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A mass shooting followed by an explosion at a secondary school in the Crimean city of Kerch has killed at least 19 people and injured more than 50, including the lone attacker, according to local Russian officials. 

In the chaos and confusion of the immediate aftermath — which included the Russian military arriving on the scene — there were wildly conflicting reports of either a gas leak explosion or a terror attack underway by a group of armed men; however, investigators have now described the event as a mass shooting by an 18-year-old student, who took his own life after shooting scores of others. 

And it’s now emerging that the shooter may have been obsessed with the Columbine Massacre school shooters who took the lives of 13 people in 1999 in a suburb of Boulder, Colorado. 

Prime Minister and Head of Crimea, Sergey Aksenov, confirmed to local Russian media, “The suspected murderer shot himself,” and added, “He was a senior student of the same college.” Even the suspect’s age and identity was subject to contradictory reports in the early hours after the shooting, per RT: 

Russia’s investigative committee has named the suspect as Vladislav Roslyakov and said he was 18, rather than 22 as first reported. It added the incident was now considered a multiple homicide rather than a terrorist attack.

Social media images first published by Mash showing what purports to be the shooter, Vladislav Roslyakov, walking through the school are being compared to Columbine High School shooter Eric Harris — who in 1999 killed 13 and wounded over 20 more alongside Dylan Klebold in Boulder, Colorado.

Crimean shooter Rolyakov was apparently imitating Eric Harris with his white shirt and shotgun as shown in the unconfirmed social media photos of Wednesday’s attack. 

According to RT, “It turned out that little more than one month ago, on September 8, Roslyakov had received a permit for a 12 caliber rifle.”

Looks like the Crimea shooter wasn’t politically motivated but more of a Dylan Klebold type as I said earlier. He was apparently a “Columbiner”—people obsessed with and sometimes sympathetic to the Columbine school massacre.

(Via @Mortis_Banned)https://t.co/KcRKkYNHfC

— Jake Hanrahan (@Jake_Hanrahan) October 17, 2018

The report continues, “He bought 150 rounds of ammunition for the weapon just a few days before he would walk onto his college campus and murder 19 people.”

Vladislav Roslyakov, who killed 17 people at a Crimea college, used the nickname “Reich” online & was obsessed with serial killers, Russian media are reporting. Creepiest of all is the suggestion he (at right) emulated Columbine killer Eric Harris with a white t-shirt & shotgun pic.twitter.com/8mvrzCSmMe

— Alec Luhn (@ASLuhn) October 17, 2018

Russia’s official Investigative Committee had previously referenced a “terror attack” after an on the ground investigation that uncovered evidence of an improvised explosive device packed with shrapnel which had been reportedly detonated in the cafeteria of the tech college (in Russia a “college” indicates a secondary school, or high school). 

Clearer photo of the alleged Crimea shooter. As I said, he’s literally come dressed as the stereotypical pop culture vision of a school shooter, even down to the Klebold combat boots. Can anyone tell what it says on his shirt? pic.twitter.com/XEpooSwwiM

— Jake Hanrahan (@Jake_Hanrahan) October 17, 2018

Though officials initially said an “unidentified explosive device” detonated, they now say all the victims died of gunshot wounds.

A number witnesses accounts appearing described a gruesome scene “bodies everywhere” – most of them students: “There was a blast and then the shooting…we started jumping out of the windows… children’s bodies were lying all over the place,” one student recalled of the horror.

Early unconfirmed reports cited eyewitnesses who said the attack began when masked armed men entered campus and burst into classrooms wielding assault rifles; however, authorities now say it was a lone gunman and have described a school shooting scenario which though uncommon in Eastern Europe, has become tragically commonplace in American domestic headlines. 

Hours after the explosion, Investigate Committee officials told Russia’s Sputnik news that “an unidentified explosive device filled with metal objects detonated in a cafeteria at a tech college in Kerch.”

RT reports of the confused and conflicting eyewitness accounts:

Only one man responsible for the shooting was found, but in the panic and confusion of the moment, people believed they saw more than one killer. Investigators haven’t ruled out there may be more.

Online, witnesses accounts and gruesome details were beginning to appear on social media. “There was a blast and then the shooting…we started jumping out of the windows… children’s bodies were lying all over the place,” one student recalled of the horror.

Armored troop transport vehicles and Russian military personnel were quickly on the scene as reports of a “terror attack” in progress had spread. 

The school’s president gave further eyewitness details, apparently relating possibly mistaken accounts of multiple shooters amidst the confusion and chaos, as follows:

“Five minutes after I left, some people burst in. They blew up the lobby, all the windows were shattered…. Like in Beslan! I would have been dead by now because they shot dead all my people, children and the staff… I don’t know,” the college director told local media.

Beslan is a reference to the worse terror attack in Russian history — the Beslan Masaccre — which involved a 3-day siege of a school North Ossetian region by armed Islamic militants in 2004, resulting in over 300 dead after planted explosives were detonated.

Video soon emerged in Russian media showing confused students attempting to interpret what they were hearing and seeing, including smoke and gunshots across the campus. 

As the attack in Crimea is now being classified as a mass school shooting by a lone attacker who was a student at the school, the more approximate comparison is that Crimea just had its own tragic Columbine-style massacre. Sickeningly it appears the shooter planned to imitate Columbine precisely. 

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Four east-coast state institutional Facebook investors have co-filed a shareholder proposal to remove Mark Zuckerberg as chairman of Facebook following his “mishandling” of several scandals this year.

As Business Insider reports, New York City Comptroller Scott Stringer, Illinois State Treasurer Michael Frerichs, Rhode Island State Treasurer Seth Magaziner, and Pennsylvania Treasurer Joe Torsella are joining forces to pile the pressure on Zuckerberg, holding over a billion dollars between them.

They have put their names to a proposal, originally filed by activist investor Trillium Asset Management, demanding that Facebook appoint an independent chairman above Zuckerberg

“We need Facebook’s insular boardroom to make a serious commitment to addressing real risks – reputational, regulatory, and the risk to our democracy – that impact the company,” New York City Comptroller Stringer said in a statement.

“An independent board chair is essential to moving Facebook forward from this mess, and to reestablish trust with Americans and investors alike.”

Rhode Island’s Magaziner added:

“Without an independent board chair, the board’s oversight of the company remains inadequate as evidenced by the recent mishandling of several controversies. Having an independent board chair… is in the best long-term interest of Facebook shareholders.”

Trillium’s proposal cites a series of scandals as the reason why the change is necessary. Crises mentioned include meddling in the 2016 US election and the Cambridge Analytica data scandal, while last month’s data breach, which impacted 30 million users, was also noted by Trillium in an email to Business Insider. You can read Trillium’s proposal in full here.

However, their chances lie somewhere between slim and none as a similar plan was put forward last year but it was crushed, despite 51% of independent investors voting in favor of the change.

This is a result of Facebook’s dual-class share structure.

Class B shares have 10 times the voting power of class A shares (owned by the public), and it just so happens that Zuckerberg owns more than 75% of class B stock.

As BI concludes, Facebook declined to comment. The firm has previously said that removing Zuckerberg as chairman would cause “uncertainty, confusion, and inefficiency in board and management function.”

So, assuming these four institutional asset managers are not idiots, this proposal would appear to be nothing more than a ‘virtue signaling’ press release against the man who ‘enabled’ Russia to put Trump in the Oval Office?

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It was a classical case of selling the news as trader euphoria for cannabis stocks faded on Wednesday as Canada’s legalization of adult use of weed went into effect, dipping into a two month rally in the sector.

Aurora Cannabis was among the biggest decliners on Wednesday just after the market opened, sliding as much as 15% shortly after the open, the biggest drop since February.

Still, putting that drop into context, today’s drop only brought most of the stocks to their lowest levels in a week. Tilray, which has surged more than 500 percent in the past two months, was the best performer, posted a 4.2% drop.

As Bloomberg notes, the sector has been on a tear since mid-August on optimism ahead of Canada’s move to become the biggest legal market for recreational use of marijuana. In a throwback to the lofty dot com days, the ETFMG Alternative Harvest exchange-traded fund has added 62% since hitting its 52-week low on Aug. 14, while the Horizons Marijuana Life Sciences Index ETF surged 70 percent in Toronto.

Heading into Wednesday, Bloomberg notes that the Top 10 stocks with the biggest gains from their yearly lows include some well-known companies such Tilray and Canopy Growth – the two biggest pot producers by value – and MadMen Enterprises, which bought medical pot firm PharmaCann for $682 million.

It also unveils some more recent darlings, such as India Globalization Capital, the heavy equipment rental business that also develops cannabis-based pharmaceuticals, as well as lesser known players that shot up under the radar.

Putting to shame last year’s cryptocurrency gains, TerrAscend’s 1,400% climb from its 52-week low, reached a year ago this week, made it the biggest gainer ahead of Canada’s legalization of recreational pot Wednesday. The Mississauga, Ontario-based company, which produces medical and wellness products featuring cannabis, counts Canopy Growth and its investment arm, Canopy Rivers, among its top holders with a combined 24% stake. The top 20 names within the list include some of pot-investors favorite stocks such as Alkaline Water and New Age Beverages.

So how to trade the sector ahead as the key “news” catalyst is now behind us? According to Eight Capital analyst Graeme Kreindler, investors will need to take a more “tactical approach” to play the industry as the sector reacts and readjusts over the next 12 months, Kreindler wrote in a note Wednesday. He sees the market growing steadily in the first year as retailers expand, before giving way to more rapid growth in the second year as retail networks are established and other cannabis derivative products – such as edibles – hit the market in late 2019, Kreindler adds.

Kreindler’s top picks at the start of this legalization are Canopy Growth, CannTrust Holdings, HEXO Corp., Organigram Holdings and Emblem Corp.

* * *

Finally, for those Americans curious how they can capitalize on today’s historic day for Canada’s cannabis culture, here are some key pointers , courtesy of Bloomberg:

How much will it cost?

While legislation from Trudeau’s Liberal Party sets up a sweeping federal system to license producers, it leaves retailing to the country’s 10 provinces and three territories, so the price will vary with location. These governments aren’t strictly regulating prices, but they are charging sales tax. Otherwise, market forces will prevail, and prices must be low enough to compete with the street dealers Trudeau promises to push out of business. Some estimates place the retail price for legal gear at about C$10 ($7.70) a gram. That compares with about C$7 a gram for the illegal variety, according to the federal statistics agency.

How much can I carry?

Federal law allows people 18 and older to possess as much as 30 grams. You can also have four plants in your home

Where can I buy?

It depends where you are, and some provinces are still figuring it out. In Toronto, you’ll have to order online because, due to late changes by the newly elected Ontario government, private, brick and mortar shops won’t be ready on time.  British Columbia is setting up private, government-run and online stores, while in Alberta, it’s just private stores and online. Quebec is sticking with government-run cannabis shops. In Nova Scotia, on the east coast, you’ll be able to pick up your weed from government-controlled outlets, just like for alcohol.

Where can I smoke?

Unlike in Amsterdam, you won’t be able to consume recreational weed in coffee shops or hash bars. Some provinces, like Prince Edward Island, are restricting consumption mostly to private residences. Others, including Quebec and British Columbia, will allow you to smoke pot much like cigarettes, though in some cases with extra restrictions to make sure children aren’t nearby. Smoking in bars is banned everywhere in Canada, though it may be just a matter of time before private pot lounges, like cigar bars, begin popping up.

What are the risks?

Driving high is still illegal, and you’re now more likely to get caught. Police forces have been beefing up their specialized drug recognition training in preparation for Green Day. The U.S. Customs and Border Protection agency recently toned down potential bans for Canadian marijuana workers, saying they can be admitted if they don’t practice their trade in America. Agents will keep enforcing federal laws banning possession and trafficking even as some states have relaxed theirs.

Can I still buy from a street dealer?

The black market will generate a quarter of sales at the beginning, according to Statistics Canada estimates. Edibles like cookies remain illegal for now.

What if I just want to invest in legal weed?

Canopy closed Tuesday with a market value of C$15.8 billion, more than double that of Air Canada, the nation’s biggest airline. The shares have gained more than 400 percent in the last 12 months. Aurora Cannabis Inc. is up 385 percent. But there may still be room to run. The market’s potential is drawing interest from mainstream companies like Walmart Inc., Coca-Cola Co. and Molson Coors Brewing Co.

Estimates for the possible size of the market are laden with guess work, because sales depend on the size of the street market, how fast people switch over, and whether legalization brings new customers. Sales could also be sensitive to the legal price. That said, most government and private estimates range between C$3.5 billion and C$5.5 billion a year. For comparison, the latest annual tally of spending on beer was C$9.1 billion.

Can I order from outside the country?

While Canada restricts marijuana exports, British Columbia’s illegal shipments are already substantial, representing 59 percent of the nationwide total of C$1 billion, according to Statistics Canada. Smuggling may decline as police toughen enforcement, or hang on if criminals losing market share at home try selling more abroad.

 

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Authored by Erin Cooke via Campus Reform,

A Georgia professor offered her students extra credit to attend a campaign event that a Democrat gubernatorial candidate hosted on campus with Democrat Sen. Elizabeth Warren.

Clayton State University criminal justice professor Andrea Allen offered students extra credit to attend an event on Tuesday supporting Democrat Georgia gubernatorial candidate Stacey Abrams, according to the Atlanta Journal-Constitution.

“Although I never offer extra credit, I’m making a one-time exception,” Allen told students in the email.

“I’m sure you’ve heard by now that the Abrams campaign along with Senator Warren are visiting campus tomorrow at 10 am in the UC commons. They would like a really big turnout. To help out I’m offering the following opportunity: If you attend, take a selfie of you at the events, and upload a pic to the folder I’m creating in D2L, I’ll add 2 bonus points to your final grade.”

Reportedly, Clayton State told Atlanta WSB -TV Channel 2 that its administrators contacted the professor and advised her that she should offer an equal amount of extra credit to students who participate in campaign events hosted by every political party. Allen did not respond to a Channel 2 request for comment, but the school said that she agreed to make available extra credit for every political event.  

“This is more than a simple mistake,” Clayton County, Georgia Republican Party Chairman Garrett Ashley told Campus Reform.

“Dr. Allen meant for this to be what it is: a gross manipulation of her rights as a professor to award bonus points by bribery to further a political campaign. I find her email very disturbing, and this ‘fix’ is merely an afterthought.”

“A student’s political preference should not determine his or her grades,” Georgia Association of College Republicans Chairwoman Kylie Harrod told Campus Reform.

“Professors at Georgia universities should teach students how to think rather than what to think – end of story.”

The Georgia gubernatorial race is close between Abrams and Brian Kemp, the Trump-endorsed Republican candidate, who is polling two points higher than Abrams, on average. These percentages, though, are within the margin of error.

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When commenting on yesterday’s somewhat puzzling, low-volume levitation, we noted that it was not so much a broad market rally, which it certainly was if rather muted, but the biggest short squeeze since at least the Trump election victory 2 years ago.

To be sure, there was also a massive positioning (and career-risk) imbalance because as Nomura’s Charlie McElligott writes, as funds of all types were practically forced to “take-up nets” and “buy” the year-end rally thesis – after “loving” the still “growth-y” NAHB sentiment and IP data – they boosted too fundamentally following the critical earnings beats from bellwethers LRCX, NFLX and ASML over the past 24 hours. This echoes a point McElligott has vocally made in recent months, namely that “if you think SPX rallies into year-end, you then too MUST have a positive view on Tech / Growth.“

Additionally, after last week’s rout which slammed vol-targeting funds such as risk parity, CTAs and variable annuities, many were still caught in a deleveraging phase as they moved to realign their risk exposure to the next level of the VIX, while as Kolanovic explained last week, there was also residual pressure from dealers who were still hedging gamma exposure in the options market.

Commenting on yesterday’s sharp reversal, McEllgiott writes in his latest daily note that while the move in stocks was impacted by said gamma options-hedging, that wasn’t the primary driver as they have simply gotten “too expensive” (there was no “upside grab” yesterday) but instead “the move then was driven by “active hedging” in futures and ETFs to “manage funds’ exposure-levels.”

So between dealer gamma hedging, a reversal in vol-targeting selling, and a general scramble for P&L by the badly underperforming active investor community, the Nomura X-asset strategist writes that the entire spectrum of the trading universe came for U.S. stocks yesterday:

• Yes, options dealers are still short “enough” gamma to impact market flow, so there was absolutely some delta hedging into the close—thus the “rip” into the close / large +++ MOC
• We also did trigger incremental systematic CTA BUYING yesterday, with S&P taken back UP to “+49% long” from “+43% long,” meaning +$6.8B of Spooz buying; FWIW Russell also increased from “neutral” to “+43% long” as well
• Who else was buying?  Everybody who NEEDED TO TAKE UP NET EQUITIES EXPOSURES from last week’s lowest levels of the year: macros (still with “beta to Equities” off a very low base) to long-short (Street PB data showing just +48% net exposure last week) to mutual funds (yes, they can toggle their “cash” and “beta”)

And yet, despite yesterday’s furious, 500+ point Dow rally, there was a moment of brutal irony about the rally for the smart money, because as noted above, while long soared higher, shorted exploded even more. This means that from a performance-perspective, despite the whopping-rally (+2.2% SPX, +2/9% NDX, +2.8% RTY and +2.2% RIY), Hedge Funds only saw a very modest lift as McElligott’s HF L/S model was only +60bps on yesterday’s session while “shorts EXPLODED HIGHER”, negatively offsetting the furious move higher in “longs”—especially in-light of the previously discussed “low net” exposure for HFs.

And while we commented on yesterday’s furious squeeze yesterday, here is some additional context on the scale of the short squeeze:

• Largest 2d move in “Default Risk” factor shorts (+7.0%) since 2010
• 3rd largest 2d move in “ROE” factor shorts (+8.4%) since 2010
• Largest 1d move in “Sales-to-Price” factor shorts (+3.5%) since Nov 2011
• 3rd largest 1d move in “EBITDA / EV” factor shorts (+4.2%) since Nov 2011
• Largest 1d move in “Book-to-Price” factor shorts (+2.7%) since Aug 2015
• Largest 1d move in my HF Most Shorted basket since Feb 2018
• Largest 1d move in GS Most Shorted basket since Nov 2016
• Largest 1d move in Citigroup High Short Interest basket since Apr 2015

To summarize, McElligott explains that “you saw a dynamic yday in the Equities quant “factor” space, where you actually only saw “outright modest” performance from “Growth” and “Momentum” market-neutral strategies, as the short-legs mitigated long-book gains.”

The last observation has become a recurring issue for traders, who while continuing to underperform the market badly YTD…

… remain overly “hedged” to any future upside, and as a result during furious rallies like Tuesday’s, are not only forced to cover shorts more aggressively than pursuing new longs resulting in dramatic squeezes, but further add to their general market underperformance as the adverse impact from forced covering overpowers the long benefit.

Meanwhile, what happens the very next day – like today – is that as the market resumes its slide, many hedge funds suddenly find themselves with not enough shorts on, and are forced to do a 180, and start shorting once again as the year-end performance scramble result in a furious panic to chase every last tick of the market.

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Via mondovisione.com,

Saxo Bank, the online trading and investment specialist, has today published its Q4 2018 Quarterly Outlook for global markets, including trading ideas covering equities, FX, currencies, commodities, and bonds, as well as a range of macro themes impacting client portfolios.

“We are clearly at a crossroads on many fronts: globalisation, geopolitics and economics”, says Steen Jakobsen, Chief Economist and CIO, Saxo Bank.

“The next quarter will either see dampening of volatility by a less aggressive Fed, more active easing in China, and a compromise on the European Union budget… or a further escalation in tensions between all three areas. I would not bet against the latter into Q4, but I remain confident that we stand only a few months away from the beginning of a new easing cycle based on ugly realities, not the hope expressed by politicians and often market consensus.

”For now, we estimate that the US economy has peaked – the powerful expansionary cocktail of unfinanced tax cuts, repatriation of capital, and fiscal spending ramped up growth in the US, but these one-off effects will peter out as the year ends. Already the US housing market is showing signs of strain as the higher marginal cost of capital (the higher yield on mortgages, more specifically) is starting to have a material impact on future growth.

”As certain as we are about the US having peaked, we are less certain as to how soon China will reach the bottom of its deleveraging process and begin to expand more forcefully again.”

Against this uncertain backdrop, Saxo’s main trading ideas for Q4 include:

Equities – Setting the stage for a comeback in value stocks

Throughout 2018, Saxo has constantly said that investors should be defensive on equities and avoid the semiconductor and automobile industries due to the escalating trade war between the US and China. Valuations – especially in US equities, which are half of the global equities index – have reached levels where the risk-reward ratio is too low.

Meanwhile, the Federal Reserve continues to normalise the Fed funds rate, communicating that rates are far from neutral. As the most important discount rate is lifted, it changes the dynamics, making growth stocks vulnerable and maybe setting the stage for a comeback in value stocks.

Peter Garnry, Head of Equity Strategy, said:

”The likelihood is quite high that US equities will achieve just 0-1% in annualised real return over the next 10 years. If inflation exceeds expectations, the outcome could be considerably worse. Making things worse for US equities, there are finally attractive alternatives due to the Fed’s recent rate hikes.”

FX – Nothing will end a strong USD faster than a strong USD

The reaction of the US dollar to developments in US yields has been an on-again, off-again affair, but a sharp rise in US yields in late Q3, after strong wage inflation data were reported for August, resulted in a weaker dollar for much of September. From here, whether rising US yields continue to squeeze global USD liquidity and especially emerging markets, could depend on China’s intentions for the renminbi.

Regardless, if US rates and the USD both rise further, the first would quickly break US markets and eventually the US economy, and together would likely break the global economy, particularly the emerging markets that most indulged in USD-denominated borrowing via the Fed’s zero interest-rate policy years after the global financial crisis.

John Hardy, Head of FX Strategy, said: 

“The direction of the US dollar remains the key driver of action as we go from a late US monetary policy cycle to potentially the end of that cycle in a more concentrated and immediate timeframe than the market or the Fed anticipates. The US dollar and US rates can only rise so far from here before something – or rather more things – break.

“US long yields have crossed the Rubicon in technical terms, and a further aggravated rise in yields cannot be excluded in Q4. But higher rates will eventually put the brakes on the US recovery, something that may already be happening as Q4 gets under way. Q4 may be the quarter in which the USD finds a local top, if it hasn’t already, and then is toppled into reverse as the market figures that the Fed has taken things too far. Timing is the chief risk as we must deal in probabilities and the risk that we are a quarter or more too early.”

Macro – China opens the credit taps

Since last May, when the trade war intensified, there has been a shift towards looser policy and stimulus efforts.

Chinese markets have been flooded with cheap central bank liquidity when the Shibor plunged, leading to a pick-up in credit growth.

So far, the most significant impact of monetary easing is that it has contributed to push the credit impulse – the “change in the change” in credit and a key driver of economic growth – back into positive territory. 

The magnitude of the impulse is still very limited, but it should increase in coming months and be sufficient to sustain local investment and expansion.

Christopher Dembik, Head of Macroeconomic Analysis, said:

“China’s global importance is likely to increase further as the US economy is succumbing to the siren song of protectionism and central bank liquidity injections are falling. In previous periods of lower liquidity or slowing growth, China acted as an adjustment variable by pushing credit upwards as in 2012-13, thereby mitigating the effects of the Fed’s tapering. It seems that China is willing to step in to restimulate the economy once again. The current divergence of monetary policy between China and the rest of the world may still represent a chance for the global economy.”

Eleanor Creagh, Market Strategist, added: “The US-China trade war continues to escalate along with Washington’s shifting perception of China. There remains some hope of keeping these powers aligned, however, as US president Trump and Chinese president Xi Jinping meet in late November at the G-20 summit. Although a deal may be struck, the probability of this outcome seems low given the marked deterioration in diplomatic dialogue and the increasing probability of a new “cold war” fought via technological supremacy.

“Given the likelihood of a trade war escalation over the next few months, the Chinese equity market could experience another leg down. For longer-term investors, short-term market noise should not detract from the fundamental opportunity. The attractive valuations are indicative of the potential for future returns once the extremely negative sentiment mean reverts.”

Commodities – Trump, sanctions and tariffs

The direction of many major commodities will continue to be influenced by the decisions taken in Washington during the past six months. Apart from the weather, which has delivered challenges as well as opportunities across the agriculture sector, President Donald Trump’s trade war with China and sanctions against Iran will keep setting the tone for the rest of the year.

Ole Hansen, Head of Commodity Strategy, said: “The trade war, especially with China, shows no signs of easing. At least not before the November midterm elections, with Democrats generally favouring Trump’s tough stance towards China. Accepting this fact, China has shown little interest in trying to find a solution before the US elections. While growth and demand-dependent commodities, such as industrial metals, have been left reeling, energy prices have risen sharply in response to the November introduction of US sanctions on Iran’s oil trade.

 ”With the risk of a prolonged trade war and rising oil prices due to sanctions, the global economy may struggle to maintain its long-held positive momentum. The combination of rising energy prices and the hitherto strong dollar, not least against many emerging market currencies, will act as an unwelcome tax on consumers. ”

Fixed Income – Preparing for the slowdown

The fragility and contradictions of the financial market are starting to surface, and although credit spreads will be put under considerable stress in the fourth quarter, we do not expect to see an overwhelming sell-off until the US economy slows and gradually turns into a recession. This should give investors plenty of time to assess their risks and position themselves for a possible downturn in 2019-20. The current market still provides opportunities, especially in the short part of the curve, and investors can use episodes of volatility to enter solid assets at a better price.

(ORANGE: CDX EM; GREEN: CDX HY; BLUE: CDX IG. PERCENTAGE CHANGE SINCE BEGINNING OF THE YEAR. SOURCE: BLOOMBERG)

From the financial crisis of 2008 until today, emerging markets have taken advantage of low interest rates and yield-deprived investors to issue more and more debt in hard currencies, the majority of which is in US dollars.

Althea Spinozzi, Bonds Specialist, added:

”We believe that Q4 will see the performance of European sovereigns put at risk by the demands of the Italian government to the European Commission, which will not only be confined to discussion of the 2019 budget but could even see an escalation of tensions as Italy makes it clear that it is not willing to abide by Brussels’ rules.

”Although the Italian government will be a tough cookie to deal with, we believe an ‘Italexit’ is not possible. The Italian economy is highly dependent on the euro area economy, and the single European currency complicates things regarding a possible exit. This makes it impossible for the parties to pursue this without losing the bulk of their voters, who would find themselves in a weaker position than they had while in the EU.”

Macro – Young demographics cannot be ignored

Since the tail end of 2017, Saxo believes that emerging market central banks were skewed towards hawkish surprises – whether they liked it or not. The two key standouts against this tide were Russia and Brazil, which were cutting rates to combat domestic problems. They have since stopped, and in Q3 the Russian central bank surprised everyone with a rate hike.

Kay Van-Petersen, Global Macro Strategist, said:

”The only thing Brazilian investors have to smile about is that at least they have fared better than investors in Turkey and Argentina whose currencies were down 29% and 44% respectively by the end of Q3, when the BRL was down 15%.

”With inflation ticking up over the summer, we could see a more hawkish Central Bank of Brazil being forced to move despite the country’s lacklustre growth and unknown fiscal policies of the future government.

”It will be crucial to see whether or not China steps up the stimulus, which so far has not been significant enough to stop the pressures on EM (for example, August’s new loan figures were worse than expected and PMIs, while still in expansion mode, are trailing down towards 50). The official line from the People’s Bank of China will be that it is not interested in a weaker renminbi. Unofficially it is dampening the tariffs from Team Trump, and the degree of combativeness from the US will be symmetrical to the eventual weakness in CNH.

”The most interesting and profitable aspect of the trade tariffs between the US and China is their unintended consequences in the long term. Washington wanted to curb China’s 2025 plans, but the result is likely to be that Beijing moves those plans forward to 2022 or, in some cases, 2020.”

To access Saxo Bank’s full Q4 2018 outlook, with more in-depth pieces from our analysts and strategists, click here.

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WTI extended losses this morning after a brief bounce on API’s unexpected crude draw, pushing down to one-month lows below a $70 handle after DOE reported an unexpectedly large crude build.

 

API

• Crude -2.13mm (+2.5mm exp)

• Cushing +1.5mm

• Gasoline -3.4mm

• Distillates -246k

DOE

• Crude +6.49mm (+2.5mm exp)

• Cushing +1.78mm

• Gasoline -2.016mm (+600k exp)

• Distillates -827k

This is the 4th weekly build for crude (and Cushing stocks) in a row…

Bloomberg Intelligence Energy Analyst Fernando Valle notes that gasoline margins will remain challenged as demand wanes after summer driving season.

WTI traded with a $70 handle ahead of the DOE data – at the low end of the last week’s range – and then legged down on DOE’s big crude build…losing the $70 handle

However, not everyone agrees with the market’s direction:

“Our basic premise is that prices will move higher,” said Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA in London.

“As Iran’s supply losses are fully realized and Venezuela suffers continuous decline, global spare production capacity will ebb and — against a backdrop of average inventories — the market will become more sensitive to adverse supply shocks.”

Meanwhile, WTI Midland’s discount to WTI at Cushing narrowed to $4.50/bbl on Tuesday, smallest since June 21…

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“Something has to be done…How can my government be subsidizing China and driving me out of business?”

Those are the words of Jayme Smaldone, who runs a 12-employee housewares company in Rahway, N.J., who first became aware of the problem when he noticed websites selling Chinese knockoffs of his “Mighty Mug,” a desktop coffee cup he designed with an anti-topple base.

And it appears President Trump has listened to Jayme among many others, as The New York Times reports that he plans to withdraw from a 144-year-old postal treaty that has allowed Chinese companies to ship small packages to the United States at a steeply discounted rate, undercutting American competitors and flooding the market with cheap consumer goods.

Peter Navarro, Mr. Trump’s hard-line trade adviser, wrote in a Financial Times op-ed last month.

“These disparities have introduced a massive distortion in the eCommerce market.

It is often possible for a Chinese company to sell ‘knockoff’ products through online vendors, such as Amazon or Alibaba, to U.S. consumers for less than it costs for American mailers to ship authentic goods. Moreover, while USPS loses an estimated $1 on every small package that arrives from China, outbound mail of American exporters is charged at well above cost.”

As The New York Times details, a 2015 report from the Inspector General of the United States Postal Service found that the treaty, which was created to ease the flow of mail and small parcels between 192 countries, had not been overhauled to reflect the new realities of eCommerce and China’s aggressive undercutting of international competitors.

The price of shipping a 4.4 pound package, the largest parcel covered by the treaty, from China to the United States is about $5, according to United States estimates, according to post office estimates culled by Mr. Navarro’s staff.

American companies can pay two to four times that amount to ship a similar package from Los Angeles to New York, and much more for packages sent to China.

The “system creates winners and losers,” the report’s author’s concluded, especially China’s national postal service and “Chinese online retailers in the lightweight, low-value package segment at the expense of the U.S. PostalService and American retailers.”

It is not clear how much the disparity costs American taxpayers and retailers, in part because the Postal Service does not release detailed country-by-country shipping breakdowns. A 2014 study, cited in a Postal Service analysis of the issue, estimated that discounted shipping cost industrialized nations as much as $2.1 billion a year in aggregate.

The losses to retailers and manufacturers could be much more, as online commerce expands further.

Presumably, President Obama decide to ignore the 2015 report.

What is most odd about this decision by President Trump is no one is against it, no one is complaining at Trump “breaking norms” or “isolationism” or “being racist” – politicians and industry groups are all in agreement that it was unfair and needed to stop…

Even industry groups that have questioned the president’s tariffs on Chinese imports, applauded the move as proportional and targeted.

“This outdated arrangement contributes significantly to the flood of counterfeit goods and dangerous drugs that enter the country from China,” said Jay Timmons, chief executive of the National Association of Manufacturers, a trade group.

“Manufacturers and manufacturing workers in the United States will greatly benefit from a modernized and far more fair arrangement with China.”

“Manufacturers are pleased to see that this issue has been elevated to the very highest levels in the Trump Administration.”

Patrick Hedren, National Association of Manufacturers vice president for labor, legal and regulatory policy, said in an emailed statement:

“Manufacturers have struggled in recent years with the rapid growth of counterfeit goods pouring in to the country through the U.S. postal system from countries like China. This problem is fueled by heavily subsidized shipping rates and it displaces American innovators from online marketplaces,”

The announcement was welcome news to Sen. Bill Cassidy, R-La., who has been pushing legislation on the issue.

“I’ve been working with the administration for months on addressing this terrible deal, because American companies are being run out of business by foreign competitors making cheap knockoff products they can ship to Louisiana for less than it costs an American company to mail the genuine product,” he said in a statement.

“President Trump is standing up for American workers and companies who are being hurt by this outdated, unfair international agreement on shipping rates.”

A new front has been opened in the trade war with China – the question is: how will China respond to this one?

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