Tag: finance

After loading up to the gills during the 2020 oil crash, Exxon is slowly but surely emerging from the crisis period (which it survived without slashing its dividend unlike so many of its peers) and moments ago the former world’s largest company reported stellar earnings which beat across the board, but more importantly, revealed a surge in cash flow as oil prices have rebounded, allowing Exxon to not only comfortably pay its dividend and capex, but also aggressively pay down debt: the key line from CEO Darren Wood.“Cash flow from operating activities during the quarter fully covered the dividend and capital investments.”

Here are the Q1 highlights which as noted, were solid across the board:

• Revenue $59.2bln (exp. $4.60bln);
• EPS $0.64 (exp. 0.59),
• Capex $3.1bln (exp. 3.33bln, -4bln Y/Y)

The company’s Adjusted net income of $2.76BN (above the $2.55BN expected), was the first profitable quarter for XOM since Q1 2020:

Needless to say, higher commodity prices drove Exxon’s first-quarter profit. Exxon’s average realizations for crude oil rose 42% from the fourth quarter, while natural gas realizations climbed 33%.

As for CapEx, Exxon said it was keeping its capital budget at $16 billion-$19 billion this year, a level that management has said is rock bottom, probably below maintenance levels, adding that “If market conditions continue above the company’s planning basis, additional cash will be used to accelerate deleveraging.”

Some more details on Q1 financials:

• Upstream earnings 2.55bln (exp. 2.62bln)
• Chemical earnings 1.42bln (exp. 970mln)
• Cash flow from operations and asset sales 9.57bln (+50% Y/Y)
• Downstream loss 390mln (exp. loss of 134mln)

Here Bloomberg notes that as with Shell, Exxon enjoyed the strong upswing in the chemical market. The company generated $1.4 billion in adjusted net earnings (total adjusted earnings were $2.7 billion). Exxon said it benefited from “continued strong demand, global shipping constraints, and ongoing supply disruptions, particularly in North America, where the polyethylene and polypropylene markets were affected by severe winter weather in Texas.”

And some more on chemicals, which is benefiting from the current rage in house-building, a trend that should be enough to move the needle even for an oil giant the size of Exxon. As such, BBG notes that “Its chemicals division is being lifted by surging prices for plastics.” The cost of PVC, used in pipes, and polypropylene, which packages consumer goods, reached record levels earlier this year, driven by a combination of strong demand and production outages caused by the winter storm and back-to-back hurricanes last year.

Volumes/production:

• Worldwide Net production of BOE/D: 2.258mln
• Refinery throughput 3.75mln BPD (-7.6% Y/Y)
• Natural gas production (mcfd): 9.173mln (exp. 8.870mln)
• Chemical prime product sales (KT): 6,446 (+3.4% Y/Y)
• Downstream petroleum product sales: 4.88mln BPD (-7.7% Y/Y)

The numbers would have been even stronger had it not been for the freak February Texas freeze: Like Chevron, Exxon reported a hit to earnings from the winter storm that pummeled Texas in February, amounting to nearly $600 million: “the severe weather event reduced first-quarter earnings by nearly $600 million across all businesses from decreased production and lower sales volumes, repair costs, and the net impact of energy purchases and sales. All affected facilities have resumed normal operations.”

And yet, despite the storm-related disruptions, overall refining throughput last quarter was “essentially flat” with the fourth quarter as it managed refinery operations in line with fuel demand and integrated chemical manufacturing needs.

But while the top and bottom line were solid, what matters was the cash flow, and it was stellar, coming in at $6.1 billion (thanks to $9.3BN in cash from operations, more than the $6.3BN estimate) and more than enough to cover the $3.7 billion the oil giant pays in dividends each quarter. That freed up money to pay down debt, and fund a likely (small) increase the capital budget next year.

This was in large part thanks to some of the best operating cash cost reductions in the industry.

The company’s guidance was solid across all sectors: :

Upstream Guidance (via slides see below):

• Lower volumes with seasonal gas demand and higher scheduled maintenance
• UK North Sea sale expected to close near mid-year, subject to regulatory and third-party approvals

Downstream Guidance

• Continuing demand improvement with economic recovery
• Higher planned turnarounds and maintenance

Chemical Guidance

• Continuing tight supply/demand balance with increased industry maintenance
• Higher planned turnarounds and maintenance

Notably, Exxon said in its slide presentation that its Permian drilling and completion costs have declined 40% versus 2020, as have lease operating expenses. Last year’s pandemic has forced price reductions for oil services. In fact, that’s allowed producers to slash CAPEX without cutting too much of their oil production.

Finally, the presentation has several slides dedicated to the hostile proxy fight with Engine No 1 (which bought a few millions XOM shares and thinks it can decide strategy) as well as its much better relationship with that other, and far more respectable activist, DE Shaw.

Full presentation below

Authored by James Rickards via The Daily Reckoning,

What took Wall Street so long to figure out something I’ve been saying for months?

Six months ago, even before the presidential election in November, I began warning my readers that Joe Biden was going to double the capital gains tax.

It wasn’t a difficult prediction. Biden said so himself in his campaign website as one of a long list of policy proposals.

Of course, the mainstream media didn’t report this because they were all-in for Biden and were determined to beat Donald Trump (remember how they covered up the Hunter Biden laptop report?).

The media were careful to cover-up any Biden policies that might prove unpopular with voters. Still, Democratic Party progressives knew about the plan and were all for it.

One Simple Rule

My rule for making policy forecasts is simple. If a politician tells you he’s going to do something, believe him.

Policies don’t drop out of the sky. They’re the result of intense internal debate and compromise by competing factions. Once a policy makes it to a candidate’s website, you can bet they will try to deliver.

This doesn’t mean that every proposal becomes law because there can be opposition in Congress and the courts. However, it does mean the politician will work to achieve his stated goals.

With the White House and both houses of Congress in the Democrat’s hands, the odds of this doubling of the capital gains tax becoming law look very good.

Despite my forecasts (which fortunately left my readers well-prepared), Wall Street didn’t seem to pay attention until last Thursday, when the Dow Jones index plunged 210 points in a matter of hours after the Biden tax plan was formally announced.

That’s a good example of how so-called “efficient markets” are not efficient at all.

Not so Efficient After All

Mainstream economists have insisted for decades that markets are highly efficient, and they do a nearly perfect job of digesting available information and correctly pricing assets today to take account of future events based on that information.

In fact, nothing could be further from the truth. Markets do offer valuable information to analysts, but they are far from efficient.

Markets can be rational or irrational. Markets can be volatile, irrationally exuberant, or in a complete state of panic depending upon the emotions of investors, herd behavior, and the specific array of preferences when a new shock emerges.

If markets were so efficient, why was Wall Street surprised when it was obvious to anyone paying attention that Biden was going to raise the capital gains tax?

The capital gains tax increase information had been there for all to see for six months, but it took a press release to get Wall Street to sit up and take notice.

It should have been priced in long before, and the announcement just would have confirmed market expectations.

So the next time you hear about efficient markets, take it with a large grain of salt.

But my forecast from six months ago was wrong in one respect.

Even Worse Than I Thought

I said the tax rate on capital gains would almost double from 20% to 39.6%. It turns out the rate will actually be 43.4% once a 3.8% investment income surtax is added on top. That surtax is a holdover from Obamacare.

If one were to add state and local income taxes, the combined rate on capital gains could exceed 50%, depending on the jurisdiction.

Of course, capital gains taxes are imposed on investments you make from after-tax dollars, so even the initial investment has already been taxed. And the corporations whose stock you buy pay corporate income tax too.

When those burdens are included, you’re lucky to get even 25% of your gains back net of taxes. This will be a headwind to stock markets for the foreseeable future.

The big question is, is the stock market in a bubble?

A $100 Million Deli?

When I first saw a recent story about a deli in New Jersey that was worth $100 million, I couldn’t believe it.

I assumed the deli must have a big-ticket franchising deal with McDonald’s or Subway to expand to 1,000 locations under the original name brand. That type of deal might justify a sky-high valuation for a one-store operation.

But, no, there was no franchise deal or other licensing deal that might explain the price. It’s just a deli with about $35,000 in annual sales.

As one analyst said, “The pastrami must be amazing.” Does anyone in their right mind think a deli with $35,000 in annual sales could be worth $100 million?

Well, it turns out that the owner of the deli created a company called Hometown International, and its shares trade over-the-counter. Recently, investors have bid up the stock price from $9.25 per share to $14.00 per share, giving the deli company a market capitalization of $113 million.

Hoping For a Greater Fool

But this story is not really about delis or pastrami. It’s about market bubbles and ridiculous valuations that can result when retail investors bid up stocks in the hope that a greater fool will pay them even more when they cash out.

In these situations, the market capitalization becomes completely detached from fundamental value, projected earnings or any other tool used in securities analysis.

It’s just a bubble with inevitable losses for the last buyers. But does that mean you should sell all your stocks now because the bubble will pop any day now?

No, not really. Bubbles can last longer than many believe because there is a continual flood of new buyers who hope that they won’t be the last ones to run for the exits.

The bigger issue is whether this kind of bubble in one stock indicates a broader market indices trend.  The Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite are all at or near all-time highs.

But this does not automatically mean the stock market indices are in bubble territory, although, many objective metrics, including the ratio of market cap to GDP and the Shiller CAPE price-earnings ratio, indicate that is the case.

No One Rings a Bell at the Top

Saying that markets are overvalued is not the same as saying they’re ready to crash.

It will take some external shock such as higher interest rates, a geopolitical crisis, or an unexpected bankruptcy of a major company to bring markets back to earth.

We know that such events do occur with some frequency. But, it’s probably not a good idea to short the market, because it could go even higher. That’s the way bubbles work. No one rings a bell at the top. There’s no precise formula to tell you the day they’ll pop.

So, I’m not suggesting that you sell everything and head for the hills. Having said that, it’s a good idea to reduce your exposure to stocks, diversify with cash and gold and just bide your time.

When the crash comes, you’ll be greatly outperforming those who are all-in with stocks – including delis.

Then we’ll see how efficient markets really are.

“As good as it gets.”

U.S. index futures slumped on the final trading day of April, dragged lower alongside European and Asian markets, despite stellar economic data and blockbuster earnings as traders took a month-end breather amid a record high for the S&P 500 Index and some earnings disappointments. The dollar pared April losses, and the VIX jumped.

Russell 2000 futures tumbled 1.1% and Nasdaq 100 futures dropped 0.8% after China’s antitrust crackdown weighed on Asian technology shares. Twitter plunged 13% in premarket trading after forecasting second-quarter revenue below some expectations, while Amazon’s blockbuster earnings helped push the stock to all time highs, although gains were trimmed in the premarket.

As Bloomberg notes, confidence in the U.S. economy has surged amid a string of positive data culminating in a report Thursday that showed quarterly growth at an accelerated 6.4%. Given the Federal Reserve’s dovish resolve, that emboldened investors to stay bullish on stocks despite concern about high valuations. Some speculated Fed Chair Jerome Powell will come under pressure later this year to reassess the extent of accommodation.

Meanwhile, earnings continue to be impressive and with just over a half of S&P 500 companies reporting earnings, about 87% beat market expectations, the highest level in recent years. For both the MSCI world index and the S&P500, analysts are expecting earnings in the next 12 months to recover to above pre-pandemic levels.

“The trouble is the asset froth that results from this — we see asset valuations very, very stretched,” said Yves Bonzon, chief investment officer at Julius Baer Group Ltd. “Will Chairman Powell blink and start to guide for slightly less accommodative policy sooner than expected? That could be a risk as early as the third quarter.”

But not yet, and the MSCI’s index of world stocks covering 50 markets dipped 0.1% but remained close to a record peak touched the previous day, up 5% on the month.

“The Federal Reserve continues to support, Biden has this huge stimulus programme as well and the earnings season continues — so far we have seen relatively benign as well as strong earnings,” said Eddie Cheng, head of international multi-asset portfolio management at Wells Fargo Asset Management.

Europe’s Stoxx 600 Index reversed earlier gains and fell as much as 0.4% to a session low, with basic resources the worst-performing European sector, sliding 1.6%; Technology -1%, Travel & Leisure -0.9%, Energy -0.9%; Telecoms, Healthcare and Insurance are only industry groups out of 20 that are in the green. Here are some of the biggest European movers today:

• AstraZeneca shares rise as much as 4.4% after the company reported profit and sales that exceeded analyst estimates in the first quarter and reiterated FY guidance. The company’s cancer drugs are among key products helping overcome disruption from Covid-19.
• Signify shares jump as much as 7.9% to a record after first-quarter results that Degroof Petercam said were “much stronger than anticipated,” saying results were supported by robust consumer demand for digital products.
• Banco Sabadell shares jump as much as 7.4% to highest in more than a year after the Spanish lender reported earnings that Barclays says are good, with solid commercial trends.
• Barclays shares drop as much as 7.5% after the bank warned that costs are rising and reported a quarterly bad debt provision of GBP55m, despite peers releasing funds this week. Strength in the investment banking arm came at a cost, adding to the firm’s bonus expenses.
• Scatec shares drop as much as 12% after earnings. Pareto says the Norwegian solar firm had a “mixed quarter” and adding that long- term it “will be difficult for Scatec to live up to what we view as unrealistic market expectations on future growth and profitability.”

Eurozone GDP and inflation data surprised to the upside, with economic growth shrinking -0.6%, better than the -0.8% expected, while HICP came in at 1.6%, in line with expectations as unemployment of 8.1% was also better than tha 8.3% expected. France, the euro zone’s second-biggest economy, saw stronger than expected growth in the first quarter.

“The speed of the vaccinations is picking up and the EU recovery fund is also finally getting off the ground” said Commerzbank analysts adding that “there is increasingly bright light at the end of the tunnel.”

It wasn’t all roses: Q1 GDP in largest economy Germany fell more than expected on a seasonally adjusted basis. Germany’s 10-year Bund yield, which moves inversely to price, slipped 0.009% to -0.202%. The German economy contracted by a greater than expected 1.7% in the first quarter as a lockdown in place since November to contain the coronavirus stifled private consumption in Europe’s largest economy, data showed on Friday.

“The coronavirus crisis caused another decline in economic performance at the beginning of 2021,” the Federal Statistics Office said. “This affected household consumption in particular, while exports of goods supported the economy.” A Reuters poll had pointed to a first-quarter contraction of 1.5%.

Earlier in the session, Asian stocks fell as China’s crackdown on technology and its disappointing economic data damped sentiment. The MSCI Asia Pacific Index was down 0.9% on Friday, with Hong Kong’s Hang Seng Index leading the region lower, falling 2% after Chinese regulators imposed wide-ranging restrictions on the financial divisions of 13 companies. Tencent and Meituan, which dropped 3.6%, were among the biggest drags on the MSCI Asia Pacific Index.

Chinese shares also took a hit after data showed manufacturing slipped in April and the services sector weakened. The April NBS manufacturing PMI fell to 51.1 from 51.9 in March and below the 51.8 consensus while Caixin manufacturing PMI improved to 51.9 from 50.6 in March. Mixed signals from two manufacturing PMI surveys due to sample differences likely suggest relatively faster growth in machinery manufacturing sectors in April and solid external demand. Overall, manufacturing growth remained decent in April. The NBS non-manufacturing PMI moderated to 54.9 from 56.3 in March, also missing the 56.1 consensus. Construction activities decelerated more meaningfully than services.

Energy and financials pushed the CSI 300 Index down 0.8%. Asian stocks are still headed for a gain of more than 1.6% in April, their third monthly advance in four. Material and tech stocks are leading the advance as investors continue to bet on a global economic recovery. Taiwan’s Taiex index, which is closed for a holiday along with Vietnam, gained almost 7% in April, the best performance in the region so far. Taiwan equities are “set to keep EM Asia leadership,” driven by a brighter outlook on exports as developed market economic activity continues to pick up, Bloomberg Intelligence analyst Marvin Chen wrote in a note.

New coronavirus infections in India surged to a fresh record and France’s health minister said the dangers of the Indian variant must not be underestimated. “Risky assets have had quite a few wobbles within the month,” said Eddie Cheng, head of international multi-asset portfolio management at Wells Fargo Asset Management.. “We need to get used to the fact that this is not going to be a straight line.”

In rates, the 10-year Treasury yield was steady and on course for the biggest monthly decline since July. Treasuries were little changed as U.S. trading gets under way after paring Asia-session declines that were led by a supply-induced selloff in Australian bonds. Yields are higher by less than 1bp across the curve, 10-year 1.64% vs session high 1.658%; 50-DMA at about 1.59% Friday continues to provide support.  Yields are higher on the week, in which stocks, commodities and inflation expectations have moved up, but Treasuries remain on pace for their first monthly gain since November. 10-year yield touched 1.686% Thursday, highest since April 13, and is 8bp higher on the week, reflecting inflation concerns that persist despite the Fed’s view of a still-fragile U.S. economy.

In FX, the Bloomberg Dollar Spot Index was higher as the greenback advanced against most of its Group-of-10 peers after it got some traction as London trading got underway. The dollar advanced beyond the 1.21 handle versus the euro despite mostly better than forecast data out of the euro zone. The pound trailed both the dollar and euro as investors prepared for next week’s Bank of England meeting; banks are divided over whether policy makers will taper bond purchases or wait until later. Scandinavian currencies were the worst G-10 performers but were still set to end the month as peer-group winners. The Australian dollar was steady while the nation’s bond yields rose, tracking higher Treasury yields and ahead of a 2031 bond auction; kiwi bonds slid after a very large offer emerged at the central bank’s QE operation. The yen rebounded from a two-week low as a decline in equities supported demand for haven assets ahead of a holiday in Japan next week.

In commodities, oil prices took a breather after hitting six-week highs on strong U.S. economic data, on concerns about wider lockdowns in India and Brazil. Brent slipped 0.54% to $68.19 per barrel, after having hit a high of $68.95 on Thursday, while U.S. West Texas Intermediate (WTI) fell 0.78% to $64.50 per barrel.

To the day ahead now, in the US we get the personal income and personal spending data for March, the MNI Chicago PMI for April and the final University of Michigan consumer sentiment index for April. From central banks, the Fed’s Kaplan will be speaking, while earnings releases include Exxon Mobil, Chevron, AbbVie and Charter Communications.

Market Snapshot

• S&P 500 futures down 0.3% to 4,191.25
• MXAP down 0.8% to 207.06
• MXAPJ down 0.9% to 698.55
• Nikkei down 0.8% to 28,812.63
• Topix down 0.6% to 1,898.24
• Hang Seng Index down 2.0% to 28,724.88
• Shanghai Composite down 0.8% to 3,446.86
• Sensex down 1.4% to 49,046.71
• Australia S&P/ASX 200 down 0.8% to 7,025.82
• Kospi down 0.8% to 3,147.86
• Brent Futures down 0.83% to $67.99/bbl
• Gold spot down 0.15% to $1,769.56
• U.S. Dollar Index up 0.2% to 90.793
• STOXX Europe 600 was little changed at 439.11
• German 10Y yield fell 1 bps to -0.202%
• Euro down 0.21% to $1.2096

Top Overnight News from Bloomberg

• The euro-area economy slid into a double-dip recession at the start of the year as strict coronavirus lockdowns across the region kept many businesses shuttered and consumers wary to spendU.K. house prices surged at the strongest pace since 2004 this month as the country eased out of lockdown and buyers rushed to take advantage of an extended tax break on purchases
• Copper’s surge toward a record high is starting to cause stress for industrial consumers in China, such as manufacturers of electric wire and end-users such as power grids and property developers
• World powers are working to restore their nuclear agreement with Iran by the middle of May, before a key monitoring deal expires, with talks now in their third week bogged down over which sanctions the U.S. intends to lift
• UBS Group AG will relocate its Tokyo-based rates trading business to Sydney by the end of this year as the Swiss bank reorganizes its Asia-Pacific operations

Quick look at global markets courtesy of Newsquawk

Asian stocks traded subdued after the momentum from yesterday’s intraday rebound and fresh record highs on Wall Street waned, with the region tentative on month-end and as participants digested an influx of earnings and mixed data releases, while an extended weekend for key markets in which Japan and China will remain closed through to Wednesday also contributed to the paring of risk. ASX 200 (-0.8%) declined with broad early pressure across all sectors. In addition, the recent pullback in copper from a decade high and announcement by ANZ Bank of a substantial impact to its H1 net also added to the sombre mood. Nikkei 225 (-0.8%) was dragged lower by currency inflows and amid an overload of recent earnings releases ahead of its 5-day closure but with losses stemmed following stronger than expected Industrial Production data and after the Japanese cabinet approved the use of JPY 500bln in reserve funds to support businesses impacted by pandemic and curbs. Hang Seng (-2.0%) and Shanghai Comp. (-0.8%) weakened heading into the Labor Day holidays for the mainland and amid a deluge of corporate results including the largest banks which were pressured after relatively tepid earnings growth amongst China’s big four banks although PetroChina was bolstered following a jump in earnings. There were also concerns regarding a crackdown on the tech sector after Chinese regulators warned of tighter oversight for its tech giants and ordered 13 firms to adhere to tighter regulation of data and lending practices, while markets also reflected on the latest Chinese PMI data in which official Manufacturing and Non-Manufacturing PMI disappointed but remained in expansionary territory and Caixin Manufacturing PMI topped estimates. Finally, 10yr JGBs were steady after the indecisiveness in T-notes and amid the lack of BoJ purchases in the market today, while the central bank also recently announced its bond buying intentions for May whereby it maintained the amounts and frequency of JGB purchases across all maturities.

Top Asian News

• Pertamina Exploration Unit Said to Mull $3 Billion Jakarta IPO
• China Policy Banks Postpone Earnings, Echoing Last Year’s Delay
• Taiwan’s Economy Grows Fastest Since 2010 on Export Boom
• China Stocks Fall After PMI Data, Tech Leads Drop in Hong Kong

Major bourses in Europe are again subject to lacklustre morning trade (Euro Stoxx 50 -0.1%), as newsflow remains quiet on month-end, and earnings take focus. State-side futures are subdued vs their counterparts across the pond, with relatively broad-based and modest downside experienced across peers. It’s also worth noting that Japanese and Chinese players will be away from their desks next week until the 5th of May amid domestic holidays – thus overnight volume is likely to be low during the first half of next week. Back to Europe, Germany’s DAX (+0.5%) narrowly outperforms regional peers after yesterday’s underperformance coupled with some gains across large-cap stocks, albeit the breadth among European cash bourses remains narrow. In-fitting with the indecisive tone, sectors across Europe are mixed and again it is difficult to observe a particular theme given earnings distortions. The healthcare sector is the clear outperformer as AstraZeneca (+3.3%) soars post-earnings after side-lining reports that point to a delay in its vaccine’s US FDA approval. On the flip side, the basic resources sector stands as the laggard amid a pull-back in base metal prices, whilst banks also reside towards the bottom of the pile as yields waned from yesterday’s best levels and following corporate updates from Barclays (-4.7%), BNP Paribas (-1.0%) and BBVA (+0.9%), although the latter has nursed opening losses. Some attribute the downside in Barclays and BNP to sluggish fixed income trading performances vs rivals including JPM, Goldman Sachs and Deutsche Bank (+0.1%). Finally, Darktrace (+35%) shares were bolstered on their London debut whereby shares traded above GBP 3.50 at one point vs guided range GBP 2.20-2.80.

Top European News

• Euro-Area Economy Slips Into Double-Dip Recession: GDP Update
• Ogury Said to Pick BofA, BNP for IPO at $2.4 Billion Valuation
• DoorDash Goes on European Deal Hunt Just Months After IPO
• Synlab Rises After $813 Million IPO as Covid Testing Ramps Up

In FX, only one day left for the Dollar to evade any residual month end selling, and so far so good as it continues to defy bearish rebalancing signals and the ongoing dovish overtones imparted by the Fed with some assistance from a back-up in yields and curve re-steepening. However, the Buck is also benefiting at the expense of others and a degree of consolidation or corrective price action approaching the end of a 4th successive week of depreciation. Looking at the DXY as a proxy, a marginal new recovery high from sub-90.500 lows in the index was forged at 90.822 after the Euro filled remaining bids in to 1.2100 and tripped a layer of stops on the back of weaker than forecast prelim German Q1 sa q/q GDP. However, Eur/Usd has found a base nearby and 2.1 bn option expiries at the round number could be keeping the headline pair underpinned alongside bids in the Eur/Gbp cross around 0.8700 that may be due to RHS fix and/or month end demand. Accordingly, Sterling is facing a task to retain grip of 1.3900 vs the Buck after topping out below yesterday’s 1.3975+ peak and failing to breach a double top against the Euro circa 0.8674, irrespective of Pound positives in the form of a super strong Nationwide UK house price survey and upbeat Lloyds business barometer.

• AUD/CAD/JPY/NZD/CHF – All more rangebound and narrowly mixed vs their US counterpart, as the Aussie and Loonie continue to derive traction from recent rallies in metals and oil among other commodities like palladium hitting Usd 3k/oz for the first time ever. Aud/Usd is holding above 0.7750, while Usd/Cad is hovering around 1.2275 following a decline to new multi-year lows sub-1.2270 in the wake of last week’s hawkish BoC policy meeting. Elsewhere, the Yen is back above 109.00 with the assistance of greater Japanese participation for a session in between Showa Day and Golden Week market holidays, plus data on balance as ip confounded downbeat expectations and the unemployment rate fell against consensus for a steady print to offset weaker than anticipated Tokyo CPI. Back down under, the Kiwi is lagging between 0.7255-30 parameters in the absence of anything fresh on the NZ front and the Franc remains tethered to 0.9100 after a big base effect boosted Swiss retail sales in March and KoF’s leading indicator smashed forecasts in April.
• SCANDI/EM – Although crude prices have come off the boil, the Nok is still comfortably above 10.0000 vs the Eur in stark contrast to the Sek that has slipped to fresh weekly lows near 10.17000, with traction from an unexpected decline in Norway’s jobless rate, a firmer credit indicator (albeit due to a back month revision) and steady Norges Bank daily foreign currency sales for next month (Nok 1.8 bn equivalent). Meanwhile, the firmer Usd bounce is taking its toll on almost all EM currencies, bar the resilient Cnh and Cny that are close to w-t-d pinnacles of 6.4607 and 6.4654 respectively regardless of somewhat disappointing Chinese official PMIs that were only partially compensated by a stronger Caixin manufacturing survey.

In commodities, WTI and Brent front-month futures trickle lower in early European trade as catalysts remain light and the tone across the market tentative. WTI, at the time of writing, has dipped back below USD 64.00/bbl (vs high USD 64.95/bbl) while its Brent counterpart hovers around USD 67.25/bbl (vs high USD 67.97/bbl). Barring any other macro headlines, the focus will be on the state of the Iranian nuclear talks – with cautious optimism expressed by the US and Iran, whilst others stated they expect a deal within weeks. That being said, commentary from the Iranian delegation has suggested there remain difficulties in discussions and a deal hasn’t yet been reached. In case of any agreement, eyes will likely turn to the details surrounding the oil-related sanctions. Elsewhere, spot gold and silver are uneventful within recent ranges around USD 1,775/oz and on either side of USD 26/oz respectively. Spot palladium meanwhile has reached USD 3,000/oz for the first time with some citing a supply shortage. Turning to base metals, LME copper has waned back below USD 10,000/t ahead of the Chinese and Japanese holidays through to next Wednesday, whilst Chinese steel rebar and futures posted weekly gains amid an improved demand outlook.

US Event Calendar

• 8:30am: March Personal Income, est. 20.2%, prior -7.1%
  • 8:30am: March Personal Spending, est. 4.1%, prior -1.0%
  • 8:30am: March PCE Deflator MoM, est. 0.5%, prior 0.2%; Core Deflator MoM, est. 0.3%, prior 0.1%
  • 8:30am: March PCE Deflator YoY, est. 2.3%, prior 1.6%; Core Deflator YoY, est. 1.8%, prior 1.4%
• 9:45am: April MNI Chicago PMI, est. 65.2, prior 66.3
• 10am: April U. of Mich. Mich. Sentiment, est. 87.5, prior 86.5; Current Conditions, est. 97.6, prior 97.2; Expectations, est. 81.0, prior 79.7;
  • 10am: April U. of Mich. 1 Yr Inflation, prior 3.7%; 5-10 Yr Inflation, prior 2.7%

DB’s Jim Red concludes the overnight wrap

After what is probably more than 6 months I’m actually going to a restaurant tomorrow night. Reservations are like gold dust here in the U.K. at the moment so my wife and I are very lucky to join a couple who have one. Only a few problems. We have to eat outside, it’s going to be cold, it might rain, and my old school friend who booked it hasn’t replied to me confirming it. The good news is that he reads the EMR so I’m hoping he’ll confirm once this hits inboxes. Unless of course we’ve been replaced by a more exciting couple. In that case I’m keen to shame him. I hope not as my wife and I are like caged tigers waiting for social interaction that isn’t each other at the moment.

After a little bit of consolidation over the last month, bond yields have acted a little like a caged tiger this week with yesterday seeing another big climb higher. 10yr US Treasuries were up as much as +7.8bps intra-day yesterday to 1.686% after being as low as 1.53% intra-day last Friday. It was the highest yields had traded since April 13. However the benchmark rate finished a more moderate +2.5bps higher on the day at 1.634%. This still left the week-to-date rise at +7.7bps, which would be the first weekly increase in yields since the week ending April 2 unless there is a massive rally in bonds today. Real rates (+2.5bps) drove much of the final move as inflation expectations (+0.1bps) were more muted. However, inflation expectations did rise for the 5th straight session (+9.4bps in all over this period), with the 10yr breakeven measure closing at 2.426% – its highest level in just over 8 years. In Europe there was a similarly large selloff, with yields on 10yr bunds up +3.8bps to -0.19%, marking the first time in over a year that they’ve closed above the -0.20% mark, while 10yr French yields (+4.4bps) likewise closed at a 1-year high.

Although rising bond yields seemed to clip their wings a little as the move higher accelerated, US equities still moved to fresh all-time highs yesterday as the combination of strong economic data and better-than-expected earnings releases helped to buoy investor sentiment and fuel fresh life into the reflation trade. By the close, the S&P 500 had gained another +0.68% to end the session above the 4,200 mark for the first time, and the MSCI World index was up +0.39% at its own record high. This positive mood music could be seen across a range of indicators, and Bloomberg’s index of US financial conditions actually eased to its most accommodative level since 2007 yesterday, which just shows the extent to which markets are primed for a strong recovery over the coming months.

A late selloff in Europe meant that indices there ended the session lower with the STOXX 600 closing down -0.26%. Banks outperformed however thanks to the moves higher for yields, and the STOXX Banks index was up +1.16% in its 6th successive daily advance, taking the index to its highest level since the pandemic began. Over in the US, the gains were fairly broad-based with over 78% of the S&P moving higher on the day, though the NASDAQ (+0.22%) underperformed slightly, while the small-cap Russell 2000 (-0.38%) lost ground. US banks (+2.10%) joined their European counterparts in reacting strongly to global yields. Otherwise nearly every industry group outside of the pandemic winners of Software (-0.59%) and Biotech (-1.02%) gained in the S&P. The biggest industry laggard was autos (-3.03%), where Ford (-9.41%) reduced its forecast significantly due to a semiconductor shortage that has caused vehicle production across the industry to stall. They forecasted a -$2.5bn hit to earnings because of the lack of chips, in what they considered the “worst-case”. This is becoming a recurring theme across different sectors.

Elsewhere in earnings, Amazon saw their shares rise +3.2% in after-market trading on strong beats across business segments. Q1 revenue rose +44% and the company offered guidance on sales for the upcoming quarter ahead of analysts’ estimates, with indications that aspects of the pandemic bump in online-sales may endure. Elsewhere in big tech, Twitter saw shares slide over -7% with EPS at $0.16 (vs. $0.12 exp.) on lower revenue guidance even as user growth was in-line with prior estimates. One issue for the company may be the stronger ad revenues seen by competitors Google and Facebook earlier this week.

Overnight in Asia we have seen China’s official April PMIs come in softer than expectations for both manufacturing (51.1 vs. 51.8 expected) and services (54.9 vs. 56.1 expected). Zhao Qinghe, an economist at the statistics bureau said that “some surveyed companies said problems such as chip shortages, poor international logistics, shortages of containers, and rising freight rates are still serious.” He also added that a slowdown in manufacturing supply and demand and rising cost pressures are also issues. These comments on rising cost pressures and chip shortages are likely to get more attention from markets and particularly inflation enthusiasts. In the details of the manufacturing PMI, a sub-index of new export orders for factories eased to 50.4 in April from 51.2 previously, while new orders were at 52. In contrast to the official manufacturing PMI, China’s Caixin manufacturing PMI came in at 51.9 as against 50.9 expected. The statement accompanying the release said that the increase was supported by significant expansion in both manufacturing demand and supply, as “manufacturers stayed confident about the economic recovery and keeping Covid-19 under control.” So a little different to the official release.

Elsewhere, Chinese regulators have imposed wide-ranging restrictions on the financial divisions of 13 companies, including Tencent and ByteDance in an antitrust crackdown.

Asian markets are mostly trading lower this morning with the backdrop of conflicting signals from China’s April PMIs and the continued antitrust crackdowns on tech giants in the country. The Nikkei (-0.52%), Hang Seng (-1.53%), Shanghai Comp (-0.51%) and Kospi (-0.74%) are all losing ground. Futures on the S&P 500 are also down -0.28% and European ones are also pointing to a weaker open. In terms of other overnight data, Japan’s final April manufacturing PMI printed 0.3pt stronger than the flash at 53.6.

There were also a number of important data releases for markets to digest yesterday, even if the overall impact was muted as they came in basically as expected. The main highlight was the news that the US economy had grown at an annualised pace of +6.4% in Q1 (vs. +6.7% expected), leaving US GDP less than 1% beneath its pre-Covid peak in Q4 2019. Meanwhile, the upward revision of +19k to last week’s initial jobless claims data from the US meant that this week’s number of 553k was the lowest since the pandemic began last year, albeit above the 540k reading expected.

Another story yesterday was the continued strength in commodity markets, which has been one of the major themes of the month as pretty much the entire range from metals to agriculture to energy prices have shown sizeable gains in recent weeks. Oil prices rose for a 3rd day running, with both Brent crude (+1.92%) and WTI (+1.80%) prices seeing decent advances, which were in part attributed to data showing road-fuel demand in the UK is nearing the levels seen last-summer and also as large cities in the US announce reopening plans. Meanwhile copper rose above $10,000/tonne in trading at one point for the first time in a decade yesterday, as it closes in on an all-time high set in February 2011 of $10,190 on an intraday basis. The industrial metal finished the day marginally lower (-0.11%), but is up nearly +28% YTD.

Positive headlines regarding the pandemic were another factor supporting sentiment yesterday. Firstly, French President Macron said that the restrictions would be eased from May 3 when restrictions on domestic travel would be lifted, while the nightly curfew would be gradually eased before it’s completely lifted on June 30. Meanwhile in Germany, health minister Spahn said that 1.1m vaccine doses had been administered yesterday, which is a record for the country. And in the UK, the 7-day case average fell to 2,259 yesterday, which is its lowest level since early September when the level of testing was a fraction of its current levels. In the US, NYC Mayor de Blasio said that they planned to fully reopen the city on July 1, though Governor Cuomo pushed back that he would like it to happen even sooner. Chicago’s mayor also announced they would be easing restrictions to allow for more seating capacity at restaurants, bars and other indoor venues. There was some bad news in the US, where Oregon announced a surge in cases, driven primarily by the younger, partially-vaccinated populations. The Governor has responded by increasing the risk-level on many counties to their extremes, shuttering indoor dining among other restrictions.

Elsewhere, emerging markets like Brazil and India are continuing to reel under the severe current wave with total fatalities in Brazil now topping 400k with the country reporting more covid deaths so far in 2021 than in whole of 2020. India has reported a record 386,452 daily infections while daily fatalities came in at 3,498. On the more positive side, BioNTech CEO Ugur Sahin said that he is “confident” the company’s Covid-19 vaccine with Pfizer will be effective against the Indian variant of the COVID-19 virus. He added that the company is evaluating the strain and the data will be available in the coming weeks.

Looking at yesterday’s other economic data, and the European Commission’s economic sentiment indicator for the Euro Area advanced to 110.3 in April (vs. 102.2 expected), which is the highest it’s been since September 2018. Over in Germany, data showed that unemployment unexpectedly rose by +9k in April (vs. -10k expected), while the preliminary inflation reading for April rose to a 2-year high of +2.1% (vs. +2.0% expected). Finally, pending home sales in the US rose by a lower-than-expected +1.9% in March (vs. +4.4% expected).

To the day ahead now, and there are an array of data highlights including the first look at Q1 GDP for the Euro Area, Germany, France and Italy. On top of that, we’ll also get the flash Euro Area CPI reading for April, and the unemployment rate for March. Over in the US, there’s the personal income and personal spending data for March, the MNI Chicago PMI for April and the final University of Michigan consumer sentiment index for April. From central banks, the Fed’s Kaplan will be speaking, while earnings releases include Exxon Mobil, Chevron, AbbVie and Charter Communications.

Following reports that Beijing was looking to scapegoat regulators responsible for initially permitting the ill-fated Ant Group IPO, which was scuttled by the CCP leadership back in October after Alibaba founder and Ant Group Chairman Jack Ma criticized Chinese tech regulation, saying it was “stifling innovation”, at an obscure industry conference, it appears China’s anti-trust regulators are imposing new restrictions on the financial arms of other Chinese tech giants after hobbling Ant.

As Beijing reportedly prepares to slap Tencent with an antitrust fine commensurate with the $2.8 billion recently demanded from Alibaba, news that Chinese regulators had summoned 13 internet companies and ordered them to rectify their digital financial businesses dealt another blow to market sentiment. The wide-ranging restrictions could weigh on credit growth and hurt the prospects of public share offerings by fintech firms, analysts have warned.

The HS Tech index which includes many Chinese tech firms is down 23% from the February peak as Beijing has vowed to step up scrutiny on monopoly practices in the industry and ordered overhaul of Alibaba’s Ant Group. Meituan, which was the subject of its own antitrust crackdown earlier this week, saw shares fall as much as 3.6%, while Tencent dropped 1.2%. The two companies were the biggest drags on the MSCI Asia Pacific Index.

In Hong Kong, the Hang Seng was down 1.6% at the lows, with Alibaba and Meituan the biggest laggards. The CSI 300 Index, China’s blue-chip index, dipped as much as 0.6% on Friday, which was the last before a five day market holiday next week.

Although it’s now evening in China, the news of the summoning was elaborated upon by a WSJ report published at 0700ET, which confirmed what analysts had widely expected: the PBOC and four other regulatory agencies had told Tencent and the other major firms that their popular finance apps could no longer be used to hawk loans and other financial products. From now on, these companies will be required to stick to payments.

During the nearly three-hour-long meeting at the People’s Bank of China’s Financial Market Department, regulators told company representatives that the bundling of several financial services within a single platform obscured how much money was flowing into the various products, creating risks for the broader financial system, these people said.

Regulators’ push to delink the technology companies’ broader suites of financial products and services from their core payments platforms, if carried out, would deal a blow to a lucrative business model pioneered most successfully by Ant Group Co., the financial-services giant controlled by billionaire entrepreneur Jack Ma.

“In the past, payment was the end of all transactions, but now payment has become the beginning of all transactions,” Ant’s then-chief executive Simon Hu told Chinese media last year.

Since then, regulators—citing the systemic financial risks posed by Ant—have halted a planned initial public offering by the company and pressed it to reorganize itself as a financial institution, subject to oversight by China’s central bank.

Beijing’s anti-trust crackdown on the country’s biggest firms is one of the biggest threats to equity-market valuations in the world’s second-largest economy (and might at least partly contribute to the latest rush for Chinese firms to list in the US).

Here’s what analysts at Wall Street banks are saying about Beijing’s latest move (courtesy of Bloomberg).

Jefferies:

• “Good days have gone. Tier-2 fintech platforms (the 13 companies excluding Tencent financial) grew business rapidly in the past six months, as they have been gaining market share while regulators focused on Ant rectification, but we expect them to slow down in volume growth starting from 2H20.”
• “We reiterate that China has shifted from encouraging personal consumption lending to curbing rapid increases in residential leverage.”
• “Fintech firms will be more difficult to get listed, including overseas and secondary listing, which is also negative for HKEx.”
• ABS issuance by their micro-lending or consumer- financing subsidiaries will be tightened.
• The Global CIO Office (Gary Dugan, chief executive officer)
• The move is “worrying.” “If these restrictions crimp credit growth, it will be bad news for the economy and the equity market.”

Core Pacific

• Investors will be cautious because the detailed policy on each company is not clear enough, since there is just a policy framework at the moment
• Investors may not rush to buy those firms at the moment, given the policy uncertainty on each firm is still high, though the framework itself removes some overhang on the sector
• The impact on Tencent and Meituan, for example, is not clear, while there is a possibility that the two will not need to restructure its fintech business the way Alibaba restructured Ant Group

Bloomberg Intelligence (Francis Chan, analyst)

• “Payment function of big tech apps is the biggest gateway for most fintech products in China, while removing the links could diminish the fintech industry outlook going forward.”
• “It may potentially lead to a shrinkage of overall fintech market.”

With Asian stocks facing a week-long lull in liquidity during the upcoming Golden Week holiday, China tumbled Friday after the latest disappointing PMI numbers prompted questions about whether China’s economic growth might be moderating. After a meeting of the Politburo on Friday, the country’s highest ruling body warned that the current economic recovery remains “unbalanced and unstable” and will require more effort to achieve a “balanced” economy.

But concerns about the short-term outlook for China’s economy might not be the only thing weighing on investor sentiment. Earlier this week, we also received confirmation that the deflationary forces facing the Chinese economy are especially dire. To wit, the latest Chinese census data (somehow leaked to the FT) are expected to show the first annual population decline since record-keeping began in 1949.

It’s just the latest reminder that China is battling not one but three vicious economic demons. The interconnected issues of insurmountable debts, deflation, and demographics threaten to sap the world’s future growth potential. All of this brings us back to what may be one of the most important near-term factors for markets: China’s credit impulse, which is – for those who aren’t familiar – a measure of changes in public and private credit creation as a percentage of national GDP.

As Washington pushes for the biggest tax hikes in decades, and rising inflation in the US becomes increasingly difficult for the Fed to ignore, China’s credit impulse will play a bigger role in global credit creation – the grease that keeps the wheel of the global economy turning.

Authored by Colin Lloyd via The American Institute for Economic Research,

In the aftermath of the Black Plague which swept across Europe between 1347 and 1353, wiping out between 30 and 60% of the population, the European economy changed dramatically.  

Source: Jeremy Norman – HistoryofInformation.com

The Black Plague had a lasting socioeconomic impact; for example, towns and cities emptied, and the sudden reduction in the labour force saw wages rise. Meanwhile attitudes towards death – and life – changed. The Latin phrase, carpe diem, quam minimum credula postero – seize the day, place no trust in tomorrow – epitomised this profound shift in attitudes.

The current pandemic, whilst utterly tragic, has been far less catastrophic, but due to the policy response it too appears destined to leave its mark in changing patterns of living and working. Unlike the 1350’s, however, where the changing price of goods and services signalled imbalances in supply and demand, the valiant monetary and fiscal actions of governments and institutions have distorted this price discovery mechanism. 

During the first months of the lockdown, economic growth declined and the price of many equities – and even bonds – fell rapidly. Central banks responded, as they had during the Great Financial Crisis (GFC) of 2008/2009, by cutting interest rates, or, where interest rates could be cut no further, by increasing their purchases of government bonds and other high grade securities. As a result of these purchases, major central banks balance sheets have swollen to $29trln:

Source: Yardeni, Haver Analytics

The effect of central bank actions has spilled over into a ballooning of global money supply: –

Source: Yardeni, Federal Reserve

Governments, cognizant of the limitations of their central banks, also reacted, providing loan guarantees, supporting the furloughing of employees and sending direct payments to the rising ranks of the unemployed. The chart below, which is from July 2020 and therefore does not account for the recent US $1.9trln spending package, nor the $2trln infrastructure proposal, shows the scale of these endeavours in comparison to the fiscal largesse of the GFC: –

Source: McKinsey 

The impact of lower interest rates, buying of bonds and increased fiscal spending might be expected to have inflationary consequences but it has been leaning against the headwind of sharply rising global unemployment: –

Source: World Bank

The rise in unemployment was itself a response to a dramatic decline in economic growth: –

Source: Yardeni

US unemployment data is beginning to improve but, as the IMF WEO April 2021 reveals, Europe may take much longer to respond. Euro area unemployment is expected to rise from 7.9% in 2020 to 8.3% in 2022. Forecasting unemployment, however, together with many other economic variables, has become much more challenging since the variance between estimates has expanded: –

Source: Federal Reserve

Savings Surge

A natural side effect of rising unemployment, furloughing of staff, together with reduced mobility and economic activity, during the waves of pandemic lockdowns, has been a rise in household savings: –

Source: S&P Global, ONS, Eurostat, Federal Reserve

The initial recipients of this spring tide of excess savings were the banks: –

Source: Federal Reserve, BEA, Eurostat, Japan Cabinet Office, Statistics Canada

Oxford Economics estimates that US savings rose $1.6trln, Eurozone households added Euro470bln and those of the UK, £170bln. Estimates from Moody’s put the figure even higher, suggesting that the global pool of excess savings may now have reached $5.4trln – roughly 6% of global GDP. Since we are only interested in the impact of ‘excess savings’ rather than ‘all savings,’ the next chart is informative. It shows the monthly change in US savings: –

Source: Federal Reserve, BEA

What will be done with these pools of saving? They may remain in bank accounts, be used to pay down debt, spent on goods and services or invested. In a recent article – What Is behind the Global Jump in Personal Saving during the Pandemic? The Federal Reserve reveals the impact during Q1-Q3 last year: –

Source: Federal Reserve, BEA, Eurostat, Japanese Cabinet office, Statistics Canada

Debt Binge

The next chart shows global debt and the debt to GDP ratio: –

Source: IIF, BIS, IMF, National sources

Such estimates probably underestimate financial sector debt and do not account for OTC derivatives, which, according to the Bank for International Settlements have a net value of $609trln.

Setting aside derivatives, here is a breakdown by debt type for a selection of larger countries: –

Source: IIF, Deutsche bank, Visual Capitalist

During 2020, relative to GDP, government debt rose from 89% to 105%, and financial sector debt to a more moderate 81%. Meanwhile, non-financial private sector debt swelled to 165% and non-financial corporate debt to 100%, helped by debt moratoria and loan guarantee programs. Many large firms, particularly in the U.S. and Japan, increased borrowing simply to bolster their cash holdings. Despite rising savings, household debt even managed to increase, from 61% to 65% of GDP, encouraged by cheap mortgages and the resilience of residential real estate: –

Source: The Economist, OECD, Land Registry, S&P CoreLogic

Elected government officials will be afraid to stem these price rises, as they hope that homeowners will feel wealthier which should feed through, eventually, to consumption. A belated exception is New Zealand, which extended its ‘bright-line test’ to reign in price increases which hit 23% annualised in March. This smacks of window dressing, as increasing the time an investment property must be held in order to gain tax breaks, from 5 years to 10, is hardly aggressive. Meanwhile, to avoid political censure, they have also introduced incentives for first-time buyers, desperate to get on the first rung of the property ladder. The UK government response to rising residential property prices has been more predictable, allowing the maximum loan to value to rise to 95%, creating an even more leveraged residential market. 

Of course the price of housing also responds to changes in supply. This is the picture in the US, where, despite feverish building activity, the supply of existing homes remains severely constrained: –

Source: Goldman Sachs, NAR, III Capital Management

The purchasers of this dwindling supply of residential real estate look increasingly like the ‘haves’ rather than ‘have nots’ – 14% of all US mortgage applications made in February were for second homes, compared to just 7% in April 2020. Similar patterns are evident in other countries. Little wonder, then, that household debt has risen.

If household savings are not being used to pay down debt, that leaves three choices; continued saving (in other words lending to the banks at near zero interest), consumption or investment. The rising price of stocks and resilience of bonds suggests savings are flowing into liquid asset markets: –

Source: CNBC, BoA, EPFR Global

Bond markets are more difficult to gauge, as they are not the retail investors’ first port of call. However, central banks continue to expand their balance sheets and the majority of the assets they purchase remain government and agency bonds. Meanwhile, many institutions are required to maintain liquidity in their portfolios, making them reluctant buyers of fixed income securities despite negligible or negative real yields. 

Other assets have also increased in price, including an array of commodities and cryptocurrencies. Some of this price appreciation is due to supply constraints but in many instances demand is driving prices higher. This may be because investors fear that the combination of fiscal and monetary expansion, combined with supply chain constraints and trade tensions, will awaken the slumbering giant inflation. This picture must be tempered, for as money supply has expanded dramatically, its velocity has continued to decline. The chart below shows US M2 but similar patterns are evident in other developed markets: –

Source: Federal Reserve

The US Treasury Bond market, led by the eponymous bond vigilantes, took flight in February and March: –

Source: Trading Economics

The bond market regained composure thanks to the palliative tone of the Federal Reserve, elegantly expressed in a recent speech by Governor Lael Brainard – Remaining Patient as the Outlook Brightens (emphasis mine): –

…The emphasis on outcomes rather than the outlook corresponds to the shift in our monetary policy approach that suggests policy should be patient rather than preemptive at this stage in the recovery.

Many developed market government bonds remain close to the zero bound, yet yields have risen from their nadir at the end of 2020. As of 2nd March a mere 17% of sovereign issuance enticed investors with a negative yield to maturity: –

Source: LPL Research, Bloomberg

The quest for yield, which has driven investors into riskier assets for more than a decade, continues to provide an alternative to low or negative-yielding government paper. The dark blue line on the chart below shows the narrowing of the credit spread of BBB corporate bonds even as US 10-year yields rose: –

Source: Amundi, Bloomberg

This yield compression is seen even more starkly in the spread between US 10-year and 30-year US mortgages: –

Source: Federal Reserve

Household Wealth

Considering the constrained nature of the US residential housing market and the fact that the 30-year Mortgage to 10-year Treasury spread is at its narrowest since July 2011 one can hardly be surprised at the appreciation of residential real estate prices. In fact the inflation of The Everything Bubble means that, unlike previous recent recessions, during the recent pandemic household net worth has actually risen: –

Source: Gavekal, 3 Fourteen Research 

The Great Reopening

Looking back over the last year, it is unsurprising that asset markets have risen. As lockdowns end and life returns towards the new normal, the key question is, what percentage of excess savings and recent investments will be redirected towards consumption and how quickly?

The Conference Board Global Consumer Confidence Index hit an all-time high of 108 in Q1, 2021, up from 98 the previous quarter – this is the highest reading since the survey began in 2005. Confidence rose in 49 out of 65 markets. When the UK reopened retail outlets, after four months, on April 12th, year-on-year footfall surged +516%, but it was still down -15.9% on the equivalent day in 2019. According to a Mintel Survey, 34% of UK consumers still feel unsafe visiting stores. Full lockdown restrictions in the UK will not end until June 21st. The road to reopening will be gradual.

The US Morning Consult Consumer Confidence Index reveals a similar picture: –

Source: Morning Consult

Morning Consult indices of 15 other economies show the same pattern, yet in each case a larger share of lower income households reported a deterioration in their financial position over the past year.

Goldman Sachs estimates that nearly two-thirds of excess savings in the US are held by the richest 40%, and they predict that the majority of these savings will be saved rather than spent. As of Q3, 2020 the top 20% of households by wealth held $10.2trln in liquid assets, the next 20% owned $2.3trln, whilst the balances of the remaining 60% amounted to just $2.7trln. As of end Q4, 2020 the top 20% garnered an additional $1.5trln of savings, and the remaining 80% accumulated just $0.7trln. 

This breakdown between richer and poorer households is important. A recent Federal Reserve study revealed that, under normal circumstances, households in the bottom quintile spend $0.97 of every dollar earned, while those in the top quintile spend just $0.48. A February Bank of America survey, asking more than 3,000 people how they would use another stimulus check, reveals a similar result – only 36% said they would spend the money.

If only $570bln out of $5.4trln of excess savings has been invested in stocks so far this year, there would appear to be a powerful put option under the stock market, but is this the correct conclusion? Without consumption spending, corporate profits will disappoint. Without consumption, demand-pull inflation will melt away, leaving only supply-chain bottlenecks to prop up inflation forecasts. Unemployment is still elevated, union membership continues to decline and new private capital expenditure will arrive cautiously. The bond vigilantes may have come to their inflationary senses, for government bond yields have already started to decline.

Lower bond yields, however, will support the stock market, as they have done for the last decade, and so too will excess savings. Add in cheap finance and The Everything Bubble looks set to continue. The melt-up from here will be gradual and there is room for some sharp corrections as the base effect of last year’s disinflation spooks the inflation bears. 

As for what is really happening? The Everything Bubble is a grand illusion, money is growing more plentiful, credit more available. Asset prices are not really rising; it is the value of money which is being systematically undermined.

I wonder whether the motto for this pandemic will be carpe diem, quam minimum credula pecunia – seize the day, place no trust in money?

When you’re a Chinese company and can list on U.S. exchanges – with little to no recourse or consequences for committing fraud and/or total opacity – why wouldn’t you?

Perhaps this is why there has been an influx of Chinese IPOs on U.S. exchanges of late, despite the ongoing tension between the U.S. and China. Even during the Trump administration, it seemed we had learned to be hawkish everywhere except on our capital markets. 

Chinese companies continue to pay listing fees, and continue to get listed, CNBC noted this week. “Despite the coronavirus pandemic and tensions between the U.S. and China, half of 36 foreign public listings in the U.S.” during the first three months of this year came from greater China.

Additionally, about 60 more Chinese companies are slated to go public in the U.S. this year. Vera Yang, chief China representative for the New York Stock Exchange, told CNBC: “From our interaction with companies, our sense is they would like to lose no time (in listing).”

Right, Vera. And you’d like to lose no time collecting listing fees.

 

Chinese startups seem unconcerned with Trump era rules that would force U.S. exchanges to delist companies that don’t comply with three years of U.S. audits. (Could that be because it usually takes far less than 3 years for Chinese firms to siphon money off U.S. exchanges, when that’s their motive?)

Blueshirt managing director Gary Dvorchak, who advises Chinese companies interested in listing in the U.S., said it has been a “tidal wave” of Chinese companies seeking to list since President Biden took office. “Our phone is ringing off the hook. We’re trying to hire more people. We haven’t seen anything like this since the Nasdaq bubble in ’99. Makes me worried,” he said.

What could there possibly be to worry about?

The rush is also being fueled by hot money chasing after Chinese unicorns. Hongye Wang, China-based partner at venture capital firm Antler, said: “A lot of companies cannot raise a lot of money, or their valuation(s) are decreasing. But if you look at the unicorns, especially the pre-IPO unicorns, their valuation is still crazy.”

For example, popular Chinese soda water company Genki Forest now sports a $6 billion valuation and recently raised $500 million. During the same week, the next largest Yuan-based fundraising rounds was just $92.3 million for Abogen Biosciences. 

But some Chinese names do slump after making their way to U.S. exchanges. Ringo Choi, Asia-Pacific IPO leader at EY, said: “The after-IPO pricing trend is not as good as last year.”

However, if you’re a bad actor or dubious company just looking for access to naive investors or liquidity, just making your way onto a U.S. exchange is a win in and of itself.

The Wall Street Journal Editorial Board said it best: Biden’s latest $1.8 trillion plan rejects the old social contract of work for benefits…

So much for the “safety net” to prevent poverty.

This is now about mainlining benefits to middle-class families so they become addicted to government – and to the Democratic Party that has become the promoting agent of government.

…

All of this adds up to healthy guaranteed annual income largely untied to the social contract that requires work, which is the real path to independence and self-respect.

The new taxes are destructive, but their impact will take time to be felt as the post-pandemic economy soars. The GOP shouldn’t ignore the taxes and spending.

But a more potent political target may be the bill’s tripling down on a welfare state that disdains the dignity of work and seeks to make Americans the wards of government.

If that doesn’t make you nervous, Conrad Black (via The National Interest), believes that Joe Biden’s speech was a declaration of war on America.

The best aspect of President Biden’s speech to the nation from the House of Representatives was his competent and persuasive delivery. He once again beat back the claims that he is a senescent, robotic dummy of severely diminished cognitive abilities. It was just reading a Teleprompter, but everyone remembers what an almost insurmountable challenge even that was at times in his candidacy, while the national political media conducted his campaign for him.

He spoke to a sparse, well-distanced corporal’s guard of well-masked and double-vaccinated legislators-signaling their doubts about vaccines and determination to continue lock-downs-Covid got Biden to the White House but they all seemed absurd.

 

He did not mention his predecessor and his entire address of over an hour was based on the only argument the Democrats have put forward on their own behalf in the last five years: Trump hate. He assumed the headship of ”a nation in crisis,” in which our “house was on fire,” and “We stared into the abyss of insurrection and autocracy,” a pitiful and almost subliminal appeal to the Trump Monster.

The country had “done nothing about immigration in 30 years,” (most of them under Clinton and Obama), except that under Trump illegal immigration was reduced by 90 percent, and the principal problem was effectively solved until Biden stopped construction of the southern border wall and reopened the borders. He said it was time to do something about the ”dreamers” but that was not the policy of his party when Trump attempted to help them. Biden called for resources to deal with the “root cause of why people are fleeing” Central America as if it were the business of the United States to raise the welfare of those poor countries, and feed more graft into them, rather than to monitor its own border and apply a sane system of an admission of immigrants.

He revived the old Obama nonsense about combating employment with unionized green jobs, and leaped into the time warp of bygone days with the bunk that “the middle class built the country and the unions built the middle class, and we must promote the right to unionize.” Unions today are an almost wholly retrograde force redundant to market pressures for higher wages and better working conditions and largely confined to the stagnant backwater the public sector.

The former administration created huge numbers of “millionaires and billionaires who cheat on their taxes…adding $2 trillion of debt and extending the pay disparity between the chief executive and the lowest wage earner to 320 to 1.” Naturally ignored were the facts that under his predecessor the income taxes of 83 percent of taxpayers were reduced, the number of positions to be filled exceeded the number of unemployed by over 750,000 and the lowest 20 percent of income-earners was in percentage terms gaining income more swiftly than the top ten percent.

He taxed the former administration with  “trickle-down” economics, though that charge was leveled at President Reagan’s massively popular and successful economic policies. Most outrageously, Biden took all credit for 220 million vaccinations with no hint that if it had not been for Trump’s direct intervention to accelerate the development of vaccines, none of it would have happened.

Almost as disingenuous was the claim that House of Representatives Bill Number 1, which would effectively eliminate any serious method of verifying the validity of individual votes, is really an attack on the Republican effort to attack “the sacred right to vote.“ That bill is almost certainly unconstitutional, would institutionalize and protect mass ballot harvesting, and it ignores the fact that 77 percent of Americans support photo-identification for voters.

The climate was again bandied as an “existential crisis” even though Biden acknowledged that the U.S. only provides 15 percent of the world’s carbon emissions. He also omitted to mention its splendid record in reducing those omissions even though there remains no convincing argument that they are relevant to the alleged crisis. Foreign affairs was an unrecognizable dreamworld: ”while leading with our allies” and  “working closely“ with them to deal with Iran and North Korea, (principally by recommitting the West to acquiescing in Iranian nuclear militarization), he will ”stand up to (Chinese leader) Xi” whom he realizes is ”in deadly earnest” in his determination to supplant the United States as the world’s most important country.    

After the usual reassertion that everyone is created equal, Biden slipped in the need to ”root out systemic racism that plagues America… White supremacy is terrorism” and has “surpassed Jihadism” as a menace. He gave no hint of what he thinks of organizations that are constantly threatening to burn America down if they’re not successful in extracting a full-body immersion in self-humiliation from the majority of Americans who despise all racism. Rarely in his rabidly bowdlerized summary of the nation’s affairs does the president allow the truth to intrude. This made the opposition response by Sen. Tim Scott of South Carolina particularly effective.

In sum, Biden’s address was cringe-worthy, fatuous, and deeply distressing. The State of the Union is almost at suicide watch.

Authored by Irina Slav via OilPrice.com,

When Texas literally froze this February, some blamed the blackouts that left millions of Texans in the dark on the wind turbines. Others blamed them on the gas-fired power plants.

The truth isn’t so politically simple. In truth, both wind turbines and gas plants froze because of the abnormal weather.

And when Warren Buffet’s Berkshire Hathaway said it had plans for additional generation capacity in Texas, it wasn’t talking about wind turbines. It was talking about more gas-fired power plants—ten more gigawatts of them.

While the Texas Freeze hogged headlines in the United States, across the Atlantic, the only European country producing any electricity from solar farms was teeny tiny Slovenia. And that’s not because Europe doesn’t have any solar capacity—on the contrary, it has a substantial amount. But Europe had a brutal winter with lots of snow and clouds. Despite the often-referenced fact that solar panels operate better in cooler weather, sub-zero temperatures are far more drastic than cool. This is not even to mention the cloud cover that, based on the Electricity Map data above, did not help.

If we go back a few more months, there were the California rolling blackouts of August that state officials and others insisted had nothing to do with the state’s substantial reliance on solar and wind power. The state’s own utilities commission disagrees.

This is what the California Public Utilities Commission and the state’s grid operator, CAISO, said in a joint letter to Governor Newsom following the blackouts:

“On August 15, the CAISO experienced similar [to August 14] supply conditions, as well as significant swings in wind resource output when evening demand was increasing. Wind resources first quickly increased output during the 4:00 pm hour (approximately 1,000 MW), then decreased rapidly the next hour. These factors, combined with another unexpected loss of generating resources, led to a sudden need to shed load to maintain system reliability.”

Further in the letter, CPUC and CAISO also had this to say:

“Another factor that appears to have contributed to resource shortages is California’s heavy reliance on import resources to meet increasing energy needs in the late afternoon and evening hours during summer. Some of these import resources bid into the CAISO energy markets but are not secured by long-term contracts. This poses a risk if import resources become unavailable when there are West-wide shortages due to an extreme heat event, such as the one we are currently experiencing.”

These lengthy quotes basically say one thing—and it is a well-known thing: wind and solar power generation are intermittent, and this intermittency is a problem. This problem continues to be neglected in the mainstream renewable energy narrative with only occasional talk about storage capacity. The reason? Battery storage is quite expensive and will increase the cost of solar and wind generation. Hence the blackout risk as renewable power capacity continues to rise.

“People wonder how we made it through the heat wave of 2006,” said CAISO’s chief executive Stephen Berberich last August. “The answer is that there was a lot more generating capacity in 2006 than in 2020…. We had San Onofre [nuclear plant] of 2,200 MW, and a number of other plants, totalling thousands of MW not there today.”

In a recent article for Forbes, environmentalist Michael Shellenberger cited both the Texas Freeze and the California August 2020 outages as examples of why there should be less solar and wind capacity added to the grid, not more: because the more renewable capacity there is, the higher the risk of blackouts.

Solar and wind are weather-dependent sources of electricity and, as the events in Texas and California show, they are unreliable, Shellenberger, who is the founder and president of Environmental Progress, a research nonprofit, wrote. He also pointed to Germany, where an audit of the country’s energy transition plans showed that some of the projections were overly optimistic, while others were outright implausible.

People in Germany, like people in California and New York, by the way, are paying more for electricity than people in places that are less dependent on renewable energy. While some may be perfectly fine with paying more for cleaner electricity, not everyone can afford it over the long term. And affordable energy is crucial for civilization, Shellenberger notes.

Affordability is one essential requirement for energy if it is to contribute to the improvement of living standards, even if we take economic growth out of the equation since it appears to be very passé these days amid the fight against climate change. Yet affordable energy is one of the driving forces of equality among different communities across the world. And so is reliable energy.

Affordability and reliability, then, are the two things good energy sources need to be. Solar and wind—unlike hydropower, which is also a renewable source—can only be one of these two things, and that’s if there is no storage included. They can be affordable, as we are often reminded. Yet, sadly, they cannot be reliable.

This means that the more billions are poured into boosting renewable capacity, the greater the risk of further blackouts. Perhaps at some point, if wind and solar become the main sources of electricity, authorities will need to institute planned outages.

The author of this article grew up in the 1980s in Bulgaria – a time when the country’s socialist government exported so much electricity for hard currency payments that blackouts were a part of life. It wasn’t a particularly convenient life, but millions of people lived that way in both Bulgaria and Romania. It’s worth mentioning, though, that back in the 1980s, people were not constantly online. Our energy consumption has soared since then.

To be fair, the limited availability of electricity would have an incredibly positive effect on greenhouse gas emissions. That is, if the limitation comes from the limited amount of energy generated rather than from excessive exports. In the end, from an environmental perspective, an overwhelming reliance on wind and solar, and the planned blackouts that are quite likely to result from this reliance, would go a long way towards the Paris Agreement targets. Of course, it would cost people certain inconvenience and loss of economic—and scientific, and medical—activity. But if priority number one is fighting climate change, then the end must surely justify the means.

If you’re aching for a look at what post-Covid life in the U.S. should eventually look like – assuming clueless politicians and double-maskers don’t seek to wield supreme executive power over our daily lives ad infinitum – you shouldn’t have to look much further than Gibraltar. 

Due to its small size, the U.K. territory already has 85% of its adults vaccinated. It’s just one of a handful of places in the world to have vaccinated a majority of its public, according to the Wall Street Journal, who profiled the country this week.

The country has a population of just 34,000 and has vaccinated 98% of adults over 60 years old. It hasn’t had a Covid case since April 8 and one of its vaccination centers closed at the end of March. The country has embarked on a plan called “Operation Freedom”, which is a plan to fully re-open its society. 

 Albert Stagnetto, director of a family chain of tobacco and liquor stores told The Journal: “I walked out of my flat and put my mask on and then remembered that I didn’t have to do that anymore.”

“You are seeing people greet each other in the street, shaking hands, hugging for the first time in months. People are smiling,” he continued. When his family got together for a meal for the first time in months, he said: “It was like being back in normality, but it gave you a false sense of what was going on in the world. It was as if Covid hadn’t happened.”

Schools, businesses and restaurants are all open. The country still only requires masks in a few places, like buses and healthcare centers. 

Samantha Sacramento, Gibraltar’s health minister, commented: “We thought we might encounter difficulty in the [vaccine] take-up, but the actual end result was the opposite. People were calling us up complaining that they hadn’t been called yet.”

72 year old local historian Tito Vallejo just saw four of his grandchildren for the first time in four months. He said: “They are at that sort of age where they grow and change overnight. It’s only been a short time but still I have noticed they’ve grown since I saw them.”

Gibraltar is a self-governing British Overseas Territory. The country is comprised of “a mix of Italians, Spaniards, Maltese and North Africans.” The country remains on edge due to its proximity to Spain, where only 8% of the population has been vaccinated so far. 71 year old Tony Cruz said: “I won’t feel completely confident until everyone else in Spain and elsewhere are vaccinated.”

23 year old Leandro Gonzalez lives in a Spanish town and works in a Gibraltar hair salon. He says reactions have still been mixed: “It’s 50-50 between the people who still want to keep their distance and wash their hands a lot, and those who want to hug you and kiss you.”

He continued: “My mind changes every day. As soon as I cross into Spain, everything changes: People wear masks, they keep their distance. Every time I cross I must also change how I behave.”

Gibraltar had about 4,300 confirmed Covid cases and 94 deaths, almost all in January and February of this year as virulent strains from the U.K. and Spain hit the country. 

The U.S., for comparison, has vaccinated about 37% of all adults. For the U.K., that number drops to about 26%. 

Authored by Paul Joseph Watson via Summit News,

A Christian pastor in the UK was arrested by police after a member of the public reported him for the “homophobic” comment of saying that marriage was between a man and a woman.

Yes, really.

The incident occurred outside Uxbridge Station in west London. A video clip shows the elderly pastor being confronted by police and forcefully handcuffed before being led away.

“I wasn’t making any homophobic comments, I was just defining marriage as a relationship between a man and a woman. I was only saying what the Bible says – I wasn’t wanting to hurt anyone or cause offence,” said John Sherwood, who has been a pastor for 35 years.

“I was doing what my job description says, which is to preach the gospel in open air as well as in a church building,” he added.

Sherwood was arrested under the Public Order Act, for using “abusive or insulting words” that cause “harm” to another person after a member of the public flagged down officers snitched on him.

Although the pastor was released without charge after spending a night in jail he is still under investigation by the Crown Prosecution Service and could be charged at a later date.

“When the police approached me, I explained that I was exercising my religious liberty and my conscience,” he added.

“I was forcibly pulled down from the steps and suffered some injury to my wrist and to my elbow. I do believe I was treated shamefully. It should never have happened.”

The UK is notorious for hate crime laws where authorities will investigate supposed “hate incidents” if the “victim” merely perceives themselves to have been victimized.

Earlier this year, we highlighted how officers in Merseyside took part in an electronic ad campaign outside a supermarket which claimed “being offensive is an offence.”

In 2019, UK police investigated the potential “hate crime” of a transgender woman being turned down for a porn role because she still has a penis.

A video published by the UK government Home Office last year also suggested that insulting someone’s appearance now constitutes a “hate crime,” despite this not being the law.

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