the Trump Administration has had very little impact on the effective tax rate only reducing it from 19.32% to 16.17%, or just a decline of 3.15%. While profits did increase, the very low adjustment to the effective tax rate is likely why the effect of the tax cut boost has faded so quickly this time.

Going forward increasing margins will become tougher as steadily increasing labor costs, weaker global economies, higher interest costs, tariffs, and a stronger dollar weigh on bottom line profitability.

Earnings Set To Decline

With share buyback activity already beginning to slow, the Federal Reserve extracting liquidity from the financial markets, and the Administration continuing their “trade war,” the risk to extremely elevated forward earnings estimates remains high. We are already seeing the early stages of these actions through falling home prices, automobile sales, and increased negative guidance for corporations.

If history, and logic, is any guide, we will likely see the U.S. economy pushing into a recession in 2019 particularly as the global economy continues to weaken. This is something both domestic and global yield curves are already screaming is an issue, but few are listening. As noted last week, we can already see this in the MSCI World Market Index as well.

“While it has been believed the U.S. can ‘decouple’ from the rest of the world, such is not likely the case. The pressure on global markets is a reflection of a slowing global economy which will ultimately find its way back to the U.S.”

As stated, forward earnings estimates are still way too lofty going into 2019. As I noted in the recent missive on rising headwinds to the market, earnings expectations have already started to get markedly ratcheted down for the end of 2019. In just the last 30-days the estimates for the end of 2019 have fallen by more than $10/share. The downside risk remains roughly $14/share lower than that.

As stated, beginning in 2019, the estimated quarterly rate of change in earnings will drop markedly and head back towards the expected rate of real economic growth. (Note: these estimates are as of 11/1/18 from S&P and are still too high relative to expected future growth. Expect estimates to continue to decline which allow for continued high levels of estimate “beat” rates.)

The issue to focus on will be the ongoing impact of rising interest rates on major drivers of debt-driven consumption such as housing and auto sales. Combine that with a late stage economic cycle colliding with a Central Bank bent on removing accommodation and you have a potentially toxic brew for a much weaker outcome than currently expected.

The end of the boost from tax cuts has arrived.

But such was always going to be the case. As noted in a 2014 study by William Gale and Andrew Samwick:

“The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.

In addition, tax cuts as a stand-alone policy (that is, not accompanied by spending cuts) will typically raise the federal budget deficit. The increase in the deficit will reduce national saving — and with it, the capital stock owned by Americans and future national income — and raise interest rates, which will negatively affect investment. The net effect of the tax cuts on growth is thus theoretically uncertain and depends on both the structure of the tax cut itself and the timing and structure of its financing.”

Since the tax cut plan was poorly designed, to begin with, it did not flow into productive investments to boost economic growth. As we now know, it flowed almost entirely into share buybacks to boost executive compensation. This has had very little impact on domestic growth. The “sugar high” of economic growth seen in the first two quarters of 2018 has been from a massive surge in deficit spending and the rush by companies to stockpile goods ahead of tariffs. These activities simply pull forward “future” consumption and have a very limited impact but leaves a void which must be filled in the future.

Nearly a full year after the passage of tax cuts, we face a nearly $1 Trillion deficit, a near-record trade deficit, and empty promises of surging economic activity.

It is all just as we predicted.

So, while many of the mainstream punditry continue to take victory laps touting the success of the Trump agenda, the reality is that the pro-growth policies were launched too late within this economic cycle. Since the administration chose to utilize both fiscal and monetary policy tools during the economic boom, it will only ensure the next recessionary drag will likely be larger, and last longer, than most expect.

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Just when Deutsche Bank probably thought the worst of its legal troubles (over the Libor scandal, sales of shoddy mortgage-backed securities, FX and precious metal rigging which collective resulted in tens of billions in legal fines) were behind it, the struggling German lender is being drawn deeper into the biggest money laundering scandal in European history.

Following reports over the weekend that Deutsche, JPM and Bank of America had been approached by federal investigators about their correspondent banking business’s involvement in clearing transactions for Danske Bank’s Estonian branch, the whistleblower who helped blow the lid off Danske’s $234 billion money laundering scandal said during testimony to the Danish Parliament that $150 billion of the money had been cleared by a large European lender, stopping short of naming Deutsche, likely to respect confidentiality rules governing the whistleblower’s work at Danske. Incidentally, as Bloomberg adds citing a “person familiar”, the unnamed bank is Deutsche Bank.

Deutsche continued to clear transactions for Danske’s Estonia branch until 2015, two years after JPM had ended its correspondent banking relationship with Danske’s Estonia branch over AML concerns. The suspicious funds flowed through Danske between 2007 and 2015 before Denmark’s largest lender closed its non-resident portfolio over AML concerns.

In an internal audit released earlier this year, Danske admitted that most of the $234 billion in non-resident cash came from suspicious sources in Russia, Azerbaijan and Moldova. With the help of its dollar-clearing correspondent banks, Danske converted the rubles and other foreign currency into dollars and moved it into the Western financial system. Roughly $8 billion of the money was converted via legal-though-shady “Mirror Trades”, where a client buys and sells a security in two different currencies, typically to help launder their money into dollars and euros (in a strange but sadly unsurprising coincidence, Deutsche’s Moscow desk got caught up in a mirror trading scandal of its own a couple years back).

Howard Wilkinson, the former Danske employee-turned-whistleblower, claimed that some of the money flowed through a London-based trading firm called Lantana Trade, which is rumored to have ties to the family of Russian President Vladimir Putin and members of the FSB. Wilkinson is expected to testify before both the Danish and EU parliaments this week, and will also be speaking with US investigators, according to the Financial Times. In addition to the DOJ and SEC, FinCEN has said it is actively interested in the Danske case.

Wilkinson, who first warned Danske’s directors in Copenhagen about suspicious activity in Estonia back in 2013 and 2014, also alluded to a “large US bank,” which the Financial Times identified as JPM.

Mr. Wilkinson also hit out at “large US bank 1” — known to be JPMorgan Chase — which stopped its correspondent banking relationship with Danske in 2013 over concerns about the non-resident portfolio in Estonia at the heart of the scandal which ran from 2007 until 2015. “It takes them seven years,” he said, of how long it took them to end their relationship with Danske.

In the past, correspondent banks involved in money laundering scandals similar to Danske’s have been treated as unwitting dupes by prosecutors. But the aggressive steps being taken by US prosecutors (regulators in Denmark, London, Estonia and the EU are also looking into the scandal) suggest that this could be the beginning of a crackdown that could fundamentally change how large international banks manage AML controls on their correspondent banking business.

That, in turn, could create serious problems for Baltic banks, which might find themselves effectively cut off from the broader global financial system, even if they take the necessary steps to tighten their AML controls. According to meeting minutes first reported by the FT, Danske directors acknowledged the suspicious activity in Estonia, but by April 2014, Wilkinson said it had become clear that the bank wasn’t planning to act. Indeed, former Danske CEO Thomas Borgen, who had previously run the bank’s international business, had reportedly taken steps to protect the Estonian branch, which Danske took over during its acquisition of Finnish Sampo Bank.

We’ll give you one guess as to why:

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In a surprising show of public dissent within Beijing’s power echelons, China’s former top trade negotiator slammed Beijing’s trade war tactics on Sunday, singling out the decision to impose tariffs on soybeans as ill-thought out. The comments by Long Yongtu – a former vice-minister with China’s foreign trade ministry who led the talks that led to China’s entry to the World Trade Organisation – and first delivered by the South China Morning Post, offered a rare glimpse of the country’s internal divisions on how to handle the dispute with the United States. He told the annual conference organized by China’s Caixin media group that it was inappropriate to involve political considerations in trade talks.

“If we have people who always talk about politics engaging in [trade] negotiations, we will never have a deal,” Long said, without naming anyone directly. “We don’t think deeply enough.”

Specifically, Long said it was unwise to impose import duties on soybeans in retaliation for US President Donald Trump’s decision to slap additional levies on Chinese imports, explaining that “agricultural products are very sensitive [in trade], and soybeans are very sensitive as well … We should have avoided targeting agricultural products because targeting agricultural products should be the last resort,” Long said. “But we have targeted agricultural products, or soybeans, right from the start.”

The agricultural states that produce the bulk of America’s soybeans make up Trump’s political heartland, but Long pointed out: “China is in dire need of soybean imports, so why did we pick out soybeans from the beginning? Is this deep thinking?”

China had imposed a 25% import duty on soybeans in the first round of the tariff battle with the US. And while this greatly reduced US exports to the world’s biggest soybean importer, it has also led to sharp price increases in China.

As a reminder, Beijing picked soybeans as one of the first US products to sanction partly because it was trying to inflict pain in the Republican Party’s heartland, however to Long this approach merely solidified Trump’s resolve to punish China and perpetuated the trade war.  Others disagreed: Lou Jiwei, China’s former finance minister and now the chairman of the national pension fund, said in March that Beijing could inflict pain on the US economy by “hitting” sectors such as soybeans, cars and aeroplanes.

For now, the former top trade negotiator has been proven right.

Long’s rare public criticism came as negotiation teams from the two countries prepare for a fresh round of talks, whose prospects however are dimming with each passing day, and certainly after this weekend’s APEC summit fiasco in which VP Pence and president Xi exhanged sharp verbal blows indicating that neither country is willing to compromise.

Still, Long said he was “cautiously optimistic” about the prospects of solving the dispute because Trump’s tariffs have also hurt US interests.

“To some extent, I like Trump’s character,” Long said. “I hope the trade talks can have a good result.”

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After a tumultuous week for the pound, cable started off on the strong foot because, amid reports that the potential for a vote of no confidence in Theresa May may be losing traction because as DB’s Jim Reid noted this morning, “we’re no closer to a leadership contest for Mrs May but it could still happen at any point.” The strategist cited The Sun – and their “extensive investigation” – which concluded that 42 lawmakers have sent letters of no-confidence in the PM (48 needed), but noted that overall though more Conservative MPs are disliking the deal – and will vote against it – than will ask for a leadership battle in Deutsche Bank’s opinion.

The consensus that is forming amongst  the Conservative MPs who dislike the Withdrawal Agreement is that it can be improved upon. This time next week we will have just had the Sunday EU summit to sign off their side of the deal but its not clear how meaningful tweaks could be made before this and before the agreement goes before UK Parliament in the next 2-3 weeks.

However, after some early strength, cable tumbled sharply on a Reuters headline citing Theresa May’s spokesman who said the government believes the UK does not need any extension to the implementation period, but it makes sense to have that option as an alternative to the backstop. Additionally, the Sun’s Political editor tweeted that “No10 say PM is adamant transition extension must end before next general election (June 2022). Six months earlier than Barnier… but 6 years after the referendum, to the very month.”

This followed news from the FT that there may be an extension: “The EU’s chief Brexit negotiator has proposed extending Britain’s transition out of the bloc until as late as December 2022 in a move that could prolong free movement of people to the UK and big payments to Brussels beyond the next election.”

Also this morning, the Times’ Matt Chorley tweeted that “Of the 48 needed to trigger a vote of no confidence, 25 have gone public so far.. Senior Brexiteers tell The Times they have “firm pledges” from 50+ MPs to submit letters by this evening, with a vote triggered within two days” suggesting that May could indeed be on her way out.

Meanwhile, another headline also hit ahead of the EU summit this Sunday, according to which “More clarity is needed on Gibraltar’s status before Spain’s government can back the Brexit deal, minister says.” refuting reports that the Gibraltar issue had been sorted.

In this context, Times Journalist Bruno Waterfield tweeted that “Madrid wants clear language that future trade relationship does not apply to Gibraltar unless UK negotiates it first bilaterally with Spain.”

Madrid wants clear language that future trade relationship does not apply to Gibraltar unless UK negotiates it first bilaterally with Spain

— Bruno Waterfield (@BrunoBrussels) November 19, 2018

While it is difficult to pin what precisely caused the slump in cable, just around 7am ET cable tumbled by nearly 100 pips and EURGBP rebounded through 0.8900 with RanSquawk speculating that the renewed pressure is due to uncertainty/divergence over extensions to the Brexit transition.

In short, jitters over Brexit are hardly over and cable will remain sensitive to any newsflow in the coming days with Theresa May’s fate still on the chopping block.

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After a dramatic end to the APEC summit in Papua New Guniea which concluded in disarray, without agreement on a joint communique for the first time in its history amid the escalating rivalry between the United States and China, U.S. index futures initially traded sharply lower as investors digested signs that America-China trade tensions are set to persist, however they staged a modest rebound around the time Europe opened, and have traded mixed since amid subdued volumes as a holiday-shortened week begins in the US.

Last Friday, US stocks jumped after President Trump said that he might not impose more tariffs on Chinese goods after Beijing sent a list of measures it was willing to take to resolve trade tensions.  However, tensions between the two superpowers were clearly on display at the APEC meeting over the weekend where Vice President Mike Pence said in a blunt speech that there would be no end to U.S. tariffs on $250 billion of Chinese goods until China changed its ways.

“The comments from Trump were seen as offering a glimmer of hope that further tariff action could be held in abeyance,” said NAB’s head of FX strategy, Ray Attrill. “The exchange of barbs between Pence and Chinese President Xi Jinping in PNG on the weekend continues to suggest this is unlikely.”

US Futures were also pressured following a report by the WSJ that Apple has cut iPhone production, creating turmoil for suppliers and sending AAPL stock 1.6% lower and pressuring Nasdaq futures.

Yet while early sentiment was downbeat following the APEC fiasco, US futures staged a rebound as shares in both Europe and Asia rose while Treasuries declined, the dollar faded an initial move higher as traders focused on the Fed’s new-found concerns over the global economy, and the pound advanced amid speculation that the worst may be over for Theresa May, since the potential for a vote of no confidence in May may be losing traction: the Sun reported that 42 lawmakers have sent letters of no confidence to Graham Brady, 6 more are needed to trigger a leadership challenge

Asia took a while to warm up but made a strong finish, with the Shanghai Composite closing 0.9% and Japan’s Nikkei 0.7% higher, helping Europe start the week off strong too as a 1 percent jump in mining, tech and bank stocks helped traders shrug off last week’s Brexit woes. At the same time, stocks fell in Australia and New Zealand, where the Aussie and kiwi currencies dropped after U.S. Vice President Mike Pence attacked China at the weekend APEC summit.

Telecommunications and construction shares pushed Europe’s Stoxx 600 Index higher, along with stocks in Italy, where Deputy Premier Luigi Di Maio said the government is ready for dialog with the European Commission over the country’s budget, which however seems just more semantics as Italy refused to concede to European budget demands.

Meanwhile, in addition to confusion over trade, the outlook for U.S. interest rates was also uncertain. While Federal Reserve policymakers are still signaling rate increases ahead, they also sounded more concerned about a potential global slowdown, leading markets to suspect the tightening cycle may not have much further to run and Morgan Stanley to write that “We Sense A Shift In Tone From The Fed.”

Goldman Sachs also chimed in, saying it expected the pace of U.S. economic growth to slow toward the global average next year.  The bank now sees a broad dollar decline next year, and revised its long-standing bearish view on the Japanese yen and tipped Latin American currencies, the Swedish krona, the Canadian, Australian and New Zealand dollars and the Israeli shekel to rise.

“We see several changes to the global economic backdrop which, combined with a few negative medium-run factors, point to more downside than upside to the broad dollar in 2019,” Goldman economists said in an outlook report. Goldman’s bearish tilt will focus attention on an appearance by New York Fed President John Williams later on Monday to see if he echoes the same theme. As Reuters notes, investors have already cut odds of further hikes, with a December move now priced at 73%, down from over 90%. Futures imply rates around 2.74% for the end of next year, compared to 2.93% early this month.

As a result, yields on 10-year Treasurys declined to 3.08 percent, from a recent top of 3.25 percent while the currency market saw the dollar fade early gains while the pound rebounded from sharp losses last week as Theresa May prepared to appeal to business leaders to help deliver her Brexit deal as the premier fights almost insurmountable Parliamentary opposition.

May said on Sunday that toppling her would risk delaying Brexit as she faces the possibility of a leadership challenge from within her own party. With both pro-EU and pro-Brexit lawmakers unhappy with the draft agreement, it is not clear that she will be able to win the backing of parliament, increasing the risk that Britain will leave the EU without a deal.

Elsewhere, the Australian and New Zealand dollars held on to their declines after Mike Pence’s attack on China this weekend fueled concern Sino-U.S. trade tensions will worsen; the yen neared a month-to-date high on the risk-aversion, onshore yuan weakened for the first time in five days.

Treasuries slipped while European bonds were mixed, with core notes slipping and peripherals rising led by Italy. In the U.S., trading activity may be thinned before the Thanksgiving holiday later this week.

In commodity markets, gold found support from the drop in the dollar and held at $1,1220.19. Oil prices suffered their sixth straight week of losses last week, but climbed toward $57 a barrel in New York on Monday. Bitcoin dropped further below $6,000, at one point touching a one-year intraday low.

 

Market Snapshot

• S&P 500 futures down 0.2% to 2,738.50
• STOXX Europe 600 up 0.5% to 359.37
• MXAP up 0.4% to 152.43
• MXAPJ up 0.2% to 488.43
• Nikkei up 0.7% to 21,821.16
• Topix up 0.5% to 1,637.61
• Hang Seng Index up 0.7% to 26,372.00
• Shanghai Composite up 0.9% to 2,703.51
• Sensex up 0.9% to 35,758.30
• Australia S&P/ASX 200 down 0.6% to 5,693.66
• Kospi up 0.4% to 2,100.56
• German 10Y yield rose 2.4 bps to 0.391%
• Euro up 0.04% to $1.1419
• Italian 10Y yield unchanged at 3.119%
• Spanish 10Y yield fell 0.4 bps to 1.632%
• Brent futures up 0.4% to $67.05/bbl
• Gold spot down 0.3% to $1,219.37
• U.S. Dollar Index down 0.1% to 96.41

Top Overnight News from Bloomberg:

• Theresa May will appeal to business leaders to help deliver her Brexit deal, as she fights almost insurmountable opposition in Parliament and a possible leadership challenge. You do the math: Can May get her Brexit deal through Parliament?
• Vice President Mike Pence sharpened U.S. attacks on China during a week of summits that ended Sunday, most notably with a call for nations to avoid loans that would leave them indebted to Beijing
• An Asia- Pacific summit ended in tumult after the U.S. and China failed to agree on language in a final statement, the latest sign that a trade war between the world’s biggest economies won’t end anytime soon
• The European Central Bank shouldn’t rush to spell out how long it plans to reinvest proceeds from bonds maturing under its asset-purchases program, said French policy maker Francois Villeroy de Galhau
• President Donald Trump said he wouldn’t stop acting Attorney General Matthew Whitaker if he curtails special counsel Robert Mueller’s investigation into possible collusion by Trump campaign officials with Russian interference in the 2016 presidential election
• U.K. house asking prices fell from a year earlier for the first time since 2011, led by declines in London and among the most expensive properties.
• President Donald Trump said Saudi Crown Prince Mohammed bin Salman has denied to him perhaps five times any role in the killing of journalist Jamal Khashoggi, and the U.S. may never know whether he was involved in the murder
• Trump’s famously opaque business will face a bracing new reality next year when House Democrats hit it with a flurry of subpoenas for the first time
• The European Central Bank shouldn’t rush to spell out how long it plans to reinvest proceeds from bonds maturing under its asset-purchases program, said French policy maker Francois Villeroy de Galhau
• The European Union is hammering out the first bloc-wide rules to prevent foreign investments from threatening national security, as Chinese acquisitions foster political unease
• Hedge funds’ wagers against West Texas Intermediate and Brent crude soared for a seventh straight week, the longest global short-selling streak in data going back to 2011

Asian equity markets began the week somewhat cautious on lingering trade concerns and after disunity at the APEC summit over the weekend which failed to agree on a joint communique for the first time in history due to US-China tensions.  ASX 200 (-0.6%) and Nikkei 225 (+0.6%) traded mixed in which nearly all of Australia’s sectors were in the red aside from miners, while Nikkei 225 was positive as participants digested mixed trade data which showed a jump in imports. Elsewhere, Hang Seng (+0.7%) and Shanghai Comp (+0.9%) were choppy amid trade-related uncertainty following the verbal jabs between US and China in which Chinese President Xi warned that countries which embraced protectionism were doomed to fail and US Vice President Pence later commented the US could more than double the tariffs imposed on Chinese goods. Finally, 10yr JGBs futures rose to match the YTD high as they tracked the recent upside in T-notes and with the BoJ also present in the market for JPY 800bln of JGBs in the belly to the short-end of the curve. APEC summit ended without an agreement on a joint communique for the first time in its history after China refused to sign amid US-China tensions, while there had been comments from Chinese President Xi Jinping that countries which embraced protectionism were “doomed to failure” and US Vice President Pence later commented that he was prepared to “more than double” the tariffs imposed on Chinese goods.

Top Asian News

• China’s Ping An Buys Stake in German Fintech Incubator Finleap
• Japan Bank Shares Fall Most in Month After U.S. Yields Drop
• Asian Markets Come out of Their Torpor as Stock Gains Accelerate
• An Accountant Stirs Debate as India Central Bank Board Meets

Major European indices are in the green, with the outperforming FTSE MIB (+1.1%) bolstered by news that Luigi Gubitosi has been appointed as the new CEO of Telecom Italia (+4.3%). The SMI (-0.2%) gave up initial gains and is lagging its peers, weighed on Swatch (-4.0%) and Richemont (-1.4%) following unfavourable price outlook for both by Bank of America Merill Lynch. Sectors are mostly all in the green, with outperformance in telecom names, while energy names are lower given pullback in oil prices in recent trade and consumer discretionary names are weighed on by Renault (-7.0%), with the company shares extending losses following reports that Nissan’s boss has been arrested in Japan regarding allegations of financial violations. Renault shares are hit given the Renault-Nissan-Mitsubishi alliance. Elsewhere, BPost (-5.7%) shares are hit following a downgrade at HSBC, while Tele2 (+1.8%), are near the top of the Stoxx 600 after being upgraded at Berenberg.

Top European News

• Villeroy Sees No Need to Define Reinvestments Length in December
• U.K. Housing Woes Deepen With First Asking-Price Drop Since 2011
• EU Set to Tighten Rules on Foreign Investment to Fend Off China
• New Telecom Italia Boss Deepens Activist Shareholder’s Clout

In FX, the Greenback has regained some composure following its downturn at the end of last week amidst soft US data and cautious if not concerned or outright dovish Fed rhetoric (Clarida conscious about contagion from slower global growth, Kaplan envisaging headwinds from rising debt and Harker opposed to a December rate hike), but the DXY remains capped below a key Fib level (96.590) and the Dollar overall is mixed vs major counterparts.

• NZD/AUD/CAD – All on the back foot against their US peer and underperforming other G10 currencies, with the Kiwi retreating below 0.6850 and undermined by cross flows as Aud/Nzd rebounds further from recent lows towards 1.0700 and Aud/Usd holds above 0.7300 in wake of last week’s strong Aussie jobs data.
• GBP – The Pound has derived some comfort, or is simply just relieved that the Tory uprising and challenge to UK PM May has not reached the minimum level required to trigger a no confidence vote and adding another potential spanner in the Brexit works. However, the situation remains far from stable and certain given that Parliament still has to vote on the Withdrawal Agreement and the room for further renegotiation with the EU looks limited at best ahead of Sunday’s Summit and more meetings planned in the run up to try and sound out whether there is scope to tweak elements of the draft. Cable has tested and marginally breached last Friday’s peak at 1.2877, but far from convincingly amidst supply ahead of 1.2900, and with the 21 DMA also representing formidable tech resistance just above the big figure (1.2918-20). Meanwhile, Eur/Gbp has not pulled back too far below 0.8900, as the single currency holds firm in its own right.
• EM – The Rand has made an encouraging start to the week, with a break through 14.0000 vs the Usd exposing recent peaks and momentum to re-test 13.8700 ahead of 13.6000 (50% Fib).

In commodities, Brent (+0.5%) and WTI (+0.1%) are in positive territory, albeit off highs, following market expectations that Saudi Arabia will steer OPEC and Russia to cut oil supply. Meanwhile, Russian Energy Minister Novak said the country is planning to sign an output agreement with OPEC at their December 6th meeting in Vienna. Overnight gains in the complex were driven by reports that Saudi is said to want oil prices around USD 80.00/bbl. Elsewhere, Iranian President Rouhani emerged on state TV and stated that the US has failed to reduce Iran’s oil exports to zero and Iran will continue to sell their crude. Conversely, Gold (-0.2%) prices fell this morning, with traders citing profit taking from last week’s gains, while Palladium is nearing parity with gold as an all-time high of USD 1185.4/oz was hit on Friday. Separately, copper is lower following tension between the US and China at the APEC summit which ended without an agreement on a joint communique for the first time in its history.

It’s a fairly quiet start to the week on Monday with the only data of note being the Euro Area and the November NAHB housing market index reading in the US. Away from that, the Fed’s Williams is due to speak in the afternoon, while BoJ Governor Kuroda, Bank of France Governor Villeroy de Galhau and his predecessor, Noyer, will all speak at the Europlace Financial Forum. Euro Area finance ministers are also due to gather in Brussels to seek to make progress on Franco-German plans to shore up the currency union.

US Event Calendar

• 10am: NAHB Housing Market Index, est. 67, prior 68
• 10:45am: Fed’s Williams Speaks in Moderated Q&A in the Bronx

DB’s Jim Reid concludes the overnight wrap

Brexit was left in a bit of phoney war this weekend. We’re no closer to a leadership contest for Mrs May but it could still happen at any point. The Sun -citing their “extensive investigation” – has concluded that 42 lawmakers have sent letters of no-confidence in the PM (48 needed). Overall though more Conservative MPs are disliking the deal – and will vote against it – than will ask for a leadership battle in our opinion. The consensus that is forming amongst the Conservative MPs who dislike the Withdrawal Agreement is that it can be improved upon. This time next week we will have just had the Sunday EU summit to sign off their side of the deal but its not clear how meaningful tweaks could be made before this and before the agreement goes before UK Parliament in the next 2-3 weeks. The only thing that could be fleshed out is more on the future relationship between the UK and Europe as Mrs May travels to Brussels this week to try to progress on this. That might appease some MPs but likely not enough to  help the vote pass. As such my personal view is that May stays on as leader, the EU offer no concession, the vote doesn’t get through Parliament and then the fun and games start. The UK may go back to Europe and ask for specific concessions at this point or we may end up with a path towards a hard Brexit or a second referendum. Quite binary options. For the EU maybe the gamble is to offer nothing and assume the UK Parliament eventually offers a second referendum and voters eventually decide to stay. This increases the risk of a cliff-edge hard Brexit but also one where no Brexit happens at all. This story has a lot of legs left in it.

There was lots in the press this weekend about Brexit but interestingly for me as a credit strategist by day, there was also a fair bit of negative press about credit with some of the more sensational articles suggesting that credit could soon blow up financial markets due to (amongst other things) the weight of US BBBs about to swamp the HY market, record levels of Cov-lite issuance and due to record high US corporate leverage. For us there needs to some perspective. We have been on the underweight side of credit all year, more weighted to a US underweight of late but that’s been more of a valuation play than over too much concerns about immediate credit quality. The US economy remains strong and credit deterioration is likely to remain idiosyncratic until it rolls over. At that point we will have big problems though and last week’s activity made us more confident liquidity will be bad when the cycle turns as we moved a fairly large amount on nervousness as much as anything else. GE, PG&E, plunging oil and the factors discussed above provided a jolt but we don’t think this is enough for now to impact the economy so credit will probably stabilise. However once there is actual broad economic weakness, this last week will be a dress rehearsal for the problems ahead and there will be little two-way activity with spreads gapping wider. However that’s for further down the cycle. For now credit’s main problem
has been it hadn’t responded enough to the pick up in vol. The good news is that this is starting to catch-up and correct. Last week, EU non-fin. IG spread widened by 13bps and HY by 45bps while those on US IG by 14bps and HY by 49bps. Big moves relative to a small down week in equities.

Looking ahead to the highlights for this week, I’d imagine if you’re in the US this will revolve around family, friends and perhaps Turkey as you sit down for Thanksgiving on Thursday. Outside of that we get the flash PMIs around the globe on Friday which in a period of nervousness about the global growth outlook will be scrutinised in thin post holiday trading. Black Friday will also mark the start of Xmas shopping season for retailers. Also worth noting is the European Commission’s opinions on the budget plans of the Euro Area countries on Wednesday. While the EC formally has three weeks to provide an opinion on Italy’s new fiscal plan following their budget resubmission last week, it’s possible that they will issue this for Italy alongside this and thus kick starting the EDP process.

This morning in Asia, markets have kicked off the week on a positive note with the Nikkei (+0.48%), Hang Seng (+0.40%) and Shanghai Comp (+0.22%) all up along with most Asian markets. Elsewhere, futures on S&P 500 (-0.33%) are pointing towards a weaker start. In terms of overnight data releases, the UK Rightmove house prices index fell -0.2% yoy (-1.7% mom), first dip since 2011, led by declines in London (-2.4% yoy). Japan’s October adjusted trade balance stood at –JPY 302.7bn (vs. –JPY 48.3bn) as growth in imports (+19.9% yoy vs. +14.1% yoy expected) outpaced the growth in exports (+8.2% yoy vs. +8.9% yoy expected).

In other news, the US Vice President Pence delivered some sharp rhetoric on China over the weekend where he called upon countries to avoid taking debt from China as that would leave them indebted to China. He also added that the US wasn’t in a rush to end the trade war and would “not change course until China changes its ways.” Elsewhere, the APEC summit ended in disarray on Sunday after the US and China failed to agree on a joint statement, reflecting tensions due to the ongoing trade war. This is the first time since the summit began in 1993 that no joint statement was issued.

Looking back briefly now to last week before we focus on the full day-byday week ahead. Friday was an eventful day for market-moving rhetoric from policymakers, highlighted by Fed Vice Chair Clarida and President Trump. First, the dollar shed -0.52% after Clarida discussed the global economy and said there “is some evidence it’s slowing.” Two-year treasury yields rallied -3.8bps (-11.0bps on the week) and the market removed 6bps of Fed hikes through the end of next year (priced out a total of 16bps on the week). This came despite Clarida’s other remarks, which emphasised the strong US economy and his support for moving policy to a “neutral” level, consistent with the FOMC’s projections. Later in the session, Chicago Fed President Evans said that he too wants to move policy to neutral, and then another 50bps or so beyond that level.

Later on Friday, President Trump injected optimism on the trade policy front by telling reporters that China wants to make a deal and that he may not institute further tariffs. China has apparently offered a list of potential concessions, which could prove to be the basis of a trade deal at the 30 November G20 summit. Even though unnamed White House sources subsequently tried to soften expectations, the market rallied with the S&P 500 up +0.22% (-1.31% on the week). The DOW and Russell 2000 closed -2.22% and -1.42% on the week, though they both rallied on the President’s comments as well (+0.22% and +0.49% on Friday, respectively). After Pence’s weekend comments we should probably discount some of the above optimism.

Other markets were already closed when President Trump’s comments boosted sentiment. The STOXX 600 closed the week -2.20% (-0.20% on Friday), while UK equities outperformed marginally, with the FTSE 100 shedding only -1.29% on the week (-0.34% Friday). This reflected the weaker pound, which retreated -1.13% versus the dollar (+0.41% Friday) and -1.83% versus the euro (its worst such week since July 2017, and -0.38% on Friday). Asian equities were mixed, with the Shanghai Composite advancing +3.09% (+0.41% Friday) on trade optimism and the Nikkei down -2.56% (-0.57% Friday). German Bunds rallied -4.0bps last week, while peripheral spreads widened slightly with Italy leading the way. BTPs sold off +8.8bps (flat on Friday) as the government  continued to escalate its confrontation with the European Commission.

It’s a fairly quiet start to the week on Monday with the only data of note being September construction output data for the Euro Area and the November NAHB housing market index reading in the US. Away from that, the Fed’s Williams is due to speak in the afternoon, while BoJ Governor Kuroda, Bank of France Governor Villeroy de Galhau and his predecessor, Noyer, will all speak at the Europlace Financial Forum. Euro Area finance ministers are also due to gather in Brussels to seek to make progress on Franco-German plans to shore up the currency union.

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As anxious global markets enter what’s expected to be a period of holiday-dampened liquidity (in the US, at least), reports that Japanese authorities have arrested (soon-to-be former) Nissan-Renault Chairman Carlos Ghosn on charges that he used company assets for personal purposes, underreported his compensation and is suspected of “numerous acts of misconduct”. The report sent shares of Nissan and French carmaker Renault tumbling more than 12%, dragging down the broader European market. 

Ghosn has been credited as the architect of the Nissan-Renault-Mitsubishi alliance and is widely seen as the “essential man” at both Nissan and Renault.

Details are still murky, but it’s unclear whether Ghosn’s alleged improprieties stemmed from income tax violations or blatant theft from the company. Nissan is preparing to hold a press conference to release more details at 7 am ET. Right now, it’s unclear what led investigators in Tokyo to look into Ghosn. Indeed, much remains unknown.

In a statement released by Nissan, the company said it had been conducting an internal investigation into Ghosn and his fellow director Greg Kelly:

Based on a whistleblower report, Nissan Motor Co., Ltd. (Nissan) has been conducting an internal investigation over the past several months regarding misconduct involving the company’s Representative Director and Chairman Carlos Ghosn and Representative Director Greg Kelly.

The investigation showed that over many years both Ghosn and Kelly have been reporting compensation amounts in the Tokyo Stock Exchange securities report that were less than the actual amount, in order to reduce the disclosed amount of Carlos Ghosn’s compensation.

Also, in regards to Ghosn, numerous other significant acts of misconduct have been uncovered, such as personal use of company assets, and Kelly’s deep involvement has also been confirmed.

Nissan has been providing information to the Japanese Public Prosecutors Office and has been fully cooperating with their investigation. We will continue to do so.

As the misconduct uncovered through our internal investigation constitutes clear violations of the duty of care as directors, Nissan’s Chief Executive Officer Hiroto Saikawa will propose to the Nissan Board of Directors to promptly remove Ghosn from his positions as Chairman and Representative Director. Saikawa will also propose the removal of Greg Kelly from his position as Representative Director.

Nissan deeply apologizes for causing great concern to our shareholders and stakeholders. We will continue our work to identify our governance and compliance issues, and to take appropriate measures.”

According to Bloomberg, Citigroup analysts say in a note that the Renault stock price reaction is so strong because Ghosn is seen as “pivotal” for any potential collapse of the Renault-Nissan structure. Also says that Renault has the “best set-up” in the face of significant industry change.

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Just three months ago, the world celebrated was celebrating Apple’s achievement of a historic milestone: becoming the first company in the world to reach a $1 trillion market capitalization.

Now, after an unimpressive product launch and poor Q3 earnings report in which the company quietly revealed its controversial decision to stop breaking out sales unit numbers for iPhones, the narrative surrounding the company’s stock has changed remarkably and, as Lumentum shareholders no doubt remember, difficulties associated with lackluster sales of the three new iPhone models are trickling down to Apple’s beholden suppliers, who were the first to hint at the trouble in paradise by cutting their guidance due to declining demand at their biggest customer(s), an obvious reference to Apple.

Smelling blood in the water, Goldman Sachs slashed its price target to $209 from $222 (based on a P/E of ~16x), citing expectations of slowing demand in emerging markets – and China in particular, where Baidu searches for the new iPhone modes (a surprisingly accurate leading indicator for demand) have fallen dramatically (though this isn’t all that surprising considering the outrageous prices of the new phones, coupled with a weakening currency that is making Apple products more expensive in yuan terms).

And one week after shares of Apple suppliers imploded following Apple’s latest earnings report (while Apple shares tumbled into bear market territory, erasing $200 billion in value from their October highs), the Wall Street Journal has published a deep dive into the reactions of Apple’s long-suffering suppliers, who were willing to countenance the company’s controlling style and its inflexible demands while sales were hot. But as Apple’s complex three-tiered product offerings create logistical nightmares and the company’s expensive handsets start turning off some customers, suppliers are beginning to rebel. In the past, Apple thrived on “the beauty of simplicity,” said,” said one executive at an Apple supplier. “It was very few models at massive volumes.”

With the company’s latest generation of phones, that has changed. And according to WSJ, over the past three weeks, Apple has slashed production orders ahead of the crucial holiday sales season, leaving at least three of the company’s largest suppliers – Lumentum, Qorvo and Japan Display – with unused production capacity and inventory, and hinting at more turmoil ahead.

Lower-than-expected demand for Apple Inc.’s new iPhones and the company’s decision to offer more models have created turmoil along its supply chain and made it harder to predict the number of components and handsets it needs, people familiar with the situation say.

In recent weeks, Apple slashed production orders for all three of the iPhone models that it unveiled in September, these people said, frustrating executives at Apple suppliers as well as workers who assemble the handsets and their components.

Forecasts have been especially problematic in the case of the iPhone XR. Around late October, Apple slashed its production plan by up to a third of the approximately 70 million units it had asked some suppliers to produce between September and February, people familiar with the matter said.

And in the past week, Apple told several suppliers that it cut its production plan again for the iPhone XR, some of the people said Monday, as Apple battles a maturing smartphone market and stiff competition from Chinese producers.

Apple declined to comment.

During an interview earlier this year with The Wall Street Journal, Apple Chief Financial Officer Luca Maestri said that trying to determine demand for its devices based on reports from suppliers can be misleading because the suppliers also make products for competitors.

At Foxconn, Apple’s largest supplier (which is famously building a factory in Wisconsin that it’s hoping to staff with Chinese workers) some workers are voluntarily cutting their shifts. Some are questioning Apple’s decision to raise prices on some phones to $1,000 and above, while also choosing to sell older models in stores. While Apple is hoping to compensate for slowing sales with higher revenues, since peaking in fiscal 2015, the number of iPhones sold annually has fallen 6% to 217.7 million units.

“The more choice you introduce, the harder it is to pinpoint who will buy what,” said Steven Haines, chief executive of Sequent Learning Networks, which has advised companies such as FedEx Corp. and Verizon Communications Inc. on product management.

And while Apple reported its largest-ever annual revenue for the fiscal year ended in September, investors and analysts have proven again and again that the unit sales figures are paramount. This goes doubly for the company’s suppliers, because while companies like Lumentum were willing to put up with Apple’s domineering tendencies as long as yoy comps were growing, now that they’re not, some are starting to question aspects of this relationship that they had previously taken for granted.

Apple has offset slowing growth by raising iPhone prices and focusing more on software and services. The strategy helped the company report its best-ever year of revenue and profit for the fiscal year ended in September; for the current quarter, it projects revenue of $89 billion to $93 billion. Its growing services business has also offset the company’s contracting hardware margins, industry analysts say.

But while Apple has been enjoying record revenue and profit for the past year, the same can’t be said for many of its suppliers. That is because unlike Apple, they can’t benefit from services and software and they rely heavily on handset volumes, suppliers and analysts say.

“The freeway of Apple suppliers is littered with roadkill,” said Timothy Arcuri, an analyst with the investment bank UBS who tracks the iPhone supply chain. “That’s one thing when units are growing and another when units aren’t going to grow. There’s an argument to be made now: Why take the risk?”

Ultimately, a supplier rebellion could create huge headaches for Apple by further eroding the company’s bottom line if these suppliers decide that they shouldn’t be so amenable to Apple’s demands when the iPhone maker has consistently treated their relationship more like a privilege than an economic necessity.  In summary, with Apple hiding its iPhone sales numbers for reasons that should be obvious to all…

…Expect to see more headlines like this one “Does Apple’s Sales Slump Mean The Company Has Finally Peaked?”.

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