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For the 19th month in a row, US Factory Orders decline YoY (-1.2% for May) with a 1% drop MoM. Simply put, in 60 years of historical data, the US economy has never, ever suffered a 19 month stretch of consecutive annual declines…
And yet we are supposed to believe there is no recession?
What happens next?
Charts: Bloomberg
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The last 48 hours in precious metals markets – more specifically silver – has been chaotic to say the least with a massive spike Sunday night above $21 and a sudden flash crash overnight to $19.50 before rallying back above $20 this morning. Silver's recent rise mirrors a similar surge in steel rebar and iron ore futures in April
But as Saxo's Ole Hanson warns, the biggest two-day surge in silver since 2011 has raised a few questions about the sustainability of the current rally and what is driving it.
Macro economic developments which have been highlighted on several occasions during the past few months continue to attract demand for precious metals from retail, real money and hedge funds.
Speculative positions held by hedge funds in both gold and silver have reached record levels while demand for exchange-traded products especially those in gold have continued to rise on an almost daily basis.
The 13% bottom-to-top rally from Friday to Monday in silver could represent a short-term top in the market, not least considering the 44% year-to-date rally seen already. During the rally in Asia Monday, several major stop levels got hit on Comex silver which could indicate that many short positions have now been flushed out.
Silver looking to consolidate the post-Brexit strong gains. Key area of support between $19.14 and $18.67.
A major move in SHF silver may attract the opposite interest from investors using other silver instruments from COMEX silver futures to spot and exchange-traded products.
On that basis, continued demand for precious metals should see silver continue to outperform but at a much slower pace with the relative value increasingly coming back into line with longer-term averages.
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As previously reported, over the weekend the FBI interviewed former Secretary of State Hillary Clinton, one of the final steps in the ongoing criminal investigation into alleged mishandling of classified information. While it is unclear if related to that interview or not, in just over one hour, at 11 am Eastern time, FBI Director James Comey will make a statement from headquarters in Washington D.C.
He will also take questions from reporters.
FBI Director James Comey
So will the FBI endorse Hillary? Stay tuned for the answer.
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The rally last week was likely end of the quarter performance gaming and little else.
Fund managers have to report their returns every quarter. With the markets gyrating throughout 2Q16, fund managers were highly incentivized to gun the markets higher in order to redeem the quarter.
However, bonds (the smart money) weren’t buying it at all. Indeed, bonds really haven’t been buying any of this rally since March.
Neither was the USD/JPY pair, which has lead the markets for over a year now.
More and more this mess is beginning to feel like late 2007/ early 2008: major warning signs abound, but investors continue to move into stocks believing that Central Banks will be able to maintain the bubble.
Smart investors are preparing now for what’s coming.
On that note, we are already preparing our clients for this with a 21-page investment report titled the Stock Market Crash Survival Guide.
In it, we outline the coming crash will unfold…which investments will perform best… and how to take out “crash” insurance trades that will pay out huge returns during a market collapse.
We are giving away just 1,000 copies of this report for FREE to the public.
To pick up yours, swing by:
Best Regards
Graham Summers
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While as previously reported the biggest political threat facing Europe in the coming months is Italy’s October referendum on Matteo Renzi’s overhaul of the political system aimed at ending Italy’s unstable governments (which as of this moment is not looking to good, with the latest Euromedia Research polls showing that 34% of Italians would vote against Renzi’s plan, with 28.9% in favor and 19.4% still undecided), a referendum which may cost the prime minister his job as Renzi has promised to resign if he does not get the needed support, another referendum has emerged overnight when as Reuters reports Hungary will hold a referendum on Oct. 2 on whether to accept any future European Union quota system for resettling migrants as Prime Minister Viktor Orban’s government steps up its fight against the EU’s migration policies.
Emboldened by Britain’s shock vote to quit the European Union, Orban – another nemesis of the Brussels establishment who was once called the “dictator” by none other than Jean-Claude Juncker – is forging ahead with his own referendum which he hopes will give him a mandate to challenge Brussels. A massive pre-referendum campaign has already been underway. Orban took an anti-immigration stance during the migrant influx to Europe last year. Hungary was the main entry point into the EU’s border-free Schengen zone for migrants traveling by land until Orban shut the Croatian and Serbian frontier.
According to Reuters, President Janes Ader said in a statement posted on his office’s website on Tuesday that the vote will be about the following question: “Do you want the European Union to be entitled to prescribe the mandatory settlement of non-Hungarian citizens in Hungary without the consent of parliament?”
Hungary is already fighting an EU relocation scheme established during the height of the crisis last year, which will set quotas for each EU country to host a share of the migrants over two years. Along with Slovakia, Budapest has launched a court challenge against the plan. But the EU is also discussing a change to asylum rules that would require member states to accept a quota of refugees or pay a penalty for them to be housed elsewhere.
Antal Rogan, Orban’s cabinet chief, said on Tuesday the flow of migrants had to be stopped. “The Hungarian government asks Hungarian citizens to say no to mandatory resettlement and to say no to the immigration policy of Brussels,” Rogan told reporters. “Only Hungarians can decide with whom we want to live in Hungary.”
Rogan also said Hungary has doubled troops patrolling its southern border with Serbia, where 6,000 to 10,000 policemen and soldiers will be deployed from now on. More than 17,000 migrants have crossed into Hungary illegally from Serbia so far this year, according to the government.
Rogan said human traffickers had begun to use drones to monitor the movement of Hungarian border patrols, adding Hungary would inform Serbian authorities about this. Orban’s anti-immigration measures have been popular at home but criticized by rights groups. As of this month, a new law has taken effect which allows police to send back to Serbia illegal migrants detained within eight kilometers (five miles) of the border, drawing criticism from the U.N. refugee agency.
The Hungarian referendum, largely expected to halt migrant flow, will be merely the latest slap in the face of European cohesion and unity, and its passage is certain to impose even further limitations on the “free flow” of individuals across the customs union which with every passing day is becoming increasingly less that and more a loose cohesion of states unbound by any overarching federalism or ideology.
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With the short-end of the Swiss yield curve yielding below -100bps, it was only a matter of time before things went entirely mad at the long-end and today for the first time in history Swiss 50Y yields have tumbled below zero (trading as low as -2.7bps) as US Treasury yields tumble to fresh record lows.
As Bloomberg notes, rising concern about the outlook for economic growth and inflation effectively means that investors are paying the Swiss government for the privilege of lending to them out to 50 years.
Britain's vote to leave the European Union has darkened the economic outlook beyond Britain's shores and increased investor demand for safe-haven government bonds, even when the yield is below zero.
That's because investors expect further interest rate cuts and monetary easing from central banks around the world in response to the increased uncertainty.
"It's a reflection on the very bad prospects for the European and global economy," said Ciaran O'Hagan, senior rates strategist at Societe Generale in Paris.
"Bond yields are driven by inflation and growth, but there's no inflation and there's no growth. The economy is built on confidence, and if there's no confidence there's no economy," he said.
Which – obviously -means the entire Swiss government bond curve is now below zero…
This won't end well.
Charts: Bloomberg
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Just when you thought it was safe to buy sterling, Carney sparks another currency dump, sending cable to a 1.30 handle for the first time since September 1985…
Cable is now 400 pips below its post-Brexit bounce highs
BoE Governor Carney’s 3rd appearance in 12 days sparked today’s carnage…
“There is the prospect of a material slowing of the economy,” the Bank of England governor said at a press briefing in London on Tuesday, after the central bank published its semi-annual Financial Stability Report. “The number of vulnerable households could increase due to a tougher economic outlook.”
Not helped by the beginning of investor panic over UK property fund redemptions.
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In a stark flashback to the catalytic event that ultimately brought down Bear Stearns in 2008, and subsequently unleashed the greatest financial crisis in history, last night we reported that Standard Life, has been forced to stop retail investors selling out of one of the UK’s largest property funds for at least 28 days after rapid cash outflows were sparked by fears over falling real estate values.
As we further noted, citing an analyst, “given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices,” said Laith Khalaf, senior analyst at Hargreaves Lansdown. “The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.”
As we concluded, whie Brexit is not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together, it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead. And, indeed, if Standard Life was the first domino, moments ago the second domino also tumbled when as Bloomberg reported that Aviva Investors Property Trust is as of this moment “frozen” citing “extraordinary” market conditions.
What is notable is that the drop in the fund is not even that bad: as such it merely shows what happens when everyone decides to pull their money out at once from a financial system built on ponzi assumptions, and how one should always panic first.
Cited by Bloomberg, Aviva said in an email that “market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity” adding that “we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect”
As Laith Khalaf, a senior analyst at Hargreaves Lansdown cited above, put it, “the dominoes are starting to fall in the U.K. commercial property market, as yet another fund locks its doors on the back of outflows precipitated by the Brexit vote. It’s probably only a matter of time before we see other funds follow suit.”
We could not have said it better ourselves.
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Back in May 2013, we wrote an article titled “Europe’s EUR 500 Billion Ticking NPL Time Bomb” in which we laid out very simply what the biggest danger facing European banks was: non-performing, or bad, loans.
We further said, that “Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).
The conclusion was likewise simple:
“The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time – the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks.”
Now, three years later, the bomb appears to be on the verge of going off (or may have already quietly exploded), and nowhere is it more clear than in an exhaustive article written by the WSJ in which it focuses on Italy’s insolvent banking system, and blames – what else – the hundreds of billions in NPLs on bank books as the culprit behind Europe’s latest upcoming crisis.
To be sure, nothing new here, although it is a good recap of the Catch 22 Italy finds itself in: from the WSJ’s “Bad Debt Piled in Italian Banks Looms as Next Crisis“
Britain’s vote to leave the EU has produced dire predictions for the U.K. economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.
Years of lax lending standards left Italian banks ill-prepared when an economic slump sent bankruptcies soaring a few years ago. At one major bank, Banca Monte dei Paschi di Siena SpA, bad loans were so thick it assigned a team of 700 to deal with them and created a new unit to house them. Several weeks ago, the bank put the bad-credit unit up for sale, hoping a foreign partner would speed the liquidation process.
The headquarters of Banca Monte dei Paschi di Siena
The U.K. vote to exit the European Union has compounded the strains on Europe’s banks in general and Italy’s in particular. It imperils the Monte dei Paschi sale, some bankers say, and creates fresh uncertainty at a time when lenders are struggling with ultralow and even negative interest rates and sluggish economic growth.
Brexit has many executives concerned that central banks will keep interest rates lower for longer than they might otherwise, in an attempt to counteract the slower growth—in the eurozone as well as Britain. European banks’ stocks slid after the vote, with those in Italy especially hurt. Shares in Monte dei Paschi are down roughly a third since the June 23 referendum. All this threatens to spark a crisis of confidence in Italian banks, analysts say. Although Italy has only one bank classified as globally significant under international banking regulations—UniCredit—some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.
“Brexit could lead to a full-blown banking crisis in Italy,” said Lorenzo Codogno, former director general at the Italian Treasury. “The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”
A quick tangent on why in the aftermath of Brexit, Italian banks have been scrambling to get a special permission from Europe to bail-out (instead of ‘In’) local banks, as the alternative would likely spark a chaotic bank run.
When the financial crisis of late 2008 hit, Italian banks tended to roll over loans whose borrowers weren’t repaying on time, hoping an economic upswing would take care of the problem, say Italian bank executives.Italian banks’ struggles have led to the first serious test of a model the EU adopted two years ago for handling banking woes. The Italian government has sought EU permission to inject €40 billion into its banks to stabilize the system.
To do so would require bending an anti-bailout rule the bloc adopted in 2014 to force troubled banks’ stakeholders—shareholders, bondholders and some of their depositors as well—to pay a financial price before the country’s taxpayers must.
Rome argues that bending this rule would be a small price to pay for erecting a firewall against possible bank contagion stemming from Brexit. Italy’s EU partners, led by Germany, reject the idea, leaving Rome exposed to the potential for a banking crisis.
… Especially if the man who was in charge of Italy’s banks in 2008, Mario Draghi, were to be somehow identified as the key man responsible for Italy’s insolvent financial system. However, so far Merkel has been again a full-blown bailout, knowing the further “bending of Europe’s rules” would simply mean more German taxpayer money being flushed down the drain.
And while we wait for the outcome of this soap opera which as of last night has seen harsh words of frustration expressed by Italy’s PM Renzi and directed at Draghi, here are some numbers:
When the European Central Bank began supervising the eurozone’s largest banks in 2014, things got harder. The new supervisor applied tougher criteria than the Bank of Italy did for declaring loans impaired, say bankers. In April, it forced one bank to take bigger write-downs to bad loans before receiving its blessing to merge with another bank. The result is that impaired loans at Italian banks now exceed €360 billion—quadruple the 2008 level—and they continue to rise.
Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25%—implying an additional €40 billion in write-downs.
One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years. Moreover, in many cases, the loan collateral is the family home of the owner of the business, or it is tied up in the business itself.
“There is a desperate need to make collateral liquid,” said Andrea Mignanelli, chief executive of Cerved Credit Management Group. “Right now, it gets stuck in auctions and judicial procedures that make cashing the loan very hard.”
The problem is that as of this moment, Rome finds itself in a lose-lose situation:
With investors pummeling its shares this year, UniCredit ousted its chief executive, Federico Ghizzoni. Last week, with its stock falling, it rushed to appoint a new CEO, Jean-Pierre Mustier, its former head of corporate and investment banking. In short order, Mr. Mustier must now present a convincing restructuring plan and raise as much as €9 billion to shore up investor confidence. UniCredit declined to comment. The Italian government pushed for a broad solution that would recapitalize banks and draw a line under the bad-loans crisis, when it appealed to the EU for permission to inject €40 billion into the lenders. The Italian government argues that without such a recapitalization move, Italy’s banking problems could mushroom into a broader crisis.
“There is an epidemic, and Italy is the patient that is sickest,” said Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry. If “we don’t stop the epidemic, it will become everybody’s problem…The shock of Brexit has created a sense of urgency.”Italian Prime Minister Matteo Renzi pressed the issue in his meeting last week with German Chancellor Angela Merkel.
The European Commission, with strong backing from Berlin, has dismissed the push from the Italians. Some European officials privately expressed annoyance that Rome has been slow to deal with its banking problem and is paying the price in such volatile markets. Now, they say, the Italians are using Brexit to press for permission to bend the rules of a hard-fought banking regime.
* * *
Rome has criticized the EU’s new banking regime and doesn’t want to use “bail-in” rules that prescribe the order in which stakeholders must bear losses for winding down an ailing bank, in part because of the peculiarities of the Italian banking system. About €187 billion of bank bonds are in the hands of retail investors, whose holdings would be wiped out by a bank resolution under the new rules.
Last year, more than 100,000 investors in four small Italian banks that were wound up saw their investments wiped out. Some lost their life savings. The controversy exploded in December after Italian news media reported that a retiree committed suicide after losing €110,000 in savings invested in one of the banks.
Such problems carry little truck in Brussels. “Every grandmother has bought bank shares,” said one EU official. “That’s how it’s presented to us…. This work has to be done within the rules, using all the flexibility there is.”
In that case, “every grandmother” in Italy has a big problem then, but not nearly as big as Renzi, because if the bank run (ahead of bail-ins) begins, it will all be over for Europe’s most insolvent banking system.
Finally, while none of the above is actually new – we have been covering it for over 5 years – so far Europe, and Wall Street, had been successful in ignoring it. As the latest JPM “Early Look at the Market” shows, everyone’s attention is finally, and fully, on Italy.
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Overnight Media Digest
WSJ
– Britain’s vote to leave the EU has produced dire predictions for the UK economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. on.wsj.com/29cz6xi
– During a rare spate of attacks in Jordan recently, Western officials in the capital Amman intercepted messages from Islamic State leaders urging supporters to spread terror at home rather than join militants across the border in Syria. on.wsj.com/29kQdzC
– The Fourth of July weekend has often been the time for Hollywood to launch some of its biggest hits. But new releases “The Legend of Tarzan” and “The BFG” are the latest examples of big-budget disappointments this summer. on.wsj.com/29saTsS
– Beepi, a Silicon Valley company selling used vehicles on a mobile app or website, will launch a new service this week that delivers cars to buyers nearly anywhere in the U.S. regardless of where the vehicle currently resides. on.wsj.com/29cF0yF
– Snapchat has become a digital mecca for high-school and college-age students, allowing them to send disappearing photos and videos. Now, the “older folks” are arriving in force, whether they are parents spying on their kids, or professionals trying out another social-media platform. on.wsj.com/29k4jRF
FT
– Simon Stevens, head of the National Health Service, said the UK government should honour existing NHS funding pledges after Brexit.
– Royal Dutch Shell wants to leave behind extremely large steel and concrete structures when it abandons Brent field and Shell has concluded that safety and environmental risks involved in removing much of the infrastructure would far outweigh the benefits.
– Nigerian President Muhammadu Buhari removed deputy oil minister Emmanuel Kachikwu from his joint role as the national oil company’s managing director and has also appointed a new board.
– Boris Johnson has backed UK’s energy minister Andrea Leadsom as the next prime minister. His endorsement establishes her as a serious rival to frontrunner Theresa May.
NYT
– YouNow, a live-streaming app that allows users to perform and interact with fans, has helped singers like Hailey Knox break into the industry. http://nyti.ms/29mwAsn
– As officials struggle to balance the city budget of San Francisco, activists and some lawmakers want the sector to help pay for programs for the homeless and for affordable housing. http://nyti.ms/29md5A4
– A California initiative meant to lower skyrocketing prescription drug prices faces opposition from not only drug makers but also some patient advocacy groups. (http://nyti.ms/29eMs0W)
– A British mutual fund with large investments in London commercial real estate said on Monday that it had suspended requests from investors wanting to exit the $3 billion fund. The decree from Standard Life Investments, the asset management unit of the large British insurance company, was a response to panicked investors looking to pull their assets following the vote by Britons last month to sever ties with the European Union. (http://nyti.ms/29i8vW3)
Britain
The Times
Boris Johnson has endorsed Andrea Leadsom to be Britain’s next prime minister, days after he ruled out making his own bid for the post. (http://bit.ly/29fem9t)
Top Gear host Chris Evans said he was quitting the BBC show and the corporation said it had no plans to replace him. (http://bit.ly/29fehCZ)
The Guardian
Investors in Standard Life Plc’s property funds have been told that they cannot withdraw their money, after the firm acted to stop a rush of withdrawals following the UK’s decision to leave the EU. (http://bit.ly/29fgjTl)
Sainsbury Plc has ditched its joint venture with the low-cost retailer Netto, putting up to 400 jobs at risk and marking the Danish chain’s second exit from the UK in six years. (http://bit.ly/29fgle8)
The Telegraph
Three former Barclays Plc traders have been found guilty of conspiracy to defraud after a three-month trial at Southwark Crown Court. (http://bit.ly/29fgFtl)
Britain will scrape by without a full-blown recession over the next two years as a weaker pound cushions the Brexit shock and panic subsides, Standard & Poor’s has predicted. (http://bit.ly/29fhxhv)
Sky News
Nigel Farage has announced he will step down as leader of UKIP in the wake of the UK’s vote to leave the EU. (http://bit.ly/29fhhPu)
A suicide bomber detonated a device near the security headquarters of the Prophet’s Mosque in Medina, according to Saudi television. (http://bit.ly/29fgXk1)
The Independent
Tom Watson will hold emergency talks with trade union leaders after a fresh attempt to persuade Jeremy Corbyn to step down failed. (http://ind.pn/29fhnXu)
London Stock Exchange shareholders have approved the company’s merger with Deutsche Boerse AG.
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