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The headline Philly Fed index spiked, jumping from 23.2 to 34.4 – smashing all analyst expectations (beating the median estimate by almost 8 standard deviations)
Prices Paid drifted lower as did the six-months-forward outlook…
But, New Orders exploded from 18.40 to 40.60 – the highest since March 1973…
But as the chart above shows – 8 months later, the US economy was in recession.
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The last time there were fewer Americans claiming ongoing jobless benefits was 1973… 45 years ago!
And the collapse in continuing jobless claims has accelerated since Trump was elected…
As good as it gets?
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Journalist Ronin Farrow is back with another bombshell report – this time from the person who leaked Michael Cohen’s banking records, detailing “pay for play” type payments from the likes of Novartis and AT&T.
In short: The leaker, law enforcement official, became alarmed after two “suspicious-activity reports” (SARs) filed by Cohen’s bank, First Republic, went missing from a the Treasury Department’s Financial Crimes Enforcement Network (FINCEN) that he leaked the rest.
And instead of going to the Treasury’s Inspector General, or special counsel Robert Mueller, the leaker chose porn star lawyer Michael Avenatti, who published the remaining SARs on Cohen (along with two other men named “Michael Cohen” wrongly included in the disclosure).
The official, who has spent a career in law enforcement, told me, “I have never seen something pulled off the system. . . . That system is a safeguard for the bank. It’s a stockpile of information. When something’s not there that should be, I immediately became concerned.” The official added, “That’s why I came forward.”
The report also refers to two previous suspicious-activity reports, or sars, that the bank had filed, which documented even larger flows of questionable money into Cohen’s account. Those two reports detail more than three million dollars in additional transactions—triple the amount in the report released last week. –New Yorker
Farrow reports that “seven former government officials and other experts familiar with the Treasury Department’s FINCEN database expressed varying levels of concern about the missing reports,” with some speculating that FINCEN may have deliberately restricted access to the reports due to the sensitivity of their content – a move officials say would be “nearly unprecedented.”
As someone who worked at Treasury on anti-money laundering activities, my reaction to this @RonanFarrow story is “holy s**t.” https://t.co/JnG5Aaqw5m
— Daniel W. Drezner (@dandrezner) May 16, 2018
That said, “A record-retention policy on FINCEN’s Web site notes that false documents or those “deemed highly sensitive” and “requiring strict limitations on access” may be transferred out of its master file,” according to Farrow.
Nevertheless, a former prosecutor who spent years working with the fincen database said that she knew of no mechanism for restricting access to sars. She speculated that fincen may have taken the extraordinary step of restricting access “because of the highly sensitive nature of a potential investigation. It may be that someone reached out to fincen to ask to limit disclosure of certain sars related to an investigation, whether it was the special counsel or the Southern District of New York.”
Banks are legally required to file SARs with the Treasury in order to note activity resembling money laundering, fraud or other criminal conduct. Once filed, the reports are routed to a permanent database maintained by FINCEN – searchable by “tens of thousands of law-enforcement and other federal government personnel.”
Of note, they are not proof of criminal activity, however the information they contain can be used in law-enforcement proceedings.
No need to fear that the missing Suspicious Activity Reports (SARs) identified by Ronan Farrow might be destroyed evidence. SARs aren’t evidence, a former federal prosecutor tells me. Bank records are, and Mueller has ‘em.
https://t.co/4OQcjBRNyV— Jonathan Alter (@jonathanalter) May 17, 2018
Cohen opened up the account at First Republic for his company, Essential Consultants, in October 2016 – right before the US election, in order to pay off porn star Stormy Daniels (real name Stephanie Clifford), to keep quiet about an alleged affair she had with President Trump.
First Republic’s compliance officers later began flagging Cohen’s transactions in the account as possible signs of money laundering. Among other potential violations, the documents cite “suspicion concerning the source of funds,” “suspicious EFT/ wire transfers,” “suspicious use of multiple accounts,” and “transaction with no apparent economic, business, or lawful purpose.” (A spokesperson for First Republic Bank declined to comment.)
By January of 2018, First Republic filed three suspicious-activity reports on Cohen’s account – the most recent of which covers the period between September 2017 and January 2018, and included activity totaling nearly one million dollars. It also refers to the two missing reports that made the leaker suspicious, which cover periods prior to September 2017.
Moreover, Cohen’s transfer of the money into his personal accounts caused Morgan Stanley Smith Barney to file their own SAR on Cohen!
A substantial portion of this money seems to have ended up in Cohen’s personal accounts. Morgan Stanley Smith Barney filed a separate sar showing that, during that same three-month period, Cohen set up two accounts with the firm, into which he deposited three checks from his Essential Consultants account, two in the amount of two hundred and fifty thousand dollars and one in the amount of five hundred and five thousand dollars. Morgan Stanley Smith Barney marked those transactions, which added up to more than a million dollars, as possible signs of “bribery or gratuity” and “suspicious use of third-party transactors (straw-man).”
Cohen also apparently lied to First Republic – repeatedly telling them that Essential Consultants would be used for leveraging “his experience in real estate to consult on commercial and residential” deals – for which he said that the transactions would be “modest.” The bank’s compliance officers noted “a significant portion of the target account deposits continue to originate from entities that have no apparent connection to real estate or apparent need to engage Cohen as a real estate consultant.”
David Murray, a former Treasury official focussed on illicit finance, told me, “There are a ton of red flags here. The pattern of activity has indicators that are inherently suspicious, and the volume and source of funds do not match the account profile that was built when the account was opened.”
Pay for play?
Last week’s report by Avenatti details a payment from Cohen’s First Republic account to Demeter Direct, Inc. – a Korean food company on its face, however “a Web site, since taken down, suggested that it was a global consulting firm.”
After the press began scrutinizing Cohen’s accounts, a man listed as Demeter Direct’s C.E.O., Mark Ko, told CNN that he served as an intermediary and translator in Cohen’s dealings with an aviation firm, majority-owned by South Korea’s government, called Korea Aerospace Industries.
First Republic’s SAR on the transaction noted that the aerospace company paid Cohen $150,000 in November, 2017, the same month President Trump visited South Korea, while Korea Aerospace Industries was lobbying for a multibillion-dollar US Air Force contract.
The Korean defense company, partnered with Lockheed Martin to build the T-50A trainer jet in hopes of securing a U.S. Air Force contract worth roughly $16 billion.
Lockheed Martin, the Pentagon’s top weapons supplier, entered the T-50A into the bidding contest. The plane is a version of KAI’s T-50, which is used in South Korea as well as several other U.S. partner nations.
Lockheed told CNBC in a statement, “We had no knowledge of a business relationship between Korea Aerospace Industries and Mr. Cohen, and are not aware of any connection that it may have to the U.S. Air Force Advanced Pilot Training competition.”
The companies are widely expected to win the lucrative contract for the delivery of 350 aircraft. –CNBC
Cohen also used his Essential Consultants account to pay personal expenses, such as his Amex bill, AT&T and Mercedes Benz bills, along with initiation fees and dues to the “Core Club,” a place for socialites to rub elbows described once by the Times as a “portal to power.” Cohen also cut himself several personal checks from his business account of around $100,000, on top of the million he deposited into his Smith Barney accounts.
Russia?
One payment which may be of particular interest to Robert Mueller (who has all of Cohen’s records now) are payments received by a company closely tied to a Russian oligarch close to Putin.
In many cases, the suspicious-activity reports highlight activity of potential interest to ongoing investigations, including that of the special counsel, Robert Mueller. Bank compliance officers noted eight payments from a company called Columbus Nova to Cohen’s account between January and August of 2017, totalling five hundred thousand dollars. The investigators wrote that Columbus Nova’s biggest client is a company controlled by Viktor Vekselberg, whom they described as “reputed to be a longtime ally of Russian President Vladimir Putin.” The report also points out that Andrew Intrater, Vekselberg’s relative and the C.E.O. of Columbus Nova, donated more than three hundred thousand dollars to Trump-related causes.
The report flagged the activity as suspicious “because the CEO’s company transferred substantial funds to the personal attorney of Trump at the same time the CEO reportedly donated substantial funds to Trump’s inauguration fund and joint fundraising committee for Trump’s reelection and the Republican National Committee.”
More banks, more SARs
Several other banks flagged Cohen for suspicious transactions – some of which piece together the reasons for the transactions from news reports, “citing articles from publications including the Wall Street Journal and Vanity Fair about Trump, Russia, and secret election-season payments.” These include the Stormy Daniels payment.
The quiet rebellion of the news junky compliance officers. https://t.co/yrcRqryhl2 pic.twitter.com/EHwxc1KbUq
— southpaw (@nycsouthpaw) May 16, 2018
Another, filed by City National Bank, concerns Elliott Broidy – the former deputy finance chairman for the RNC, who Cohen arranged a $1.6 million payoff to a former Playboy model in late 2017. The woman says Broidy impregnated her, then forced her to get an abortion as part of the deal.
The report notes, “Broidy also owns a private security company, Circinus, which provides services to the U.S. and other governments. The company has hundreds of millions of dollars in contracts with the U.A.E.” Broidy has said that Cohen and another lawyer, Keith Davidson, worked out a deal in which Broidy would pay $1.6 million to a former Playboy model he had impregnated. Broidy appears to have paid both lawyers for arranging the deal. The City National report shows that Broidy funnelled the payments through Real Estate Attorneys’ Group, a legal corporation. Broidy seems to have paid Davidson two hundred thousand dollars, and to have sent three payments, of $62,500 each, to Cohen—one to the Essential Consultants account and two to the account of Michael D. Cohen and Associates.
A rep for Broidy said that the description of the payments was “not correct,” adding that “Mr. Broidy is not going to detail his payments for legal services to Mr. Cohen.”
According to FINCEN, disclosing a SAR is a federal offense which carries harsh penalties including fines of up to $250,000 and five years in prison. The official who leaked to Avenatti says he was aware of the risks, but feared that the missing SARs might be suppressed.
“We’ve accepted this as normal, and this is not normal,” the official said. “Things that stand out as abnormal, like documents being removed from a system, are of grave concern to me.”
When it comes to the potential legal consequences of leaking, the official said “To say that I am terrified right now would be an understatement.”
“This is a terrifying time to be an American, to be in this situation, and to watch all of this unfold.”
To this some would counter: why did he put himself in this position, and why – given the seriousness of the official’s concerns – did he leak to a porn star’s lawyer instead of going straight to Mueller?
As forecast, Avenatti obtained his information through an illegal, CRIMINAL LEAK by someone now identified as a “law enforcement official.” Given this source both knew about bank transactions and had access to a government database, this is highly likely either #SDNY or #Mueller. https://t.co/cuReeYc2qn
— Robert Barnes (@Barnes_Law) May 16, 2018
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Submitted by Bill Blain of Mint Partners
“Fools ignore complexity. Pragmatists suffer it. Geniuses remove it.“
What we got in markets this fine and dandy morning? The clue might be in the weather. Blue skies over London, and the forecast is for a great weekend. Compare and contrast with the snow and storms of just 2 months ago. The outlook is fine – so why is everyone so bleak about market prospects?
Perhaps it’s the sheer complexity of all the awful bad news in geopolitics, rates, flows and all the other what-evers that drive market sentiment? Treasury yields (the 10-year US bond rate) have decisively breached 3%, spiking all the way up to 3.11% this morning – triggering terror across global stocks according to the news wires, although a glance out the window suggests stock jobbers ain’t hurling themselves lemming-like from the 19th floor… yet. Still… we live in hope.
The problem is bad news sells. When did you last read a headline about everything being just peachy? You didn’t. Sure there are worries out there. Recent economic data has been disappointing – which is hardly surprising when you consider just how much economies were disrupted by the miserable winter. It feels the global growth macro engine has stalled – but hey-ho, the sun is literally shinning this morning. We’ve seen divergence and dissonance in the synchronicity global growth vibe, but a few bum notes shouldn’t stop the concert!
The bottom line is we’re in a period of correction. Negative sentiment has been fanned because so many investors are out their comfort zones, for instance: if you bought into EM debt in search of the stellar returns that dried up in investment grade, you are probably nursing severe bruises – meaning you are bound to be negative. Meanwhile, you might miss that distressed sovereign specialist Michael Hasenstab of Franklin Templeton just took a massive $2.25 bln bet on Argentina, buying new Peso debt.. Ask yourself: what does he know that recent yield tourists into Latin America don’t? (The answer – I would hazard.. is lots.)
Then there is Italy. what’s ever not to worry about when it comes to Italian politics! 10-year Italy bond yields have risen 25% since early May, and if you really think 2.09% is the right yield, I’ll sell you as much as you want. Sure, its got everyone worried about the EU, how the ECB will react, and all that stuff about how Italy will become a rotten core of Europe with a quasi Lire destabilising the Euro. Or maybe not: Italy has been, is and will always be… Italy. Get over it. My best advice on Italian politics is worry not.. the Italians don’t seem to mind.. In fact, play the likely over-reactions…
And as for US bond yields spiking to 3.11%. Yawn… 3% bond yields are still far south of the 5% normalised rate we saw prior the Global Financial Crisis (GFC) of 2008. Slightly higher, but still historically low, interest rates will shake out a few weaker over-levered firms, put the fear of god into yield tourists, but will also stimulate other return driven sectors – not least financials!
What we are seeing is shift.
The bond spike confirms it’s the end of the long-term secular 30-year bond bull market, but also the end of the post GFC experimental monetary-policy driven rally. Bond yields will go higher. Get over it. Reassess where other markets are going – take a look at oil prices, up 30% since Feb. Stocks aren’t showing direction yet – but it’s clear the VIX shock back in Feb has calmed much of the froth, and our chartists agree that while we may see a continued range pattern for a while, its as likely the next big move will be higher.
Sorry if all the above sounds a bit upbeat. I shall no-doubt return to my resolutely bearish mood by this time next week.
Meanwhile, I’ve spent the last few days traveling, including a very informative one day aviation conference arranged by Doric – the largest independent aircraft lessor. They assembled a superb roster of speakers to address many of the key aspects of aviation finance including valuations and transparency. But, perhaps the key “wake up and smell the coffee” moment was a very effective on-stage interview with the CFO of Finnair who reminded us of the complexity of all major businesses – when asked about threats, she responded with the example of new clean fuel regulations on shipping.
The new regulations will require ships to either use cleaner fuel or fix scrubbers from 2020. Presently, most ships use raw oil sludge/bunker fuel to power dirty engines. In just a few years, they’ll need refined fuel, or to spend millions retro-fitting. You can’t magic up new global refining resources overnight – and a shortage of fuel could drive Jet fuel higher as it competes for scarce capacity. The cost of fuel is a major driver of airline profits and costs.
Real Complexity – it’s a topic worth spending some time thinking about! Forget the noise about politics, and seek out the real factors driving markets.
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Italy’s two-and-a-half month stalemate is finally coming to an end, and according to unnamed Bloomberg and Reuters sources, the leaders of Italy’s populist Five Star movement and Northern League have agreed on a final government program, one which to the market’s relief does not include a request to write down €250BN in debt held by the ECB.
… or maybe not: shortly after the flashing read headlines hit, the League said the government deal is not final, and nor is there a deal on premiership. Meanwhile, Italy’s Ansa newswire reported that according to its sources, a final government plan has not been sealed yet, and that negotiations are still ongoing on govt program and on the name of candidate prime minister.
In any case, here’s a summary of what we know so far courtesy of Bloomberg:
In a meeting in the Palazzo Montecitorio, Matteo Salvini and Luigi di Maio, the leaders of the League and M5S, respectively, are trying to decide who will be the next prime minister of Italy.
Meanwhile, the leaks about the government’s policy program appeared to dull concerns about a possible Italeave.
And while initial reports of a deal raised hopes, Five Star officials later denied that an agreement had been reached, leading to widespread confusion about the status of a deal.
Still, it appears that most outstanding items have been resolved:
Meanwhile, as Bloomberg adds, president Mattarella’s office has made no secret of the fact that he is not amused — by Di Maio and Salvini starting with the program and dealing with the premiership only afterwards.
For Mattarella, it’s putting the cart before the horse — the “proper” procedure is for Mattarella to name a premier first, then he brings a list of ministers and his government plan back to the president.
While some hoped this added clarity would stabilize European assets, Italian BTPs continue to selloff, and the 10Y Italian yield was trading around 2.16%, as concerns over the parties’ anti-European sentiment trumps the fact that some agreement has been reached after all; meanwhile the Italian-German spread remains at the widest levels since January.
Equities are taking matters somewhat better, with the Stoxx 600 rising as much as 0.3% and the FTSE MIB reversing earlier losses to trade flat on the day.
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A few days after the Parkland high school massacre, an aide to a Florida state legislator lost his job for claiming that two survivors were “not students here but actors that travel to various crisis [sic] when they happen.” Such “crisis actor” rumors, which have spread after several recent public tragedies, are a reminder that people are capable of believing bizarre stories that are supported by only the thinnest alleged evidence. But some pundits think they represent something more: a breakdown in the media ecosystem.
A February 20 ThinkProgress article, to pick one representative example, announces in its lede that crisis-actor tales “have spread like wildfire across social media platforms—despite the repeated promises of Big Tech to crack down on fake news.” The author circles back to that idea at the end, arguing that “the viral spread of the ‘crisis actor’ theory, along with other recent examples of highly-shared fake content, shows that [Facebook] is still ripe for misinformation and exploitation.” One Facebook post touting the theory, he notes, has gotten more than 110,000 shares, and some of the videos promoting the idea have been “viewed tens of thousands of times.”
That sounds less impressive when you start thinking about the context, writes Jesse Walker in the latest edition of Reason.
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This week’s Supreme Court decision in favor of sports gambling opens the way for states to allow something that has been popular in many places but legal only in Nevada—wagering on actual athletic contests. If this activity were not popular, newspapers and ESPN wouldn’t offer betting lines on a raft of professional and college games every day.
The legal and political acceptance of sports betting didn’t occur because Americans abruptly shed their inhibitions, writes Steve Chapman. It occurred because states experimented with legal gambling and found the results agreeable, or at least tolerable. Each new venture provided more information—and the more information the public had the more comfortable it became letting people wager with the blessing of the law.
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The tyranny of local government was on full display this week. The culprits are some greedy members of the Seattle City Council. Backed by their union friends, they just voted to impose a “head tax” on large employers, such as Amazon and Starbucks. The real victims, of course, writes Veronique de Rugy, will be the companies’ employees.
Thanks to Seattle’s many thriving businesses, its revenue base has been growing much faster than its population. Unfortunately, the City Council is doing what it does best and, rather than look into streamlining and cutting its ineffective spending programs in order to combat Seattle’s homeless problem, is looking for fresh cash. Seeing as large companies have it, the council set out to take it.
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European leaders gathered in Sofia on Thursday to hash out a plan for shielding Iran from the brunt of US economic sanctions as they try to convince Iranian President Hassan Rouhani to continue abiding by the terms of the deal, while proposing levying tariffs on US goods in response to Trump decision to impose sanctionson Iran.
Shortly after President Trump announced that the US would pull out of the deal, Rouhani promised that his country would continue abiding by its terms only if Iranian businesses could continue operating normally.
In an interview with Germany’s Deutschlandfunk radio, European Union budget commissioner, Guenther Oettinger discussed several options for preserving the deal, including using the European Investment Bank to offset the impact of sanctions by extending loans to firms with financing problems. In an example of one more-extreme measure under discussion, the EU has also considered “imposing its own tariffs” on the US that would make it much harder for US firms to sell their goods and services in the trade bloc.
Of course, the US has important goods and services in the industrial sector that it would like to offload in Europe, Oettinger said.
While sanctions weren’t the EU’s first choice for preserving the deal, few other actions would be strident enough to get President Trump’s attention, as Oettinger made clear:
“We want to resist that. We have limited possibilities,” he said.
“Trump despises weaklings. If we back down step by step, if we acquiesce, if we become a kind of junior partner of the US then we are lost.”
And while the EU would like to protect its largest companies from US sanctions, French President Emmanuel Macron said on Thursday that companies would be responsible for deciding whether they will still do business with Iran.
Macron was referencing French oil firm Total, which said on Wednesday that it would end work on a large gas field project in Iran unless it receives an exemption from US sanctions against Tehran, according to Reuters. Tehran had hailed that project as a symbol of the deal’s efficacy.
Meanwhile, A.P. Moller-Maersk, the world’s largest container shipping company, also said it would cease business operations in Iran.
CEO Soren Skou told Reuters on Thursday that A.P. Moller-Maersk was following suit.
“With the sanctions the Americans are to impose, you can’t do business in Iran if you also have business in the U.S., and we have that on a large scale,” Skou told Reuters in an interview following the firm’s first-quarter report.
“I don’t know the exact timing details, but I am certain that we’re also going to shut down (in Iran),” Skou said.
Finnish mining technology company Outotec said US sanctions would complicate its business with Iran, though it added that it’s too early to make a final decision on whether it would leave the Iranian market.
Macron said France backed proposals by the European Commission to protect and compensate European companies that might be hit by US sanctions for trading with Iran.
“International companies with interests in many countries make their own choices according to their own interests. They should continue to have this freedom,” Macron said after arriving for a second day of EU leaders’ talks in the Bulgarian capital.
“But what is important is that companies, and especially medium-sized companies which are perhaps less exposed to other markets, American or others, can make this choice freely.”
That said, there’s no easy or quick way to protect companies from US sanctions, and that it will take time before the bloc can decide on a strategy. And even when they do, the plan will likely fall short of the types of firm guarantees that the Iranian authorities are seeking.
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With Walmart unofficially set to close Q1 earnings season, which despite being the strongest in 7 years failed to boost the S&P500, all attention will remain glued on the interplay of the rates-dollar-oil trio, and judging by the somber overnight market action, traders are not too excited with the ongoing meltup in all three.
U.S. stock index-futures inched lower driven by contracts on the Nasdaq 100 as Cisco’s forecasts fell short of Wall Street’s most optimistic projections. European stocks are mixed although concerns about Italy’s new government are rising again, while Asia was modestly in the red.
In the early session, U.S. 10-year TSY yields extended their advance to over 3.1%, rising as high as 3.12%. The 5s30s curve pared an earlier steepening move to flatten slightly.
Focus remains on 3.22% level in 30-year bond, which is this year’s highest closing level and has also has been highlighted by market commentators. Rising just shy of 3.25%, the 30Y rose to its highest level since 2015, showing that this year’s selloff has spread to the most-resilient part of the world’s biggest bond market.
The other main driver of risk, the Dollar index (in this case the BBDXY), slipped initially as talk on the probability of U.S. yield-inversion prompted some profit-taking, but it then quickly erased the drop as the yield on 30-year notes hit fresh cycle highs after the London open.
Sterling provided intraday traders with the volatility they were looking for amid conflicting reports over the U.K.’s intentions to stay in the EU customs union, while the euro stayed in a lower-highs pattern as leveraged names fade rallies given Italy risks remain. Buoyed by the sinking Euro, European stocks edged higher.
As Bloomberg notes, there were three moving parts within European session;
The energy sector will also be in focus after oil rose to $80 a barrel in London for the first time since November 2014 as U.S. crude inventories fell and traders braced for the impact of renewed sanctions on OPEC member Iran. Money managers who are reducing their bullish bets on oil are following a “dangerous” strategy, according to Goldman Sachs which today released its latest bullish note on oil, suggesting that just like in the summer of 2008 Goldman is selling the hell out of crude. Demand will remain strong and concerns over economic growth will probably prove temporary, analysts including Jeffrey Currie wrote in a May 16 note
In Europe, all eyes are on Italy, and especially its bond and stock market, and where the early rebound in the benchmark FTSE MIB fizzled out, with the index now falling as much as 0.5% amid volatile trading as investors await news on a potential final deal between Five Star and League to form government. Italia stocks initially rose at the open after newspaper Corriere della Sera reported populists had dropped a request for a €250BN writeoff by the ECB. Overnight, the two anti-establishment parties said they have virtually completed a government program.
Ahead of today’s announcement, analysts remain largely sanguine: Italian concerns at the current juncture will likely not “prove sufficient enough to trigger sustained selling pressure on the euro in the near-term, although they could contribute to more volatility,” Lee Hardman, a currency analyst at MUFG, told Bloomberg.
Traders will focus on jobless-claims data and the Philadelphia Fed Business Outlook. Walmart, Applied Materials, and Nordstrom are among companies reporting earnings
Market Snapshot
Top Overnight News from Bloomberg
Top Asian News
Discounting the SMI (-0.3%) being weighed on by major component underperformance all major European bourses are trading in positive territory for the day with the Euro Stoxx 50 up 0.2%. In an earnings heavy morning, Altice (+10.5%) Lagardere (+2.3%) and National Grid (+1.6%) posted positive results and are currently trading positive for the day, with AP Moeller-Maersk (-9.4%) Investec (-4.5%) and Royal Mail (-5.4%) coming in under expectations and trading in negative territory. Pervasive news for the UK gambling sector with the UK cutting the maximum stake in FOBTs to GBP 2.00 has led to gambling names such as William Hill (-3.0%) and Paddy Power (-0.7%) being down for the day on the announcements that revenues will be impacted negatively.
Top European News
In FX, the dollar has seen volatile trade on conflicting drivers as the ongoing rally in US Treasury yields underpins the Greenback and offers protection against global tariff headwinds. The index is meandering between circa 93.100-450, vs yesterday’s marginal new high for the year around 93.640, and also subject to choppy moves on the back of fluctuating fortunes in basket currencies. GBP/EUR: The Pound has been buffeted by latest Brexit reports suggesting a customs union back-stop in some shape or form, with an initial boost on paper talk that the UK may stay in the current EU fold until 20121 or longer and then a downturn on denials via a spokesperson for PM May. However, Cable has recovered to 1.3500+ and Eur/Gbp is back below 0.8750 after subsequent headlines essentially pointing to a halfway house, while Eur/Usd remains leggy above 1.1800 after weakening to a fresh ytd low on Wednesday around 1.1761. CAD/AUD/NZD: Both holding a firmer line vs their US counterpart, the Loonie still getting some support from elevated oil prices and not giving up on a NAFTA deal before the day is out even though the prospects are waning – Usd/Cad currently nearer the bottom of a 1.2795-50 range, above hefty option expiries at 1.2700 (running off today and more for Friday’s NY cut) and well within barriers from 1.2925-1.2625. The Aud saw 2-way price action after a mixed Aussie jobs report overnight and has settled towards the middle of a 0.7505-45 band as some elements of the labour data were encouraging, while cross flows were also bullish as Aud/Nzd rebounded over 1.0900 again. Note, the Kiwi has also struggled above 0.6900 vs the Usd even though the NZ budget balance and forecasts improved overnight.
In commodities, oil is trading marginally higher today with WTI (+0.3%) and Brent (0.2%), the latter rising above $80 for the first time since Nov. 2014. There has been little oil news flow following the larger than expected DoE crude inventory drawdown. Barclays raised their Brent oil assumptions to USD 73/bbl in 2018 and USD 70/bbl in 2019, following suit from other analysts. Yesterday, Iran Oil Minister Zanganeh stated Iran will be doing its best to maintain production and continue exports, while he also commented that oil prices at USD 60-65/bbl are ‘logical’ and the US wants to see high prices to boost shale production. Elsewhere, gold and copper trade lower on the day as the yellow and red metal track the current risk tone.
Looking at the day ahead, we’ve got the latest weekly initial jobless claims print (215k expected) along with the May Philly Fed PMI (expected to soften slightly to +21.0 from +23.2) and April leading index (+0.4% mom expected). Away from the data the ECB Vice-President Constancio is scheduled to speak at two separate events in Frankfurt at 11.30pm BST and 1.00pm BST, while the BoE’s Haldane speaks at 5pm BST. Over at the Fed, Kashkari is due to speak at 3.45pm BST and Kaplan is scheduled to speak at 6.30pm BST
US Event Calendar
DB’s Craig Nicol concludes the overnight wrap
While the rout across bonds may have slowed slightly, or in some cases reversed, over the last 24 hours for most markets, no one appeared to pass on the invite to Italy with the main story in markets being the surge for BTP yields yesterday following leaks of some of the details of a draft coalition agreement between the 5SM and League. Indeed, 10y BTPs touched a high of 2.112% intraday yesterday (+16.4bps) before eventually finishing just off that at 2.107% and +16.2.bps on the day for the biggest one-day selloff since June last year. The yield is the highest now since October last year and up 40bps from the April lows. The spread to Bunds also reached 151bps and the widest post-election after an eye opening +20.2bps move. That’s the biggest one-day spread move between BTPs and Bunds since the Brexit-impacted widening on 24th June 2016.
So, some impressive price action. What really grabbed the market’s attention was the comment in the leaked draft which came through early yesterday morning that the new government planned to ask the ECB to write-off €250bn in Italian debt. Subsequent comments throughout the day appeared to downplay the statement with League economic advisor Claudio Borghi saying that there was no such proposal to cancel part of Italy’s debt, but that instead there is “simply the request for a change in accounting rules” which appeared sufficiently vague to keep the market guessing. Other snippets of the draft proposal included a mechanism to move away from the single currency (which has also since been downplayed) and also to reassess the country’s EU budget contributions. A separate statement from the two parties which was picked up by the FT also revealed that the nation’s desire “must be to return to the pre-Maastricht setting”. According to Bloomberg the two leaders of the 5SM and League are said to still be putting finishing touches to their program after talks dragged on late into last night.
Despite the emergence of the two populist parties as the front runners in Italy, markets had become accustomed to a softer stance from the 5SM and League in recent weeks and months so it wasn’t a great surprise to see markets react as they did. Indeed the whole BTP curve was sharply higher with 2y BTPs in fact rising back into positive territory (+14.8bps to 0.064%) for the first time in over a year. Cyprus is the only other Eurozone country to have positive 2y yields. The rest of the periphery seemed to get dragged along with Italy yesterday with Greece in particular finishing +22.6bps higher, while Spain and Portugal were +5.5bps and +6.3bps higher respectively. In contrast, the rest of Europe was a few basis points lower with Bunds actually rallying -4.0bps. Treasuries finished last night +2.4bps at 3.097% with decent industrial data again helping, and is trading around that level this morning. EM currencies and bonds were also generally a bit more resilient with the recently hammered Turkish Lira amongst the top FX performers.
Those Italy developments also resulted in the Euro falling -0.25% and temporarily below 1.180 for the first time this year. The FTSE MIB also tumbled -2.32% and the most since early March with Banks down around 4%. By contrast the Stoxx 600 and DAX finished +0.22% and +0.20% respectively. Weakness spread over into Italian credit too with sub bonds in the Italian Banks between 10bps and 12bps wider.
The weakness was by and large contained in Italy and to a lesser extent the periphery however as across the pond the S&P 500 nudged up +0.41% last night helped by results out of the retail sector of all places with Macy’s posting a second straight quarter of sales gains and also raising full year guidance. That solid industrial production print also appeared to help (more on that below) while the White House appeared little concerned about North Korea’s comments threatening to pull out of talks with President Trump next month. Last night we also got the news that White House Trade Adviser Peter Navarro was to be excluded from trade discussions with China this week, which was taken positively in the sense of it making more likely that an amicable outcome would be met.
Overnight, markets are a bit more mixed in Asia with the Nikkei (+0.63%) and Hang Seng (+0.05%) flat to slightly higher, but the Shanghai Comp (-0.23%) and ASX (-0.27%) in the red. US equity futures are flat while Gold and the rest of the commodity complex is slightly firmer. A headline from the Telegraph newspaper saying that the UK will tell the EU it is prepared to stay in the customs union post 2021 has helped Sterling bounce +0.50% in the early hours.
Moving on. Other news really played second fiddle to the Italy headlines yesterday in markets. Over at the Fed we heard from Atlanta Fed President Bostic with the biggest takeaway perhaps being that he is in the camp of those Fed officials who have some concern about a possible inversion of the yield curve. Indeed he said that it is his job to make sure that it doesn’t happen. After a relatively big move on Tuesday, the 2s10s curve was less than 1bp wider yesterday at 50bps. Later on, San Francisco Fed President Williams said interestingly that he thought forward guidance would at some point be “past its shelf life”. Our US economists have previously hinted that forward guidance is something that could be phased out in the future, with the first part of this being removing the “for some time” phrase from the FOMC statement.
Away from this, the economic data barely played a role yesterday in Europe after CPI reports in Germany and the Euro area failed to throw up any surprises. Indeed the core April CPI reading for the Euro area was confirmed at +0.7% yoy which matched the flash reading, while Germany’s April headline reading was confirmed at -0.1% mom. Staying with Europe, it perhaps wasn’t a surprise to see German Chancellor Merkel’s comments overshadowed by the Italy headlines with the Chancellor reiterating a need for EU states to push for European reform including providing a “common backstop” through the European monetary fund.
Meanwhile, there was a small positive data surprise in the US where April industrial production rose +0.7% mom and the March print was revised up two-tenths. Capacity utilization was also confirmed as rising four-tenths to 78.0%. Prior to that, data in the housing market was more mixed with starts much softer than expected in April (-3.7% mom vs. -0.7% expected) but permits less than soft than the consensus expected (-1.8% mom vs. -2.1% expected).
Looking at the day ahead now, the diary is fairly sparse this morning with the March trade balance reading in Italy and March construction output data for the Euro area the only releases of note. This afternoon in the US we’ve got the latest weekly initial jobless claims print (215k expected) along with the May Philly Fed PMI (expected to soften slightly to +21.0 from +23.2) and April leading index (+0.4% mom expected). Away from the data the ECB Vice-President Constancio is scheduled to speak at two separate events in Frankfurt at 11.30pm BST and 1.00pm BST, while the BoE’s Haldane speaks at 5pm BST. Over at the Fed, Kashkari is due to speak at 3.45pm BST and Kaplan is scheduled to speak at 6.30pm BST
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