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Authored by Irina Slav via Oilprice.com,

The controversy of the Trans Mountain pipeline expansion projects has so far focused more on the implications of the project’s delay for Albertan crude oil producers. Yet, the developments around the pipeline also have reverberations for the U.S. refining industry and more specifically that part of it, which operates in the Pacific Northwest, a region without the luxury of many and different sources of crude to turn into fuel and other products for the local industries and households.

Canadian crude and crude from Alaska have been the traditional feedstock for Pacific Northwest refineries. Now that production is growing and so are refining rates, local operators are buying oil from Russia, which, in the political context between the U.S. and Canada, and Russia, makes for an interesting ironic twist. Yet these are the realities of life, as Stewart Muir, executive director of Canadian think tank Resource Works, writes in a recent story. If you can’t get a commodity you need from one place, you’ll have to get it from another.

Last month, Muir writes, a tanker under a Portuguese flag delivered between 600,000 bpd and 650,000 bpd of Russian crude to a refinery in Washington State, one of the two that produce fuel and oil products for Washington and Oregon. This might become a more frequent occurrence as crude oil production in Alaska steadily declines and Albertan oil sands miners cannot get their growing output to refineries because of pipeline constraints. An alternative—railway deliveries of Bakken crude—was rejected by the Washington governor who, unlike most Trans Mountain protesters, has obviously familiarized himself with the safety statistics of various crude oil delivery methods.

When market logic trumps politics, this is what happens. Refineries need feedstock. They do not deal with politics. They deal with demand and supply. And because of this, the United States has been importing Russian oil for years, as strange as this may seem in the current political situation.

Here are the facts: The U.S. began importing Russian crude in 1995. Since then, monthly deliveries have peaked at 25.083 million barrels in May 2009, with the latest monthly figure, for May this year, coming in at 15.216 million barrels, according to EIA data. This means that a little over half a million barrels daily of Russia oil were coming into U.S. refineries in May.

Although certainly modest as a portion of total U.S. imports, which in May stood at an average of 10.57 million barrels, Russian oil is flowing into the United States, and in the Pacific Northwest it might become irreplaceable, Muir suggests. Now, this may be a stretch, a worst-case scenario that will never come true. Even so, the situation in the Pacific Northwest seems to support the argument that the Trans Mountain expansion is necessary—if not for economic reasons, then at least for political ones.

Meanwhile, a round of sanctions that is being discussed in Congress could suspend all Russian oil and oil product exports to the United States, which may aggravate the situation of the two Washington refineries, one operated by Shell and the other by Andeavor. If Russian imports into the Pacific Northwest are indeed essential, the next round of sanctions will certainly aggravate this situation. But on the other hand, the possible suspension of Russian oil imports into the U.S. could just prove Muir and other skeptics wrong. That will be bad for Trans Mountain and for the refiners in Washington, particularly Andeavor, which has made a long-term commitment to use the additional Trans Mountain capacity that may never come online.

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By Nomura’s Charlie McElligott, head of cross-asset strategy

The US Dollar is again rallying into this week’s Jackson Hole meeting, with net USD longs at one year highs and against specs now short all available G10 currencies for the first time since Jan ‘17

Today’s USD move is being driven by 1) Euro weakness (again teetering around ~1.14 level) and now too 2) a modest “re-weakening” in offshore Yuan despite the PBoC overnight strengthening the reference rate by the most since Aug 2nd and a new headline stating “*PBOC SAID TO HAVE PROVIDED USD LIQUIDITY TO MARKET” via FX swap market

EU Equities outflows for the 23rd consecutive week and making -$51B OUT over the past six months, as Macro Fund beta to Eurostoxx indicates “outright capitulation” going down to the 10th %ile from 69th %ile

EM stabilizing modestly overnight:

• China “State Fund” buying in Equities is the highlight, driving a 2% reversal over the last hour and a half of the session and turning A-shares from lows of day (and two year lows at that) to closing at session highs
• Also boosting EM sentiment was a beat in Thai GDP which boosted broad Asian EMFX, as policy-normalization looks to be on-track
• Euro EMFX is the overnight exception and again specifically TRY, which is modestly weaker into the local holiday week as recent restrictions on selling TRY in forwards “informally” look like nascent steps towards capital controls

U.S. Rates shows spec short positioning in TY growing again (another -$8mm/01 on the week) and now makes for the shortest TY positioning of all-time as a percentage of open interest—which to us means significant “reversal / squeeze risk,” especially as U.S. Economic Surprise Index approaches one year lows (and now negative = “missing” on average)

The multi-month performance disaster for U.S. Equities funds (primarily L/S and M/N HFs, although MFs significantly lagging index as well) which has seen “gross exposure” purged lower (see “Gross-Down” monitor below) has dictated two standout flows last week:

• A “Beta Grab” (HF L/S beta to SPX jumps to 89th %ile from 65th %ile the prior week)
• A re-adding of exposure to “Momentum Longs” (L/S beta to Momentum Longs leaps to 32nd %ile from the recent puke down to 10th %ile)
• All of this despite SPX sector-performance last week showing “pure de-risking”: Telcos / Staples / REITS / Utes / Healthcare as the five best sector returns, while the bottom-six sectors were Industrials / Financials / Tech / Consumer Discretionary / Materials / Energy

The largest part of the Equities performance-issue (in addition to “idiosyncratic” EPS reactions in a number of “crowded” trades) has been either the de-facto “Long Growth / Momentum, Short Value / Quality” construction of “consensus” portfolios and / or the “Reflation” positioning theme—“Long Cyclicals / Commodities-Sensitives, Short Defensives / Duration-Sensitives,” all highlighted as “at-risk for reversal” in the “Downshift” call June 18th

An update on these key thematic reversals since making the “Downshift” call:

• U.S. Equities “1m Price Reversal” factor +6.8%
• U.S. Equites “Long Duration” sector hedge +4.6%
• U.S. Equities “Sector Mean-Reversion” Market-Neutral +5.1%
• TLT +0.5%
• U.S. Equities “Cyclicals / Defensives” Pairs -3.0%
• U.S. Equities Cash / Assets factor (“Long Growth, Short Value” proxy) -4.1%
• U.S. Equities “Cyclical Beta” Longs -5.1%
• AQR Long-Short Equity Fund -4.7%
• AQR Equity Market-Neutral Fund -4.7%
• GS HF VIP L/S -5.0%
• Bloomberg Commodities Index -5.0%
• U.S. Equities Long Tech / Short Utes (“Long Growth, Short Defensives” proxy) -7.3%
• UST 5Y Breakeven rates collapse 2.085 to 1.958

EQUITIES “GROSS-DOWN” MONTH-TO-DATE:

DESPITE POSITIONING-DATA SHOWING HEDGE FUNDS ADDING ‘BETA TO SPX’AND ‘MOMENTUM LONG’ EXPOSURE LAST WEEK, BROAD S&P SECTOR PERFORMANCE SHOWS OUTRIGHT ‘DE-RISKING’:

FACTOR- REVERSALS CONTINUE TO ‘BLEED’ VS YTD / PAST 1Y RETURNS:

AS UST 5Y BREAKEVEN YIELDS BREAK-DOWN, SO TOO DOES U.S. EQUITIES “HIGH BETA / LOW VOL” RATIO, AS PORTFOLIOS SHIFT-BACK TO MORE DEFENSIVE STANCE:

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Authored by Steen Jakobsen via Saxo Bank,

There is currently a lot of focus on Turkey, and for good reason, but Turkey is really only a second or third derivative of the global macro story.

Turkey represents the catalyst for a new theme, which is “too much debt and current account deficits equals crisis”.

In that sense, we have come full cycle from deficits and debt mattering in the 1980s and ‘90s but not in the ‘00s and ‘10s post- the Nasdaq crash and great financial crisis under the biggest monetary experiment of all time.

In our view, the order of sequence for this crisis is as follows:

1. The debt cycle is on pause as first China and now the US have deleveraged and ‘normalised’.

2. The stock of credit or the ‘credit cake’ has collapsed. First it was the ‘change of the change of credit’, or the credit impulse, which tanked in late 2017 and into 2018. Now it is also the stock of credit. Right now, global M2 over global growth is less than one, meaning the world is trying to achieve 6% global growth with less than 2.5% growth in its monetary base… the exact opposite of the 00’s and ‘10s central bank- and politician-driven model.

3. This smaller credit cake is spilling over to a stronger USD (as US growth increases versus the rest of the world) and a higher marginal cost of funding (as the amount of dollars available in the credit system shrinks), leading to a mini-emerging market crisis.

4. Finally, the Turkish situation was really created by the aforementioned factors but it was made worse by President Erdogan’s autocratic and naive monetary and fiscal response. The reason this mini-crisis is not idiosyncratic is points one through three, but the market is still treating Turkey as the starting point of the current EM mini-crisis.

Where do we go from here?

More and more investors seem to believe that we are on the brink of an ‘Asian crisis 2.0’ or a liquidity crisis.

I no longer think that there are really any preordained paths or predestined scenarios for all of this, but my forecast would be:

1. A 25% chance of a Turkish default within 12 months. Erdogan is not following the three standard responses to a funding crisis: an aggressive monetary and fiscal response, seeking help from outside (read: European Union or International Monetary Fund), and/or creating a currency board/closing convertibility of TRY. The present approach contains none of these elements, which could lead to further escalation and an overall EM crisis.

2.  A 25% chance a strong reversal of quantitative tightening from the Federal Reserve, supported by the European Central Bank and major central banks. The timing here could be around the Jackson Hole event at the end of August. Overall, US monetary policy and growth have peaked, and the mini-crisis together with the Trump administration’s trade tariffs is creating a need to first pause and then reverse policy lower. The world is almost coming to a standstill, after all, from the Fed’s extremely hollow tightening.

3. A 25% chance that China comes to the rescue in a fashion similar to 2007/08. China is now asynchronically easing both monetary policy and fiscal policy as growth is not only undershooting targets but doing so significantly. To me, the recent technology sector sell-off is a sign that the lows could be coming in soon. A ‘Chinese rescue’ scenario could also be called another delay, or yet more ‘pretend-and-extend’, but the data and research I am seeing from China (plus the research I have published) points to a country that is acutely aware of the risks posed by growth shortfalls based on too much deleveraging relative to the country’s position in its overall economic transformation (China 2025).

Be aware that the potential potency of Chinese stimulus is now much smaller than it was last time as the country’ debt is higher, productivity remains low, and global transmission is clogged.

4. A 23% chance that global recession, based on points one through three, arrives by Q4’18 or Q1’19. This recession would spring from the enormous underestimation of the damage done to SMEs and MMEs by: tariffs, a rising marginal cost of capital, and a USD that is too strong for the world’s indebted markets.

5. A 2% chance that the world recovers, with this event coming to be seen as a mere blip on the radar. In this scenario, the US economy is strong enough to carry the rest of world, Italy sees 3% growth, and the EU solves Brexit… remember, nothing is impossible.

Market views

US markets are three standard deviations more expensive than the MSCI World index. I repeat: three (based on a 24-month look backwards).

Our recommendations:

Forex: We are long dollar, JPY, CHF, and will buy gold in the next 48 hours. We are extremely alert on our USD long as the main driver of dollar equals US growth minus global growth. We expect US growth to have peaked and for global growth to expand relative to US growth; due to USD’s reserve status… this is the driver on the dollar rate.

Fixed Income: Long 10-year and UST as safe-havens, plus we see improving fundamentals.

Commodities: We like grains in the long term and have a small exposure (mainly wheat for now).

EM: We think China is getting cheap… its multiples are down at half of their peak levels and we see the recent technology rout as an opportunity to dip our feet into Chinese stocks. We bought small EM last month and will be adding in increments over the next six months to an overall exposure of 25% on the potential for a Chinese reversal and a turnover in QT.

Equities: We are adding utilities, we like capital goods for their cheapness, but overall we are slowly switching our US equity exposure EM/China.

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This week’s calendar is relatively sparse, nevertheless the flash PMIs across the globe, the latest FOMC policy meeting minutes and the final Q2 GDP for Germany should give markets something to look out for. The key highlight will be the Jackson Hole meeting which begins on Friday. Elsewhere Turkey, which is on a one week holiday, and the rest of the EM complex will stay in focus and expect plenty of headlines as we approach the restarting of US/China trade talks towards the end of the month; as a reminder the US tariff deadline on Chinese products is August 23.

As DB’s Craig Nicol writes, the release of the flash August PMIs across the globe on Thursday is the key highlight. We’ll see the manufacturing print for Japan early in the morning followed by the manufacturing, services and composite readings for Germany, France and the Eurozone, and then the same for the US in the afternoon. In terms of what to expect, the current market consensus is for a slight improvement in Europe. The Eurozone manufacturing reading is expected to nudge up 0.2pts to 55.3. The services print is also expected to rise 0.3pts to 54.5 and the composite to rise 0.2pts to 54.5. In the US the manufacturing PMI is expected to fall 0.3pts to 55.0 which would be the lowest in 8 months and the 4th monthly decline. Expect the market to be focused on some of the prices components of the data, as well as more-trade sensitive components like new orders given the softness in the August Philadelphia Fed Business Outlook.

In the meantime, we will be getting the minutes of the latest FOMC monetary policy meeting on Wednesday. While the original meeting on August 1 was largely uneventful, the minutes could be more closely watched to get further colour on the discussions between the FOMC members over growth, inflation, yield curve inversion and trade wars.

With regards to other economic data that’s due out next week in the US we’ll get a few important releases towards the end of the week. On Friday, we will get the flash July durable and capital goods orders data (+0.5% mom durable goods ex  transportation print expected). Other data in the US next week includes July existing home sales on Wednesday, July new home sales, the 2Q house price purchase index and Kansas City Fed PMI on Thursday.

A summary breakdown is below:

In Europe, we will get final Q2 GDP for Germany on Friday. As a reminder the preliminary print came in one-tenth higher than expected at +0.5% qoq and the expectation is that it will stay steady at +0.5% qoq. Other data releases worth highlighting next week in Europe includes July PPI for Germany (expected +0.4% mom) and June construction output for the Euro area on Monday, July public finances data for the UK on Tuesday, latest ECB monetary policy minutes, August Business confidence and manufacturing confidence for France along with France’s survey of industrial investment on Thursday and finally July PPI for Spain on Friday.

In Asia, the data releases of note are July CPI and services PPI for Japan on Friday along with final July machine tools orders on Tuesday.

Away from data, Fed Chair Powell will be speaking on the economy and monetary policy at the Jackson Hole central banking symposium on Friday where this year’s topic is “changing market structure and implications for monetary policy.” Atlanta Fed President Raphael Bostic will discuss the U.S. economic outlook at the Bristol Chamber of Commerce on Monday. Meanwhile, the US might impose new sanctions on Russia for a March 4 nerve-agent attack in the U.K. on Wednesday and will start imposing 25% tariffs on an additional $16 bn of Chinese imports from Thursday which China has vowed to retaliate with equal measures.

The earnings of note during the week are Lowe’s and Target on Wednesday, with Intuit, HP, and Alibaba reporting on Thursday.

Key events by day courtesy of Deutsche Bank

• Monday: Its a fairly light start to the week. There are no data releases of note in Asia. In Europe, we get the August Rightmove house prices for the UK, overnight followed by the release of July PPI for Germany in the morning along with release of the June construction output for the euro area. There are no data releases of note in the US. Away from data, the Fed’s Bostic will speak on the U.S. economic outlook in Tennessee.
• Tuesday: Overnight we get July supermarket sales and Nationwide department store sales in Japan along with final July machine tool orders. The only release of note in Europe is the July public finances data in the UK. There is nothing of note in the US.
• Wednesday: Overnight we get the June all industry activity index in Japan. There is nothing of note in Europe. In the US, we get July existing home sales data for the US along with minutes from the latest FOMC monetary policy meeting. Away from data, Lowe’s and Target will report their earnings.
• Thursday: It is the most data heavy day of the week with the big focus being the release of the flash August PMIs across the globe. Overnight we’ll get the manufacturing PMI for Japan followed by the manufacturing, services and composite PMIs for France, Germany and the Eurozone. The US PMIs will then be out in the afternoon. Away from PMIs, in Europe, we will get the latest ECB monetary policy minutes, August business and manufacturing confidence and, production outlook for France along with the survey of industrial investment for France and advance August consumer confidence for the euro area. In the US, we get the June FHFA house price index, 2Q house price purchase index, July  new home sales and August Kansas City Fed manufacturing activity index. Away from data, Intuit, HP and Alibaba will reports their earnings.
• Friday: Overnight we get July CPI and services PPI for Japan. In Europe, we get final 2Q GDP data for Germany, July PPI for Spain and July finance loans for housing in the UK. In the US, we get preliminary July durable goods orders and capital goods orders data. Away from data, the Fed will be hosting its annual Jackson Hole central banking symposium where Fed Chair Powell is set to discuss the economy and monetary policy.

Finally, focusing on just the US and consensus expectations, Goldman writes that the key economic data release this week is the durable goods report on Friday. There are several scheduled speaking engagements by Fed officials this week, including a speech by Fed Chairman Jerome Powell on Friday at the Jackson Hole Economic Symposium. In addition, minutes from the August FOMC meeting will be released on Wednesday.

Monday, August 20

• 11:00 AM Atlanta Fed President Bostic (FOMC voter) speaks; Atlanta Federal Reserve President Raphael Bostic will discuss the U.S. economic outlook with the Johnson City, Kingsport and Bristol Chamber of Commerce in Kingsport, Tennessee. Audience Q&A is expected.

Tuesday, August 21

• There are no major economic data releases scheduled.

Wednesday, August 22

• 10:00 AM Existing home sales, July (GS flat, consensus +0.7%, last -0.6%); We look for a flat reading in July existing homes sales based on regional housing data, following a 0.6% decline in June. Existing home sales are an input into the brokers’ commissions component of residential investment in the GDP report.
• 2:00 PM Minutes from the July 31 – August 1 FOMC meeting; At its August meeting, the FOMC left the funds rate target unchanged, as widely expected. The key changes in the post-meeting statement were the upgrade to the characterization of economic activity from “solid” to “strong,” as well as an upgrade to the consumption characterization from “picked up” to “grown strongly.” The Committee also tweaked the description of headline and core inflation to “remain near 2 percent.” In the minutes, we will look for further discussion of trade policy, which was left unmentioned in the statement.

Thursday, August 23

• 08:30 AM Initial jobless claims, week ended August 18 (GS 210k, consensus 215k, last 212k); Continuing jobless claims, week ended August 11 (consensus 1,735k, last 1,721k): We estimate initial jobless claims declined by 2k to 215k in the week ended August 18, following a 5k decline in the previous week. Initial jobless claims continue to steadily march lower, and we believe there is additional scope for this trend to continue.
• 09:00 AM FHFA house price index, June (consensus +0.3%, last +0.2%)
• 09:45 AM Markit Flash US manufacturing PMI, August preliminary (consensus 55.0, last 55.3)
• 09:45 AM Markit Flash US services PMI, August preliminary (consensus 56.0, last 56.0)
• 10:00 AM New home sales, July (GS +2.5%, consensus +2.7%, last -5.3%); We estimate new home sales increased 2.5% in July, following a 5.3% decline in the prior month. Single family starts and single-family permits increased in July, while mortgage applications declined.
• 11:00 Kansas City Fed manufacturing index, August (consensus +22, last +23)

Friday, August 24

• 08:30 AM Durable goods orders, July preliminary (GS flat, consensus -0.5%, last +0.8%); Durable goods orders ex-transportation, July preliminary (GS flat, consensus +0.5%, last +0.2%); Core capital goods orders, July preliminary (GS +0.1%, consensus +0.5%, last +0.2%); Core capital goods shipments, July preliminary (GS +0.3%, consensus +0.3%, last +0.7%): We expect durable goods orders to stay flat in the July report, given mixed data from commercial aircraft orders and scope for an increase in defense spending. Given a pullback in manufacturing surveys from earlier in the month, we see scope for a pause in core capital goods orders growth. Manufacturing production growth was solid in July, with a continued increase in the capex-sensitive business equipment category of industrial production. Accordingly, we look for a 0.3% increase in core capital goods shipments.
• 10:00 AM Fed Chairman Powell (FOMC voter) speaks: Federal Reserve Chairman Jerome Powell will deliver a speech titled “Monetary Policy in a Changing Economy” at the Kansas City Federal Reserve Bank’s annual Economic Symposium in Jackson Hole. The topic of the conference this year is “Changing Market Structure and Implications for Monetary Policy.” Audience and media Q&A is not expected.

Source: DB, Goldman, BofA

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First it was Google that succumbed to Chinese censorship, when in the name of revenue growth it was revealed that the company that would “do no evil” would offer a censored version of its browser in China (even as its employees reportedly revolted over the clandestine project), and now it is Apple’s turn.

According to the WSJ, under pressure from Chinese state media, Apple said it removed illegal gambling apps from its App Store in China—a move that could help quell the latest challenge for the American tech giant in its most important market outside of the U.S.

The Journal notes that Apple had been criticized by Chinese news outlets for “not doing enough to filter banned content and applications” and on Sunday, state broadcaster CCTV, which last month reported that Apple’s app store allowed illegal gambling apps disguised as official lottery apps, said that 25,000 apps had been removed.

“Gambling apps are illegal and not allowed on the App Store in China,” Apple said in a statement Monday. “We have already removed many apps and developers for trying to distribute illegal gambling apps on our App Store, and we are vigilant in our efforts to find these and stop them from being on the App Store.”

Apple offers more than 1.8 million apps in China, according to the Ministry of Industry and Information Technology. Apple didn’t confirm the number of apps it took down or when it had removed them, but 25,000 would amount to about 1.4% of that total.

To be sure, Apple occasionally cleans up its App Store in the U.S. as well, removing outdated or spam apps. But it’s not remotely close to the enforced crackdown that Apple undergoes every so often in China. 

Last year, In China, Apple said it removed nearly 700 virtual private networks, or VPN, apps from its App Store last year in response to new local restrictions. VPN is used by individuals and companies to send secure emails, transmit data and access websites blocked in China.

The state media attacks came at a vulnerable time for Apple, which like other U.S. companies operating in China, is caught in the middle amid growing trade friction between Washington, D.C. and Beijing. The purge follows just two weeks after China threatened Apple with “anger and nationalist sentiment” if the company doesn’t share more wealth with its local employees: a clear warning that Apple may be a casualty should the US-China trade war escalate further.

As the WSJ further notes, U.S. companies are paying close attention to the messages they get from the Chinese government and the state media in this sensitive trade environment, said Ben Cavender, a director at China Market Research Group who focuses on consumer technology and retail.

“They are going to move very quickly to try to rectify that problem, because this is a situation where there could be a lot more backlash in the government in terms of regulations,” Mr. Cavender said.

In its latest report on the app housecleaning, CCTV also said that illegal apps that were banned from the App Store would still be working on devices of users who had downloaded them. It also said that fake positive reviews for the illegal apps had misled some users.

“Apple itself has set up the rules on how to allow apps onto its store, but it didn’t follow that, resulting in the proliferation of bogus lottery apps and gambling apps,” it said in its report.

Apple’s strong ties to China leaves it exposed should trade tensions ratchet up. China accounts for about one-fifth of its revenue. The Cupertino, Calif.-based company also assembles its iPhones in China, which means the iPhones are a Chinese export that could potentially be subject to tariffs in the trade row.

The bottom line: in order to preserve its precious Chinese revenue stream, Tim Cook will do anything China demands, although that may set up the company for a climatic showdown, when it is torn between conflicting demands from Trump and Xi. So far the company has been spared that particular dilemma.

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The chart which we first published last December, and which shows that for the past 3 years the ECB has purchased the bulk of Italian new government bond issuance appears to be making the rounds…

… because as Italian 10Y yields continue to rise and are now at the same level they hit during the May panic liquidation amid rising fears of what the end of the ECB’s QE at the end of the year will mean for demand (as a reminder, last week Goldman warned that unless a new buyer of last resort emerges, Italian debt faces a “huge structural shift“)

… today the topic of ongoing ECB QE finally came to a fore when the Italian Cabinet Undersecretary Giancarlo Giorgetti – a prominent member of League, the government coalition partner – said he hopes the ECB’s quantitative easing program will be extended to “help protect the country from financial speculators.”

In an interview with newspaper Il Messaggero, Giorgetti said that Italy also needs to be credible to help shield itself especially following the Genoa bridge disaster which may lead to an extra spending request to the European Union, and boost the country’s budget deficit, leaving its bond market increasingly exposed.

The ECB under President Mario Draghi has “carried out a very important function these last few years,” Giorgetti told the newspaper. “I hope that the quantitative easing program will go forward” he said, quoted by Bloomberg.

Giorgetti echoed Erdogan, saying that speculative funds are “doing their job” as the ECB winds down QE and said that “it is up to us to be credible and to overcome that speculative instinct.“

What he meant is that it is up to the ECB to prevent short sellers from sending Italian bonds into a tailspin once the ECB backstop that has been present for the past 4 years finally goes away.

The Italian was close to begging when he said he expects the EU to look favorably on government spending to upgrade Italy’s deteriorating  infrastructure, while the starting point is for the government to boost next year’s budget deficit to 1.6% to 1.7% of GDP from the 0.8% foreseen by the previous administration. That would mean about 15 billion euros in extra spending.

The problem is that by setting up the strawman, Italy’s bonds are now going to be truly “attacked” by “speculators” if and when the ECB indeed concludes its QE program, which is set to expire at the end of the year when its government bond holdings reach €2.6 trillion ($3 trillion).

Perversely, Italy’s only hope is for the EM contagion to spread and to hit developed markets in general, and Europe in particular, which then forces Mario Draghi to reassess his strategy.

 

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Elon Musk may be about to suffer another nervous meltdown on Twitter.

After Friday’s plunge in Tesla shares following the publication of a bizarre interview in the NYT with CEO Elon Musk which revealed the state of his emotional breakdown, Tesla shares are down another 3% this morning, trading below $300 in the pre market after JPM published a scathing research report, in which it cut its TSLA price target by a whopping $113 from $308 to $195, after JPM analyst Ryan Brinkman said he was “reverting to valuing TSLA shares on fundamentals alone given funding appears to not have been secured.”

We are reverting to valuing Tesla shares on the basis of fundamentals alone, which entails a $113 reduction in our price target back to the $195 level where it stood prior to our August 8 note in which we newly weighted 50% in our valuation analysis a go-private scenario for which funding was at that time said to have been secured to take the company private at $420 per share.

Commenting previously on Musk’s Twitter statements, JPM had said that “As surprising to us as these developments are, and as lacking as the statements are in any details regarding whom is expected to provide the required amount of financing and on what terms, they are nevertheless declarative statements from the CEO of a public company which we feel should be considered seriously. Either funding is secured or it is not secured, and Tesla’s CEO says funding is secured.” The bank added that “Our price target could move up or down based upon further developments affecting the likelihood the transaction will or will not go through.”

Fast forward to today, when for at least one bank, the going private deal is now dead. We publish the key highlights from the report, which are self-explanatory and may result in the latest meltdown from the erratic Tesla CEO:

Our interpretation of subsequent events leads us to believe that funding was not secured for a going private transaction, nor was there any formal proposal. On August 13, Mr. Musk posted a statement to Tesla’s website in which he explained that the comment relative to funding being secured was based upon a July 31 meeting with the Saudi Arabian sovereign wealth fund in which its representative expressed support for funding a transaction to go private. However, it was also stated, “Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.” We had imagined following the surprise August 7 announcement that another party (e.g., the Saudi fund) had already firmly decided (including having completed any internal review process) to fund a going private transaction. The revelation the Saudi fund is subsequently asking Tesla for details of how the company would be taken private suggests to us that any deal is potentially far from even being formally proposed, which is different from our understanding on August 8 which was based on Mr. Musk’s statement on Twitter that, “Only reason why this is not certain is that it’s contingent on a shareholder vote”.

Tesla does appear to be exploring a going private transaction, but we now believe that such a process appears much less developed than we had earlier presumed (more along the lines of high level intention), suggesting formal incorporation into our valuation analysis seems premature at this time. Mr. Musk has announced the hiring of financial and legal advisors in support of exploring a going private transaction (this appears to have been done after the August 7 announcement), and has stated conversations with the Saudi fund continue and also that he is having discussions with a number of other investors. Tesla’s Board of Directors has also announced a special committee comprised of three independent directors to evaluate any transaction (the Board stated it has not yet received a formal proposal). This to us suggests a going private transaction is clearly possible, which could potentially provide upside risk to the shares, but that such a process appears much less developed than we had earlier presumed. When Mr. Musk tweeted on August 7 that, “Only reason why this is not certain is that it’s contingent on a shareholder vote,” we had presumed that a formal proposal had been received from another party, that funding had been secured for that formal proposal, and that the Board was at least informally supportive of the formal proposal. Given our updated interpretation that none of these three presumptions are currently the case, we feel it is appropriate at this time to remove the 50% weighting we had briefly assigned to a going private transaction, and instead return to our previous fundamentals-based valuation approach (i.e., a 50/50 blend of DCF and 2020-based multiples analysis — itself consisting of a blend of P/E, EV/EBITDA, and Price-to- Sales) that values TSLA shares at $195.

Shorter JPM: Musk lied. We now await the SEC’s verdict if it agrees with the largest US bank, and what that would mean for the embattled Tesla CEO.

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Despite last Friday’s sharp risk rebound after a WSJ report that the US and China are hoping to end the ongoing trade dispute with a November summit, the overnight session started off with risk largely subdued and on the back foot with US futures unchanged ahead of Friday’s Jackson Hole meeting (and FOMC and ECB minutes) and ahead of the Aug. 23 U.S. tariff deadline on Chinese products, while Chinese stocks slumped despite a 120BN yuan net liquidity injection by the PBOC and a sharp bounce in the Yuan, prompting even more concerns about the inability of Chinese stocks to stage a rebound.

Then, out of the blue Chinese A-shares surged just before 2am ET, with the Shanghai Composite spiking into the last hour of local trading and closing up 1.1% at session highs just below 2,700, an action that was closely reminiscent to countless “national team” interventions…

… and sure enough, Bloomberg reported that it was China’s state-backed funds, or the so-called “national team”, that purchased blue-chip stocks last on Monday to support the A-share market, citing people familiar with the matter. As an amusing justification, the Bloomberg sources said that the “national team bought shares with an aim to stabilize market, not to push up stock prices” even though that’s precisely what happened.

The intervention had an immediate effect and as one Bloomberg commentator put it, “everything in markets is looking much brighter than it was a couple of hours ago, after a late turnaround in China shares helped drag up indexes around the world. Indian equities are surging to another record high and even beaten-down Indonesian shares have soared.”

The Chinese market manipulation was so forceful, it sent S&P futures spiking from session lows, promptly pushing them to overnight highs.

And after trading in the red just a few hours earlier, the rest of the world promptly turned green. And all it took was China throwing in the towel on no further market manipulation, and giving algos hope that Beijing is now once again actively micromanaging the stock market.

The rebound in Chinese stocks also pushed miners and industrial metals higher, helping the Stoxx Europe 600 Index rise in thin volumes. And while China’s artificial move higher was enough to lead to green closes across most of China, Japan’s Nikkei225 bucked the trend.

In FX, the dollar firmed after two days of declines and the 10-year Treasury yield was little changed. The onshore yuan climbed after the People’s Bank of China strengthened its reference rate by the most in more than two weeks to 6.8718 (vs an average estimate of 6.7842), sending the CNY up 0.48% to strongest since Aug. 10, at 6.8536. Despite the onshore yuan strength, the offshore CNH fell 0.34% to 6.86 per dollar, snapping two days of gains.

The euro slipped for the first time in 4 days, with its gradual slide continuing as London traders came into the market; the common currency failed to move above Friday’s high as demand during the Asian session wasn’t enough to tackle with leveraged supply.

The Japanese yen dipped 0.1% to 110.66 per dollar while the New Zealand dollar declined on selling against the Aussie as regional macro funds add to existing AUDNZD longs; both Australia and New Zealand’s dollars earlier slipped as speculators added to their short positions ahead of the Aug. 23 U.S. tariff deadline on Chinese products.

The pound was little changed after The Telegraph reported that the U.K. government has stepped up preparations for a “no-deal” Brexit.

In other news, as the WSJ reported earlier the Trump administration rejected an effort by Turkey to tie the release of a U.S. pastor to relief for a Turkish bank facing U.S. fines, just days after Turkey’s credit rating was cut further into junk Friday by S&P and Moody’s. Furthermore, shots were fired at the U.S. Embassy in Ankara from a car around 5am Turkish time, CNNTurk website reports. The news sent the lira sliding against the dollar, with the TRY the worst performing EM currency against the USD to start the week. Turkish markets are closed for most of this week, which may mean low trading volumes and sharper currency swings than usual.

Greece is about to exit its bailout, a symbolic move past the debt crisis that exploded eight years ago. On the trade war front, Chinese and U.S. negotiators are drawing a road map for talks, which could lead to meetings between U.S. President Trump and Chinese President Xi Jinping in November, according to the WSJ. The euro is down 0.2% at $1.1413. Its recent drop to one-year lows on the back of the Turkish crisis is a silver lining for European earnings

China’s intervention also impacted the rates market as bunds unwound some of their early decline, while BTPs hold gains as risk sentiment turned positive following the “rally” in Chinese equities. The German 10y yield steady at 0.31%; Spain 10y -4bps to 1.41%; Italy 10y -4bps to 3.09%. Meanwhile, Treasury futures rebound following a couple of block trades which weigh on the 10y sector. The 10Y yield dipped less than 1bp to 2.8569%.

With Q2 earnings season now over, investors will be closely watching this week’s Jackson Hole symposium for clues on whether the Fed will delay or stop its rate hiking approach, (full preview here), and to see if central bankers can bring back stability after the recent bout of emerging market-led volatility. Additionally, traders will watch for any potential complications ahead and after the Aug. 23 U.S. tariff deadline on Chinese products.

In the latest Brexit news, the UK government is to publish no-deal advice on Thursday, notices will include advice for businesses, citizens and public bodies. Thursday will also see UK Brexit Secretary Raab making a speech in Westminster to outline plans in the case of a no-deal Brexit. UK Cabinet papers showed plans for EU migrants to be given the right to stay in UK in the event of a no-deal amid worries of potential labour shortages. UK Tory Brexiteer Jacob Rees-Mogg warned PM May that Eurosceptics will block her plans unless they are changed, while the group are also reported to be devising an alternative proposal to PM May’s Brexit plans.

In other news, ECB’s Weidmann stated that monetary policy normalization is foreseeable following the latest decisions and that interest rates will increase as a result, although the process will be gradual.

Italy’s populist government are drawing up a plan of up to EUR 80bln to rebuild the country’s rundown infrastructure after the Genoa bridge collapse. Italy’s Deputy PM Salvini said all funds raised for infrastructure will be invested. The Italian cabinet undersecretary Giorgetti has indicated he wanted the ECB to continue buying fresh bonds, including Italian government debt, under its QE program.

In commodities, WTI and Brent trade mixed, with the former eyeing USD 66/bbl to the upside while the latter straddling above USD 72.00/bbl. News flow for crude was light over the weekend, although Iran expressed opposition to Saudi Arabia’s willingness to make up for any shortfall that could arise from US sanctions, in which it told OPEC that no country is allowed to take over the share of other members for production and exports of oil under any circumstances. Elsewhere, gold (+0.3%) is in the green as it crawls closer to the USD 1190/oz level. London copper rose 1% this morning as hopes for US-Sino trade talks buoyed risk appetite after reports suggested China and Washington are to hold low-level trade talks on August 21st and 22nd, ahead of the new US tariffs on USD 16bln of Chinese goods take effect.

There is nothing on the US economic calendar today; the Fed’s Raphael Bostic is scheduled to speak on the U.S. economic outlook. Estee Lauder is among the handful of companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.2% to 2,858.50
• STOXX Europe 600 up 0.7% to 383.61
• MXAP up 0.4% to 162.77
• MXAPJ up 0.9% to 526.62
• Nikkei down 0.3% to 22,199.00
• Topix down 0.3% to 1,692.15
• Hang Seng Index up 1.4% to 27,598.02
• Shanghai Composite up 1.1% to 2,698.47
• Sensex up 0.9% to 38,301.39
• Australia S&P/ASX 200 up 0.09% to 6,344.99
• Kospi up 0.04% to 2,247.88
• Brent futures up 0.5% to $72.17/bbl
• German 10Y yield rose 1.1 bps to 0.316%
• Euro down 0.2% to $1.1413
• Italian 10Y yield rose 0.4 bps to 2.848%
• Spanish 10Y yield fell 1.6 bps to 1.433%
• Gold spot up 0.4% to $1,188.46
• U.S. Dollar Index up 0.2% to 96.28

Top Overnight News

• Business economists are sounding some sour notes about Trump administration policies, from trade to immigration to the budget, while expecting the short-term boost to growth from Republican tax cuts to lessen over time
• Venezuelan President Nicolas Maduro carried out one of the greatest currency devaluations in history over the weekend — a 95% plunge that will test the capacity of an already beleaguered population to stomach even more pain
• The U.K. will recognize some EU regulations in the event of a no-deal Brexit to ensure continued access to medicines, car parts and chemicals, the Telegraph reported, citing government papers
• U.S. economy will be hit many times harder than the rest of the world by an escalating global trade war, according the chief executive officer of A.P. Moller-Maersk
• Trump administration has rejected an effort by Turkey to tie the release of a U.S. pastor with relief for a Turkish bank facing U.S. fines, Wall Street Journal reports, citing an unidentified senior White House official
• By shutting banks off from borrowing at the benchmark 17.75% repo rate and forcing them to turn to the overnight lending rate, Turkey’s policy makers have effectively enacted a 150bp hike within a week
• Qatar and Turkish central banks sign currency swap agreement, Qatar central bank says on website
• Italian Cabinet Undersecretary Giancarlo Giorgetti said he hopes the ECB’s quantitative-easing program will be extended to help protect the country from speculators
• Britain will give EU migrants a unilateral right to stay in the U.K. in the event of a no-deal Brexit, Telegraph reports, citing seen leaked Cabinet papers

Asian equity markets were mostly higher but with gains contained as the region struggled for direction due to a lack of fresh catalysts and as earnings dominated news flow. ASX 200 (+0.1%) traded positive but with price action kept in a tight range as strength in miners was counterbalanced by weakness in the largest weighted financials sector and consumer staples following disappointing results from Woolworths, while Nikkei 225 (-0.3%) underperformed amid a firmer currency and as some analysts even suggested stealth tapering after the BoJ refrained from buying stocks for 2 days last week. Elsewhere, Hang Seng (+1.4%) and Shanghai Comp. (+1.1%) traded higher but with sentiment in the mainland bourse flimsy as it swung from gains and losses, however the bulls eventually took the upper hand following another firm liquidity effort by the PBoC and continued hopes regarding trade talks. Finally, 10yr JGBs were initially uneventful amid a similar tone across asset classes and a lack of BoJ presence in the bond market, although prices gradually edged higher throughout the session amid the underperformance of stocks in Tokyo which helped 10yr JGBs break above resistance around the 150.50 level.

Top Asian News

• Thailand’s Economy Grows More Than Forecast in Second Quarter
• Veerathai: Thailand Awaiting Right Timing to Consider Rate Hike
• In Potential Challenge to Army, Pakistan Seeks India Talks
• Holcim Indonesia Soars as Sale Is Said to Attract Asian Tycoons

European equities kick started the week higher by 0.2% to 0.3% before gains accelerated (Eurostoxx 50 +0.8%) as sentiment improved across the region amid the latest US-China trade developments. On Friday, it was reported US and China have a plotted road map to resolve trade disputes by November. In terms of sectors, material names are outperforming on the back of firmer base metals price actions. Antofagasta (+2.2%) shares are higher after also reporting optimistic numbers while reaffirming CapEx guidance. Elsewhere, Atlantia (-9.0%) shares continue take a beating, the latest reports suggesting the Italian government has begun revoking Autostrade’s licence, also casting doubt over an initial offer of EUR 500mln for compensation and building work from Atlantia.

Top European News

• A $76 Billion Fund’s Growing Bet Shows Normal Is a Long Way Off
• BOE’s Unanimous Rate Hike Has Economists Projecting Two in 2019
• Italy to Revoke Autostrade Concession Despite Company Aid Offer
• Benettons Go From Preachers to Pariahs After Genoa Disaster
• Italy’s Salvini Is Unaware of New Law Plan to End Concessions

In FX, the broad Dollar and DXY is mildly firmer, but well within established ranges and G10 pairs are narrowly mixed even though risk appetite suggests that a degree of divergence between traditional safe-havens and high beta currencies would better reflect the overall tone. Hence, the index is relatively lacklustre within 96.300-010 bounds awaiting firmer direction and impulses that could arrive later this week via US-China trade talks, FOMC minutes and/or Jackson Hole. In EM, the TRY is back under pressure after S&P’s downgrade and no FX Depo auction today, with comments from President Erdogan largely shrugged off or arguably undermining the Lira if anything, although the US rejecting Turkey’s offer to release Pastor Brunson in exchange for bank aid is probably more of a negative factor. Usd/Try back near 6.1000, in contrast to Usd/Rub around 67.0000 in wke of Fitch affirming Russia and Usd/Zar sub-14.5000 in consolidation after last week’s Rand slump and ahead of SA inflation data and the beginning of testimonies for the capture inquest. NZD/EUR/JPY – Highlighting the rather indifferent and conflicting start to the week, the Kiwi, single currency and Jpy are all underperforming at the base of the major pecking order, with the former just about retaining 0.6600+ status, Eur/Usd still struggling to extend rebounds above 1.1400 (topping out ahead of the 200 HMA at 1.1458) and Usd/Jpy continuing to pivot around 110.50 (albeit Eur/Jpy also capped circa 126.50 and under its 200 HMA of 126.82).

In commodities, WTI (Unch) and Brent (+0.4%) trade mixed, with the former eyeing USD 66/bbl to the upside while the latter straddling above USD 72.00/bbl. News flow for crude was light over the weekend, although Iran expressed opposition to Saudi Arabia’s willingness to make up for any shortfall that could arise from US sanctions, in which it told OPEC that no country is allowed to take over the share of other members for production and exports of oil under any circumstances. Elsewhere, gold (+0.3%) is in the green as it crawls closer to the USD 1190/oz level. London copper rose 1% this morning as hopes for US-Sino trade talks buoyed risk appetite after reports suggested China and Washington are to hold low-level trade talks on August 21st and 22nd, ahead of the new US tariffs on USD 16bln of Chinese goods take effect. UK union confirmed the offshore oil & gas platform strike has begun at the three platforms Alwyn, Elgin and Dunbar. China are said to have shifted to Iranian tankers to keep oil flowing amid US sanctions.

US Event Calendar

• 11am: Fed’s Bostic Speaks on U.S. Economic Outlook in Tennessee

DB’s Jim Reid concludes the overnight wrap

This is a good opportunity to recap where markets stand with regards to Turkey after a turbulent 10 days. After markets closed on Friday, both S&P and Moody’s cut Turkey’s credit rating deeper into HY territory (to B+ and Ba3 respectively), citing the weaker currency, current account deficit, and high inflation as the principle risks. S&P also said that they forecast a recession next year. Meanwhile on Sunday, Qatar’s central bank said that it has signed a currency swap agreement with Turkey’s central bank to provide liquidity and support to help financial stability. This morning in Asia the Lira is chopping and changing either side of flat but has just spiked back into positive territory as we type and follows the -3.15% fall on Friday.

After the dramatic price action in Turkish assets 10 days ago, it’s worth recapping how domestic assets performed last week. It felt like they rebounded well to the previous Friday’s capitulation but the reality was that the Lira opened down nearly 12% last Monday and although it rallied hard after this over the week, as a whole the Lira ‘only’ rose +6.45%. Elsewhere Government bond yields traded mostly flat on the week, with 10-year USD and local yields down 3 and 1  basis point, respectively. Local yields are still over 10 percentage points higher this year though, and 5-year CDS spreads rose 63 basis points on the week to a new nineyear high. So with the Lira consolidating the market seems to be pricing some stabilisation in the external position for now, but the risk of a full-scale crisis is still elevated with asset prices at these levels. This week we could easily see some big spikes on any new news due to thin markets as Turkey has public holidays from Tuesday to Friday.

This morning in Asia, markets are trading mixed with the Hang Seng (+0.90%), Kospi (+0.09%) and Shanghai Comp. (+0.10%) modestly up while the Nikkei is down -0.15%. Meanwhile the Chinese Yuan is c0.4% up and on track to be stronger for the third day while futures on the S&P are marginally down. Elsewhere the US congress appears on track to avoid a potential government shutdown next month as White House Budget Director Mulvaney told Fox News Sunday that “all signs are good that we’re going to actually get some spending bills passed before the end of the fiscal year”.

Turning to this week’s highlights now. Datawise it’s relatively sparse with the flash PMIs across the globe on Thursday being the focal point. Elsewhere the minutes from the recent Fed and ECB meetings will be released on Wednesday and Thursday respectively and to cap off the week we have the annual Jackson Hole central banking symposium as we move into this coming weekend with Mr Powell speaking on Friday. Occasionally this get-together offers up the signalling of a major policy shift but there’s no indication that it will this year but it is still worth watching nevertheless. We would also expect to see plenty of headlines as we approach the restarting of US/China trade talks towards the end of the month.

Ahead of this in US trading on Friday, markets were trading pretty flat amid thin summer volumes until the WSJ reported that the US and China are making progress on trade negotiations. The headlines did not contain any substantive details, but did suggest that negotiators aim for a meeting between Trump and Xi in November. Risk assets received a boost, with the S&P 500 and Dow Jones indexes closing 0.33% and 0.43% higher, respectively. The offshore yuan also appreciated 0.39% against the dollar in response, while US fixed income sold off slightly on the news, with 10-year Treasury yields retracing a 2.4 bps intraday rally to close 0.6 bps lower and CDX IG tightened 1.2 bps off their intraday wide. Brent crude oil rallied 0.56% but still lost 1.35% on the week, and it remains 9.58% lower since the end of June.

European markets had already closed before the risk-positive move accelerated into the New York close, with 10-year German bund yields rallying 1.3 basis points and peripheral spreads widening slightly. Italy 10-year yields ticked 0.4 bps higher and were 12.9bps wider on the week. The Euro Stoxx index retreated -0.10%, with banks shedding -0.76%.

On the subject of Italy, it doesn’t feel like we’ve heard the last of last week’s bridge tragedy. The political and budget consequences are still resonating. One side impact has been in credit markets. Indeed on Friday, Michal in my team published a report “Macro Credit Sensitivity to the Atlantia Risk”, exploring the impact of the sudden idiosyncratic stress in the Atlantia/Autostrade credit on relevant bond and CDS indices, including macro credit curves and the magnitude of  a potential fallen-angel technical pressure. He notes that there is also some uncertainty about the reaction of the ECB given this is a CSPP-eligible credit with 14 Atlantia/Autostrade bonds in the CSPP portfolio and the ECB’s history of selling the distressed Steinhoff bond. You can download the full report here.

Back to Friday and economic data was mostly strong, with the July US leading indicator up 0.6% mom, a rate only exceeded three times in the last four years. The leading indicator correlates with industrial production, and signals healthy growth in the third quarter. Separately, the August University of Michigan consumer sentiment index surprisingly fell to its lowest level since last September. Consumers notably downgraded their assessments of buying conditions of durable goods, vehicles, and houses, citing higher prices. While not necessarily positive for the consumer spending outlook, the survey could signal growing inflation pressures as the US economy continues to grow above potential. Following the above, the NY Fed’s estimate of 3Q GDP edged down to 2.4% saar (vs. 2.6% previous). In Europe, the July current account balance printed at €23.5 billion, marginally higher than June. Final July CPI was confirmed at 2.1% yoy headline and 1.1% yoy core

Today, in Europe, we get Germany’s July PPI in the morning along with release of the June construction output for the euro area. There are no data releases of note in the US. Away from data, the Fed’s Bostic will speak on the U.S.  economic outlook in Tennessee.

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An unknown gunman fired several gunshots from a passing vehicle at the US embassy in the Turkish capital, Ankara, on Monday, hitting a window in a security cabin but causing no casualties, police and broadcaster CNN Turk reported. The attack has coincided with a deepening row between Ankara and Washington over the trial of a U.S. pastor in Turkey.

A police officer told Reuters at the scene the drive-by shooting occurred around 5 a.m. (0200 GMT) and that nobody was hurt. The embassy was closed for a weeklong public holiday to mark the Islamic Eid al-Adha festival.

Broadcaster Haberturk showed police teams inspecting one of the entrances to the embassy and apparent damage caused by a gunshot could be seen in one window. It said empty cartridges were found at the scene.

#BREAKING: Shots fired at the US Embassy in Ankara #Turkey, targeting the security guards booth pic.twitter.com/Zg5VJHyB5M

— Amichai Stein (@AmichaiStein1) August 20, 2018

Commenting on the shooting, an Erdogan spokesman said that the shooting at the US embassy was a clear attempt to create chaos.

Police teams were searching for the assailants, who fled in a white car after the attack, CNN Turk said. Four or five gunshots were heard, it said.

The U.S. embassy in Ankara and the consulate in Istanbul have been the targets of attacks by militants and have faced numerous security threats in the past.

Separately, in the latest diplomatic escalation between the US and Turkey, the WSJ reported , citing a White House official, that the Trump administration has “rejected an effort by Turkey to tie the release of a U.S. pastor with relief for a major Turkish bank facing billions of dollars in U.S. fines,” and has told Ankara other issues are off the table until the minister is freed. The jailing of Andrew Brunson triggered the worst crisis between the two countries in decades and helped push the Turkish currency to record lows in recent months.

The Trump administration wants Turkey to release Brunson and other citizens it holds on disputed terrorism charges unconditionally, as well as three Turkish nationals who work for the U.S. government.

“A real NATO ally wouldn’t have arrested Brunson in the first place,” the senior White House official said, referring to Turkey’s membership in the North Atlantic Treaty Organization.

Turkey, seeking a gesture in exchange, asked the U.S. to drop an investigation into Halkbank , which is facing potentially crippling fines for allegedly violating U.S. sanctions on Iran. However, the White House official told the WSJ that the U.S. made clear to Turkey that areas of dispute between the two nations, including the fines Halkbank faces, won’t be discussed until Mr. Brunson has been released.

The U.S. and Turkey have been in prolonged negotiations over a major fine against Halkbank, but the talks stalled. Halkbank is also facing further investigation in the U.S.

Halkbank recently complied with a subpoena request from the U.S. Treasury’s Office of Foreign Assets and Control, but its response was deemed insufficient, the White House official said. Washington has told Ankara that Halkbank must comply properly with the U.S. legal process before any discussions about relief could be entertained, the official said.

The Trump administration imposed sanctions against two top Turkish officials earlier this month, and Treasury Secretary Steven Mnuchin said the U.S. was prepared to take tougher steps. The rejection of a possible trade sets the stage for the U.S. to impose another round of penalties against Ankara as soon as this week.

Following the shooting, together with the WSJ report of the news of the US hardline negotiating stance, the Turkish Lira slumped against the dollar despite the weeklong Turkish holiday, and was the worst performing currency against the dollar in today’s session.

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