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Frequent readers will recall that it was Andrew Lapthorne’s revelation back in late 2015, which was behind the following chart, indicating that virtually all net debt issued this century has gone for one thing: to fund buybacks, i.e. wealth transfers from bondholders to shareholders.

Now, in a follow up note as the increasingly politically-charged topic of record (projected) buybacks…

… which over the past few days has once again made the financial media rounds (WSJ: “Record Buybacks Help Steady Wobbly Market“; Barron’s “Why the Buyback Boom Is Bullish for Investors“; ZH: “This Is What The Slow-Motion LBO Of The Stock Market Looks Like“), Lapthorne reminds his readers that “we are anti-buybacks for the simple reason that while the theory is sound, in practice they are hugely inefficient.” And as Lapthorne explained last year, “typically it is the weakest not the strongest businesses that buyback”, which if accurate raises big question markets about some of the most lauded companies in the S&P500:

Lapthorne is also against buybacks because, as he often notes, “there is also a strong tendency to use debt rather than spare cash, which has led to a dangerous build up in US leverage“, and he is right: see the top chart for evidence.

But have buybacks really helped stocks outperform the overall market? As we noted over the weekend, according to WSJ calculations the answer is yes as “of the 20 S&P 500 companies that spent the most on buybacks over the first quarter, nearly three-quarters have outperformed the index so far this year. The group has risen an average of 5.2% in 2018, compared with the S&P 500’s 1.9% gain.” Lapthorne is not so sure, and writes that while “much has been made of the surge in repurchases, which leapt 20%+ in the last quarter as companies took advantage of repatriated cash and tax cuts to increase their buyback programs” a more nuanced look reveals something surprising.

Of course, the S&P500 is up over 20% over the last year so 20%+ is just keeping up with market prices, but newswires are still full of glowing articles proclaiming companies that bought back in Q1 outperformed and have helped prop up the equity market. We find differently. When measured as a % of market capitalisation, businesses that buy back the most of their market cap underperformed – albeit not significantly so.

Wait, but if buybacks did not have a direct impact on outstanding shares, what were they used for? And here another stunning revelation by Lapthorne: “it looks like the bulk of last quarter’s repurchases went on stock options (aka wages).”

We recognise that calculating the stock option effect is an educated guess as we look at the amount repurchased versus the actual reduction in the share count and assume the difference is the option issuance effect (though issuance can be for other reasons).

The SocGen strategist’s conclusion: “looking at the table below it appears as if buybacks have indeed gone to pay higher wages, but we suspect not in the way policymakers hand in mind.“

Well, at least someone is getting rich from Trump tax reform, too bad it’s the opposite of the middle class that was supposed to benefit.

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The Israeli military continued its violent repression of Palestinian protesters on Monday when soldiers once again gunned down unarmed demonstrators whom it claimed were trying to penetrate the border fence separating Israel from the Gaza Strip.

According to Italian newspaper Il Sole 24 Ore, Israeli soldiers said they were “provoked into violence” when small groups of Palestinians began throwing stones at IDF soldiers from the other side of the border fence. The soldiers responded by gunning down demonstrators; by the time the demonstrations had quieted down, at least 28 Palestinians had been killed, and another 600 had been wounded, according to the Hamas-controlled Health Ministry.

Hamas-controlled Health Ministry reports 25 killed during #Gaza protests

— Michael A. Horowitz (@michaelh992) May 14, 2018

The Wall Street Journal reported that a 12-year-old and a 14-year-old had been counted among the dead.

At least 10,000 Palestinians had gathered early Monday local time along more than 10 locations along the border fence, which is one of several closed borders that has effectively cut off Gaza from the rest of the world (though Hamas has been known to dig tunnels to help people move in and out of the territory), Il Sole 24 Ore reported.

The international community has widely condemned President Trump’s decision to move the US embassy to Jerusalem (though, as Trump has correctly pointed out, every US president since at least Bill Clinton had promised to move the embassy). The UK reiterated Monday that it doesn’t intend to move its embassy, adding that it doesn’t agree with President Trump’s decision.

Since late March, Hamas has been organizing protests along the border fence as part of six weeks of protests meant to demand the long-sought “right of return” for Palestinians who were forced off their land by Jewish settlers during the genesis of the Israeli state.

The IDF has blamed Hamas, which controls Gaza’s government – of instigating the “March of Return” protests with the intention of ultimately breaching the border fence, something that the army says would threaten Israeli towns near the border.

On Sunday, Israel dropped leaflets throughout Gaza warning Palestinians to stay away from the border fence. They also accused Hamas of “stealing your money and using it to dig tunnels at your expense.“

This is what is written on the leaflets pic.twitter.com/s88z1P83QM

— IDF (@IDFSpokesperson) May 14, 2018

Ruptly is broadcasting a live feed from the Gaza side of the border, where demonstrators could still be seen milling about amid clouds of smoke – though the protest had largely subsided.

On Monday, Israel is celebrating its 70th Independence Day. However, among Palestinians – many of whom are descendants of the Arabs who were forced off their land by the Israelis – the anniversary is known as the Nakba, or “catastrophe”.

In a series of tweets, the IDF accused Hamas of leading a “terrorist operation under the cover of the masses throughout Gaza” and said the army would “destroy Hamas infrastructure, which was intended to be used as forward operating bases for terrorist activity today and tomorrow.”

The IDF added that, should Hamas succeed in breaching the border, Palestinians would threaten thousands of Israeli lives.

If Hamas breaches the border thousands of Israelis will be in danger pic.twitter.com/DgMPqAV7YJ

— IDF (@IDFSpokesperson) May 14, 2018

Hamas is leading a terrorist operation under the cover of the masses throughout Gaza. According to Hamas’ declarations & IDF intelligence, Hamas ultimately intends to carry out terror attacks, including a mass infiltration

— IDF (@IDFSpokesperson) May 14, 2018

Around 10,000 violent rioters are currently assembled along the security fence & thousands more are approximately 0.3mi away from the security fence. IDF troops are operating in accordance with standard procedures

— IDF (@IDFSpokesperson) May 14, 2018

Overnight, IDF troops operated along the security fence in order to destroy Hamas infrastructure, which was intended to be used as forward operating bases for terrorist activity today & tomorrow. The operation was a defined & precise effort

— IDF (@IDFSpokesperson) May 14, 2018

The IDF is prepared for a variety of scenarios. IDF commanders are present in the field & are conducting situation assessments. The IDF will act forcefully against any terrorist activity & will operate to prevent attacks against Israelis

— IDF (@IDFSpokesperson) May 14, 2018

Of course, Gaza isn’t the only area where tensions were flaring. As we pointed out yesterday, Israeli police swarmed Jerusalem’s Old City to try and stop radical Jewish settlers from storming Islam’s third-holiest site, the Al-Aqsa Mosque, and raise Israel’s flag over the monument.

“Hundreds of settlers stormed the compound along with a large Israeli police force,” Firas al-Dibis, a Palestinian official who oversees the city’s Islamic religious sites said in a statement.

U.S. Embassy opening in Jerusalem will be covered live on @FoxNews & @FoxBusiness. Lead up to 9:00 A.M. (eastern) event has already begun. A great day for Israel!

— Donald J. Trump (@realDonaldTrump) May 14, 2018

President Trump tweeted Monday morning that the opening of the US embassy in Jerusalem would be covered live on Fox News beginning at 9 am. Treasury Secretary Steven Mnuchin was in Jerusalem for the occasion. In recognition of Trump’s decision to move the embassy despite widespread international outrage, one of Israel’s top football teams announced Sunday night that it would rename itself in honor of President Trump.

According to the Mirror, Beitar Jerusalem said it would now be called Beitar Trump Jerusalem.

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High-profile Wall Street divorces typically provide some entertaining grist for the gossip pages – whether it’s Ken Griffin’s ex-wife demanding alimony payments of $1 million a month (how else would she afford those $500,000 vacations?) or a former Miss Germany suing her hedge-fund hubby for (allegedly) giving her herpes.

To that list, we can now add the story of Bill Gross’s ex-wife Sue Gross, who pilfered a 1932 Picasso purportedly worth some $35 million from the couple’s Laguna Beach, Calif. home.

“Le Repos” by Pablo Picasso, courtesy of Sotheby’s

In the months before their separation, Sue Gross replaced the painting – which had been hanging in the couple’s former bedroom – with a copy that she said she herself had painted a few years prior.

And as it turns out, despite having publicly acknowledged his ex-wife’s fondness for painting replicas of their art collection, her husband never noticed. That, or it just goes to show what the intrinsic value of a Picasso is, when one’s amateur painting wife can draw a replica and the billionaire purchaser will never know…

In any case, the former Mrs. Gross revealed the switcheroo during the couple’s acrimonious divorce proceedings, noting that she had already taken the painting after she successfully secured control of the piece in a coin flip used to divide their assets. 

Upon learning of his wife’s deception, Bill Gross was not pleased: “She stole the damn thing,” Gross fumed, according to the New York Post.

The painting, titled “Le Repos”, is “an intimate portrait” of Picasso’s lover and muse, Marie-Thérèse Walter. The couple had owned the painting since 2006.

In November testimony, the ex-wife readily admitted to swiping the Picasso, citing an e-mail Bill sent to her where he instructed her to “take all the furniture and art that you’d like.”

“And so I did,” she said.

But it wasn’t quite that simple, as testimony revealed the ex-wife’s prowess for both painting and artful deception.

“Well, you didn’t take it and leave an empty spot on the wall, though, did you?” lawyers for Bill Gross asked.

“No,” Sue responded.

“You replaced it with a fake?” the lawyer asked.

“Well, it was a painting I painted,” Sue responded.

“A replication of the Picasso?” the lawyer asked.

“A replication, yes,” Sue answered.

“And it had the Picasso signature and everything, didn’t it?” the lawyer asked.

“Not exactly . . .” she said.

“Whose signature was it? Sue Gross?” the lawyer asked.

“I don’t remember how I signed it. Bill will remember because I painted it at home years ago,” she said.

“Did you tell him that you took the Picasso?” the lawyer asked.

“No. We didn’t speak for a year and a half,” she answered just before the line of questioning turned to a 7-foot, 300-pound rabbit sculpture she also admitted taking.

While Gross admitted that he couldn’t tell the difference between the original and the wife-drawn replica, he said he wasn’t surprised to learn of the original’s fate.

According to court documents, Gross alleged that several other choice items had gone missing from their home shortly after their separation – including a Tiffany clock, 20 bottles of wine, Christmas decorations and a 1,000-pound-statue.

As the Post reminds us, Gross once praised his wife’s painting prowess during one of his famous investor letters from June 2015, when he conceded that his wife was “the artist in the family.”

“[Sue] likes to paint replicas of some of the famous pieces, using an overhead projector to copy the outlines and then just sort of fill in the spaces,” Gross wrote.

“‘Why spend $20 million?’ she’d say – ‘I can paint that one for $75,’ and I must admit that one fabulous Picasso with signature ‘Sue,’ heads the fireplace mantle in our bedroom,” Bill continued, referring to a different artwork.

The original Picasso is expected to sell for between $25 and $35 million during a Sotheby’s auction at 7pm on Monday. It is unclear if Bill will be (double) bidding on it, to assure its return back to his mansion.

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ECB member and Bank of France governor, Francois Villeroy de Galhau, hit the wires this morning insisting that despite sluggish inflation, the governing council is set to stick with the plan and end QE over he near term, citing September or December as the likely cut off point, and warning that the first rate hike could come quarters, not years after the end of asset purchases.  

Absent some political fiasco (ahem Italy), the ECB wants to stick with the current plan of normalisation, to some degree, and on inflation alone he went on to say that the governing council view the slowdown as ‘temporary’ and that it expects a pick up to ‘resume over coming months’.

In light of this, the Bank of France governor deemed it necessary to quantify the meaning of rate hikes ‘well past’ the end of QE, saying that this does not mean years but rather quarters.  Naturally central bankers like to maintain a level of consistency to their guidance – much like we saw with the Bank of England last week and their more optimistic take on the Q1 GDP data, and in the same way, the ECB will be loath to back down from previous assessments, with less caution required on their wording and general rhetoric now that we have seen the EUR moderate levels against the resurgent USD.  

Villeroy’s comments prompted a spike in the Euro, which rose to session, and one week highs, rising as much as 1.990, while 10Y bund yields similarly bounces during the speech, rising as high as 0.60% this morning.

Later on this week we get the final reading of Apr CPI which is expected to remain at 1.2%, but ahead of this, on Tuesday, Q1 GDP is expected to show a 0.4% rise which should alleviate some of the concerns over damp inflation levels.  Nevertheless, this is the ECB’s primary mandate, and they will dance to the tune of asset price stability or not, but at least they will be less concerned over the level of the exchange rate which almost moderated to their forecast level of 1.1800 used as reference late last year.

That said, in a classic case of reflexivity, the ECB is only considering pulling back on QE (and eventually hiking rates) as long as European markets are stable, which they are currently, and surprisingly so in light of the latest political developments in Italy, although the moment the ECB hints QE is over, expect turmoil and chaos to turn, because – as we have shown on several occasions in the past week – the only buys of Italian bonds in the past few years, has been the ECB. Take the ECB out and all that’s left are sellers.

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S&P futures are higher, maintaining overnight gains  as most Asian markets advance with the MSCI Asia Pacific index 0.5% higher, as sentiment was boosted by President Trump unexpected reversal on China telecom giant ZTE over the weekend when in a Sunday morning tweet, Trump vowed to get the Chinese telco back to business in a surprising policy U-turn after the company announced a halt to major operating activities following a US 7-year supply ban order.

Europe was broadly, if modestly, in the red as a result of the EUR rising to session highs just shy of 1.20, the highest in over a week, after the ECB’s Villeroy said the first rate hike could come quarters, not years after the end of asset purchases, while political strains in Italy outweighed optimism over waning global trade tensions. Thanks to the weaker dollar, emerging-market stocks built on their first weekly advance in four weeks.

Elsewhere in Asia, Malaysia’s markets showed only short-lived post-election panic, with the ringgit rebounding from 1% drop while stocks in Kuala Lumpur recover opening losses to gain 0.5% as trade returns after a historic election loss by the ruling Razal-led coalition, its first in over 60 years.

Also in Asia, the PBOC conducted a 156BN yuan MLF operation to boost liquidity helping H shares rally 1.5%. And speaking of China, the onshore yuan surged the most in almost three weeks against the trade-weighted basket of currencies, as the central bank boosted its daily reference rate for a second day, pushing up the yuan fixing by 0.28% to 6.3345 per dollar, extending the two-day increase to 0.66%. The Bloomberg replica of the CFETS RMB Index, which tracks the yuan against 24 exchange rates, jumped 0.18%, the most since April 24, to 97.77; According to Bloomberg that was the highest level since China adjusted the basket in Jan. 2017.

Emerging markets currencies were stronger as the Bloomberg dollar index softened marginally, with the euro and pound rising to the top of G-10 scoreboard. The Bloomberg Dollar Spot Index fell 0.2% to hover near Friday’s one-week low. The euro gained 0.4% to touch $1.1990, the strongest in more than a week, while sterling gained as much as 0.4% to $1.3597 after advancing 0.2% on Friday. The Swiss franc climbed 0.1% to $0.9992, staying close to Friday’s one- week high.

Treasuries are weaker, with the firmer with 10-year yield rising from 2.96% at the European open to a session high of 2.985%, while Australian and Japanese government bonds grind sideways.  European bonds edge higher after ECB’s Villeroy says the first rate hike could come “some quarters, but not years,” after policy makers end their bond-buying program.

While the EUR strengthened, there was some modest selling for Italian government bonds following late Sunday’s news that the 5-Star and League have reached an agreement on forming the first anti-establishment government, although so far the move remains largely contained and is far less troubling than the capitulation some had expected with Italy faced with a populist coalition.

In a curious rate arb move, Bloomberg reports that the U.K.’s biggest bond-mutual fund is shifting money to the other side of the Atlantic as the interest-rate gap between Europe and the U.S. widens to record levels. M&G Ltd. has boosted U.S. holdings in its 23.4 billion-pound ($32 billion) Optimal Income Fund this year to more than a third. To cushion inflation risks and the impact of rising U.S. rates, it’s gorging on short-term Treasury bills and paring credit risk.

Oil prices are modestly lower, subdued on continued profit taking with WTI crude below the USD 71.00/bbl level, while some reports also noting increased efforts by European nations to salvage the Iranian nuclear deal and will be meeting with Iranian Foreign Minister Zarif tomorrow. Dalian iron ore strengthens for second day. Elsewhere, gold trades flat with marginal gains observed on the back of a subdued USD, while copper (-0.5%) is lower amid reports Japanese miners plan to boost Chilean copper output this year. Aluminium prices eased for a third session as markets continue to correct following the rally last month supported by US sanctions against Rusal. Meanwhile, Chinese iron  ore prices extended gains, supported by a firm demand outlook and a decline in the metal’s inventories at ports

ECB Executive Board member Sabine Lautenschlaeger, chief economist Peter Praet, Executive Board member Benoit Coeure speak

Bulletin Headline Summary from RanSquawk

• The biggest DXY currency components are leading broad gains vs the Dollar
• Italian President Mattarella to hold government formation talks with 5 Star at 16:30 (15:30 BST), with League at 18:00 (17:00 BST)
• Looking ahead, highlights include the OPEC Monthly Report (05:40 CDT/11:40 BST), Fed’s, Bullard, ECB’s Praet, Lautenschlaeger, Coeure

Market Snapshot

• S&P 500 futures up 0.2% to 2,736.25
• STOXX Europe 600 down 0.06% to 392.16
• MSCI Asia Pacific up 0.5% to 176.48
• MSCI Asia Pacific ex Japan up 0.5% to 576.26
• Nikkei up 0.5% to 22,865.86
• Topix up 0.6% to 1,805.92
• Hang Seng Index up 1.4% to 31,541.08
• Shanghai Composite up 0.3% to 3,174.03
• Sensex down 0.1% to 35,488.55
• Australia S&P/ASX 200 up 0.3% to 6,135.30
• Kospi down 0.06% to 2,476.11
• German 10Y yield rose 2.3 bps to 0.582%
• Euro up 0.3% to $1.1974
• Italian 10Y yield fell 6.2 bps to 1.616%
• Spanish 10Y yield rose 3.0 bps to 1.303%
• Brent futures down 0.1% at $77.04/bbl
• Gold spot up 0.1% at $1,320.94
• U.S. Dollar Index down 0.2% to 92.34

Top Overnight News

• In a sign that the U.S. may be open to easing trade tensions ahead of a meeting in Washington with Chinese officials this week, President Trump made a major reversal on an earlier move to block telecom equipment maker ZTE Corp. from its American suppliers
• Chinese regulators have restarted their review of Qualcomm Inc.’s application to acquire NXP Semiconductors NV after having shelved the work earlier in reaction to the growing trade tensions with the U.S., according to people familiar with the matter
• Italy’s populist duo has all but completed a governing plan that includes a flat tax as low as 15%, a guaranteed income for the poor and a lower retirement age as they prepare to seek a green light to form an administration from the president on Monday
• U.K. Prime Minister Theresa May faces a crunch week for her leadership and Brexit plan, with ministers and backbenchers in her Conservative Party feuding over Britain’s future ties to the European Union. May issued a plea for unity in an opinion piece in the Sunday Times newspaper, calling on Brexiters to “trust me to deliver.” “I will not let you down,” she wrote
• One of Trump’s most contentious foreign policy projects, the inauguration of a U.S. embassy in Jerusalem, will be carried out Monday with the president addressing the ceremony via video. His daughter and son-in-law, Ivanka Trump and Jared Kushner, Treasury Secretary Steven Mnuchin, and deputy Secretary of State John Sullivan are among the U.S. delegation
• Fed’s Mester (voter): recent move higher in PCE inflation may not last due to base effects; Fed may eventually need to raise federal funds above its longer-run neutral rate
• ECB’s Villeroy: ECB could give additional guidance on timing of first hike; current “well past” language means at least some quarters, but not years
• German Construction sector agrees wage hike of roughly 6% for over 800,000 workers; strongest wage deal sealed so far this year: Reuters
• U.S. sells three-, six-month bills; St. Louis Fed President James Bullard speaks at a blockchain technology conference

Asian equity markets began the week mostly positive but with trade relatively rangebound following Friday’s mixed performance on Wall St, where stocks saw an indecisive finish to their best week since March. In addition, US equity futures also received a modest uplift after US President Trump provided a lifeline for ZTE over the weekend as he vowed to get the Chinese telco back to business in a surprising policy U-turn after the Co. had announced a halt to major operating activities following a US 7-year supply ban order. ASX 200 (+0.3%) was positive with M&A activity underpinning Healthscope, while Nikkei 225 (+0.5%) was also in the green as
earnings remained in focus with Shiseido among the index leaders on record Q1 sales. Shanghai Comp. (+0.3%) and Hang Seng (+1.4%) conformed to the broad risk appetite as trade concerns eased following the ZTE policy reversal by Trump and as participants also reacted to better than expected lending data. Elsewhere, KLCI (+0.4%) saw an early slump with losses of over 2% on reopen from the surprise election result, but then pared all the weakness as the fears of a new government gradually subsided. Finally, 10yr JGBs were flat amid similar price action in T-notes and with demand sapped amid gains in stocks, while downside was also counterbalanced by the BoJ’s presence in the market for a respectable JPY 1.03tln of JGBs in 1yr-10yr maturities. US President Trump said he instructed the US Commerce Department to assist Chinese telecoms firm ZTE to get back into business which is seen as a U-turn on the firm which was previously placed under a 7-year supply ban by the US.

Top Asian News

• ZTE China Suppliers Jump After Trump Provides Lifeline to Firm
• Nissan Forecast Misses Estimates on Yen, Slower U.S. Demand
• Hong Kong’s Most Popular ETF Is Short the Whole Stock Market
• Sumitomo Mitsui Sees Lower Profit as Negative Rates Persist

European equities are currently trading with no firm directions (Euro Stoxx 50 -0.1%) with the SMI the outperforming bourse (+0.3%) aided by Novartis (+0.8%) and Roche (+1.2%) both receiving positive news from the FDA pertaining to drug expansions. The modestly underperforming bourse is currently the FTSE MIB (-0.5%) with traders mindful of upcoming developments on the Italian Government formation. The automotive sector is being weighed on following the US proposition of 20% tariffs of foreign cars imported to the US. Further effects in European equities from US actions has seen the healthcare sector showing positivity in the wake of the Trump administration releasing a (vague) blueprint for drug pricing; and Ericsson and Nokia down on Trump’s tweet that he will help the penalized ZTE. In stock specifics, strength is being seen for IWG (+21.2%) on the news that the co. has received separate takeover  proposals from private equity groups Starwood, Lone Star and TDR Capital, raising prospects of a bidding war.

Top European News

• Norway’s Olsen Says Outlook Indicates Soon Right to Raise Rates
• TPG Is Said to Mull Sale of U.K.’s Poundworld: Sky News
• Germany Seeks Out Russia, Ukraine to Ease Nord Stream 2 Rift
• Nordea Says EUR/SEK Above 10 ‘Is Here to Stay’ Due to Riksbank
• Airbus CFO Wilhelm to Leave in 2019 Along With CEO Enders

In FX, the biggest DXY currency components are leading broad gains vs the Dollar on a combination of supportive fundamentals (relatively hawkish rhetoric from ECB’s Villeroy and further progress towards an Italian coalition Government in the case of the single currency), and a more positive technical landscape after recent sharp declines. It appears that Eur/Usd and Cable have both formed fairly solid bases circa 1.1820 and 1.3460 respectively, and dip-buyers/fresh longs are looking for extended recoveries towards 1.2000 and 1.3600 with stops said to be poised around 1.1980 and 1.3610. Market contacts also note that chart resistance in Eur/Jpy has been breached at 130.86, with bulls eyeing a 50% Fib next (131.86 vs 131.20 top so far). CAD/AUD/CHF:  All mildly firmer vs the  aforementioned depressed Greenback overall (index still sub-92.500), with the Loonie still benefiting from latest NAFTA reports suggesting a deal could be forthcoming by Thursday and Usd/Cad retesting bids/support ahead of 1.2750. Aud/Usd is maintaining recovery momentum around 0.7550 amidst less against on the global trade front after US President Trump’s volte-face on China’s ZTE, and with cross Aud/Nzd also a prop (over 1.0850 and edging towards the 200 DMA at 108.81). Usd/Chf is holding just below parity, prompting more pledges from the SNB to keep rates negative and active in terms of direct FX intervention to curb Franc demand/appreciation. NZD/JPY: The G10/major laggards and bucking the overall trend with losses vs the Usd, albeit modest, as the Kiwi hovers near 0.6950 and Usd/Jpy rebounds from the low 109.00 area to 109.50.

Top Asian News

• ZTE China Suppliers Jump After Trump Provides Lifeline to Firm
• Nissan Forecast Misses Estimates on Yen, Slower U.S. Demand
• Hong Kong’s Most Popular ETF Is Short the Whole Stock Market
• Sumitomo Mitsui Sees Lower Profit as Negative Rates Persist

In commdities, oil prices are lower, subdued on continued profit taking with WTI crude below the USD 71.00/bbl level, while some reports also noting increased efforts by European nations to salvage the Iranian nuclear deal and will be meeting with Iranian Foreign Minister Zarif tomorrow. Elsewhere, gold trades flat with marginal gains observed on the back of a subdued USD, while copper (-0.5%) is lower amid reports Japanese miners plan to boost Chilean copper output this year. Aluminium prices eased for a third session as markets continue to correct following the rally last month supported by US sanctions against Rusal. Meanwhile, Chinese iron ore prices extended gains, supported by a firm demand outlook and a decline in the metal’s inventories at ports.

US Event Calendar

• May 14-May 18: Mortgage Delinquencies, prior 5.17%
• May 14-May 18: MBA Mortgage Foreclosures, prior 1.19%
• 2:45am: Fed’s Mester Speaks at Bank of France Conference
• 9:40am: Fed’s Bullard Speaks at Crypto Conference in New York

DB’s Jim Reid concludes the overnight wrap

At first glance the week looks a bit less hectic than my weekend with the US retail sales number and the monthly China data dump tomorrow being the data highlights. We do have a busy Fedspeak calendar though and expect a lot of focus on the recent slightly weaker-than-expected inflation numbers. Meanwhile trade talks might come back to the fore with China’s Vice Premier traveling to Washington to continue talks with Treasury Secretary Steven Mnuchin. There’s also a few Brexit meetings to flag and Iran, North Korea and the Oil price will no doubt stay on the radar. The full week ahead preview is at the end today.

We start this morning with Italy, where we seem to be inching closer to a new government. The leaders from the two largest parties are expected to meet the head of state later today and “report back on everything” they had negotiated over the weekend. Earlier, La Repubblica reported that the Leaders of the 5SM (Luigi Di Maio) and League party (Matteo Salvini) have decided that neither should be Premier of the new government, but did not elaborate on a potential candidate.

According to Bloomberg and newspaper Repubblica, measures agreed in a draft government program include: a citizen’s income for the poor, a flat tax at 15% (20% for higher earners), renegotiating EU accords and complying with EU limits on public spending. However, there are no details on how they will fund these proposals but at first glance this seems like a lot of potential spending promises.

Now turning to other headlines over the weekend. On trade, President Trump seemed to partly reverse the sanctions on China’s number 2 telco company (ZTE) as he and China’s President Xi are working together to give ZTE “a way to get back into business, fast”. He added that the “(US) Commerce Department has been instructed to get it done”. In geopolitics, North Korea said it will dismantle its nuclear test sites within two weeks and invited international  journalists to watch. On the other side, the US National Security adviser Bolton said “we’re prepared to open the trade and investment with North Korea as soon as we can” while the Secretary of State Pompeo noted that NK will have access to US capital if “complete, verifiable, irreversible denuclearisation” occurs. Then finally on Iran, Security adviser Mr Bolton warned that US sanctions on European companies that continue to maintain business dealings with Iran were “possible”, while Mr Pompeo was hopeful that the US and its allies can strike a new nuclear deal with Iran.

This morning in Asia, markets are broadly higher, with the Hang Seng (+1.28%), Nikkei (+0.40%) and Shanghai Comp. (+0.55%) all up while the Kospi is slightly lower. Elsewhere, the Malaysian ringgit pared back losses to be broadly flat vs. the USD as markets resumed trading following Mahathir’s historic election victory last week. Datawise, Japan’s April PPI eased 0.1ppt mom to an in line print of 2.0% yoy.

Now briefly recapping markets from Friday. The Stoxx 600 edged up +0.11% while the S&P rose +0.17%, supported by the telco sector as Verizon jumped 3.0% after announcing a buyback of its debt securities. In government bonds, core 10y bond yields were slightly higher (UST +0.8bp; Bunds +0.2bp; Gilts  +1.2bp) while peripherals outperformed. The yield on 10y Italian BTPs fell -6.3bp, reversing its prior losses on Thursday. In FX, the US dollar index was marginally higher (+0.02%), while the Euro and Sterling rose 0.23% and 0.17% respectively. Lastly, WTI oil fell for the first time in three days (-0.92% to $70.70/bbl) and precious metals softened slightly (Gold -0.17%; Silver -0.31%) while other base metals were little changed.

Now turning to the Fed Bullard’s views on the yield curve. He noted that “…the yield curve inversion is getting close to crunch time” and that we “could be talking about it in September”, although he does not think it’s likely to happen that fast, but it will be an issue next year. On inflation, he said “we’re not in any danger of any breakout in inflation any time over the forecast horizon” and he basically has “no problem with some overshooting of the (2%) target”. On rates, he believes the Fed does not need to raise rates further, in part as rates have reached its neutral setting and “it’s not necessary to change the policy rate to keep inflation at target”.

Ahead of more Brexit talks this week, the UK’s PM May wrote in the Sunday Times newspaper to reiterate her calls for unity over Brexit, she noted that “you can trust me to deliver….the path I’m setting out is the path to deliver the Brexit people voted for”. So lots bubbling along until we get more clarity on the issue.

Before we take a look at this week’s calendar, we wrap up with other data releases from Friday. In the US, the May University of Michigan consumer sentiment index was steady mom and slightly above consensus at 98.8 (vs. 98.3 expected). In the details, the current conditions index edged down 1.6pts mom to 113.3, while the expectations index firmed 1.1pts mom to 89.5. The 1y inflation expectation edged up 0.1ppt mom to 2.8% while the 5-10y inflation expectation was steady mom at 2.5%. Elsewhere, import prices rose 0.3% mom in April while exports grew 0.6% mom. Following the above, the NY Fed’s Nowcast measure of Q2 GDP growth ended the week unchanged at 3.0% saar, while the Atlanta Fed estimate is 4.0% saar. In Europe, the final reading of Spain’s April inflation was unrevised at 1.1% yoy.

On Monday’s Calendar, central bank speak will be the focus of today with the Fed’s Mester and ECB’s Villeroy both speaking in the morning in Paris, followed by the ECB’s Lautenschlaeger, Praet and Coeure later in the day. Brexit developments could also come back to the forefront with the EU’s Barnier due to brief European affairs ministers on the status of talks. Datawise the only release of note is the Bank of France industry sentiment print for April. Senior officials from Euro area finance ministries are also due to meet to discuss the latest Greek bailout review.

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Steve Eisman, who correctly predicted the collapse of subprime mortgages before the 2008 financial crisis and was subsequently popularized in the move The Big Short, appears to have had a change of heart on the banking sector. Recall that just two months ago, Eisman explained to CNBC that he was bullish on bank stocks, claiming that the financial “industry is so well-capitalized today that I don’t see any problems emerging for a very long time … I sleep very well. I just don’t see any systemic risk on the horizon.”

And while he still believes the “financial system in the US is safe”, he is far less optimistic on what is going on abroad.

Speaking in an interview with Bloomberg TV, Eisman said that “Deutsche Bank is a problem bank,” has “real profitability issues,” and predicted that it will probably have to raise capital next year; he refused to disclose however if he was short shares.

Eisman’s bearish turn on Germany’s largest bank comes just weeks after DB’s new CEO announced that as part of a major restructuring and cost-cutting, the bank would scale back U.S. rates sales and trading, reduce the corporate finance business in the U.S. and Asia and review its global equities business. The measures will lead to a “significant reduction” in the workforce this year. Commenting on this, Eisman said the firm has to “shrink dramatically.”

The good news is that while Deutsche’s return on equity trails that of its main competitors, the bank’s capital cushion is comparatively strong with a Tier 1 equity capital ratio of 13.4%, above the average among its largest peers. That however has not stopped Deutsche shares from slumping 34% in the past 12 months, the second-worst performance on the MSCI Euro index and far more than the 4.9% decline in the Bloomberg Europe 500 Banks index in the same period.

It wasn’t just Deutsche however, as Eisman also recommended shorting Canadian financial companies, saying “Canada is ok, but Canada will have some issues with their housing market”, and reiterated that he is still short Wells Fargo.

Eisman, who was played by Steve Carell in the movie “The Big Short”, is most famous for his early bets against the housing market before the 2008 crisis. At the time, Eisman worked at FrontPoint Partners LLC, and joined Neuberger Berman after closing his hedge fund Emrys Partners in 2014.

Eisman also said that he doesn’t currently see opportunity in bond market, and predicted that long-short investing is making a comeback as volatility is here to stay; Eisman explicitly refused to comment on the financial situation in China.

His Bloomberg interview is below.

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Authored by Tsvetana Paraskova via OilPrice.com,

In the days following the U.S. withdrawal from the Iran nuclear deal, Iran’s European customers continue to buy Iranian oil and are in no immediate rush to replace volumes, but some refiners and traders have flagged financing issues as having the potential stop to crude trade with Iran.

After the U.S. walked out of the Iran deal, the U.S. will be targeting Iran’s crude oil sales, and sanctions previously lifted under the deal will be re-imposed following a 180-day wind-down period, the U.S. Treasury said.

European buyers are not in an immediate rush to replace Iranian supplies due to that wind-down period, with sanctions expected to kick in in November. All buyers report that they are complying and will comply with any sanctions imposed on Iranian trade, and some of them expect that banking issues will arise from the sanctions, such as the availability of trade finance.

Marta Llorente, a spokeswoman for Spanish oil company Cepsa, one of Iran’s customers in Europe, told Reuters:

“At this moment, our trading activity is business as usual.”

Italy’s Eni also continues to buy Iranian oil and it is buying 2 million barrels of oil per month from Iran under a deal that expires at the end of the year.

“We’re doing nothing,” said the head of trading at another European customer of Iran’s. “It’s wait and see. If we’re forced to reduce, we will. Iranian is not the only crude,” the manager told Reuters.

Sources at trading companies tell Reuters that “It looks like you can still go on for six months,” but traders expect the banks to be the key in determining whether Iran’s customers in Europe can buy oil, and even if the U.S. grants waivers to European buyers, whether they will need to reduce their volumes during the wind-down period.

Outside Europe, one of Iran’s single biggest customers—China—has already reassured Tehran that it would continue to import its crude.

Amidst the still ‘wait-and-see’ mode in Europe—especially when financing crude oil trade is concerned—Iran says that its oil exports will not be disrupted by the re-imposition of sanctions.

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According to the Warrior Maven, the United States Army is scrambling to send its newest Stryker MSL (Maneuver Short-range air defense Launcher) equipped with AGM-114 Hellfire missiles and Raytheon Stinger short-range air defense missiles to Europe to counter the Russian regional threat.

Air and missile defense is one of the top modernization priorities for the Army. “We are looking for a rapid solution for the near-term fight,” Maj. Gen. John Ferarri, Director, Program Analysis and Evaluation, told Warrior Maven in an interview.

For the first time since the Cold war, the Army is speeding up the development of new Short Range Air Defense (SHORAD) capabilities in Europe by the end of 2018. The program is likely to encompass the Stryker MSL, which could deploy its first armored vehicles to Europe by 2020.

General Dynamics Land Systems presents a short promotional video of the Stryker MSL SHORAD.

It is likely that the Stryker MSLs could be assigned ” to the permanently forward-stationed 2nd Cavalry Regiment, which is already the first in U.S. Army Europe to have received 80 new Stryker ICVs armed with the 30mm cannon, and additional 87 Strykers with the CROWS-J Javelin system, both of which were engineered to help fill that SHORAD gap,” said Army Recognition.

Stryker MSL (Maneuver Short-range air defense Launcher) at White Sands Missile Range. (Source: General Dynamics)

In March, we reported how the 2nd Cavalry Regiment was actively testing a high-tech laser weapon in Europe, called the Mobile High Energy Laser (MEHEL) mounted on the M1126 Stryker armored personnel carrier for SHORAD purposes.

“Given that counterinsurgency tactics have taken center stage during the last 15 years of ground wars in Iraq and Afghanistan,” said the Warrior Maven, the Army now recognizes that increased close-in air Russian threats of cruise missiles and small unmanned aerial vehicles could be a major problem when the next conflict breaks out.

“We are looking for an end to end system that is able to detect and defeat the rotary wing fixed wing and UAS (drone) threat to the maneuvering BCT (Brigade Combat Team),” Col. Charles Worshim, Project Manager for Cruise Missile Defense Systems, told Warrior Maven in an interview.

The Stryker MSL includes a Boeing unmanned turret mounted at the rear of the vehicle; this is where a cargo area replaces the “original infantrymen compartment. The turret is armed with four Longbow Hellfires located on the right side and another pod with four launchers for Raytheon Stinger short-range air defense missile,” said Army Recognition.

Boeing-GDLS STRYKER MSL Ready for US Army “Shoot Off.” (Source: Monch)

Senior military officials believe Boeing and General Dynamics Land Systems could have the first Stryker SHORAD prototype ready by 2019 as a step toward producing 144 initial vehicles.

The Stryker MSL will be the most advanced SHORAD vehicle to meet the Army’s requirements for combating a rapidly emerging threat from enemy unmanned aerial vehicles, rotary wing, and cruise missile threats.

“We atrophied air defense if you think about it. With more near-peer major combat operations threats on the horizon, the need for SHORAD and high-tier weapons like THAAD and PATRIOT comes back to the forefront. This is a key notion of maneuverable SHORAD – if you are going to maneuver you need an air defense capability able to stay up with a formation,” the senior Army official told Warrior Maven in an interview.

The Army is conscious about the exponential rise of inexpensive, unmanned air and land-based drones on the modern battlefield, and is now actively working to field an entire fleet of  Stryker MSLs to counter short-range enemy threats. Judging by the regional deployment in the early 2020s, it seems as the Pentagon is getting ready for a shooting war with Russia. Will the endless war-spending bankrupt America? We will find out shortly…

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