Gold: The Cost Of Fear

Authored by Jeffrey Snider via Alhambra Investment Partners,

Gold is the ultimate hedge, but it is far from perfect. Unlike, say, sovereign bonds there should be no expectation for a negatively correlated price. You can buy a UST or German bund even at negative yields and at least expect the price to rise when things are at their worst. Flight to safety or flight to liquidity.

You can’t with gold. One big reason is its seemingly opposing uses. I got a chance to sit down once again with Erik Townsend of MacroVoices to talk about gold, negative rates, and the lies (of omission) of Janet Yellen, but to further that discussion, particularly the gold parts of it, I’ll add more here.

While a UST will rise in value during a liquidity event partly or even mostly because of its status in repo, the opposite happens in the gold market. Though gold is a collateral of last resort, too, it isn’t as flexible and so it gets dumped whenever deployed that way. Very negative for its price.

So, it ends up in a tug-of-war between what I’ve called collateral gold (negative price) and fear gold (positive price). What ultimately might determine which one wins out is hard to predict, and it’s not a precise and straightforward mix at least inferring ahead of time.

As I wrote last December during the landmine:

Gold may be collateral of last resort but many still treat it as a hedge against everything going wrong – including central banks and their numerous big errors (forecasts). Therefore, even with renewed deflation and market liquidations tied right into collateral problems gold has been moving in that other direction – UP…

In other words, if there wasn’t this fear bid, gold would probably be down huge likely more than it was after April 18. That it’s not and is in fact at multi-month highs is a testament to the level of anxiety permeating global markets right now.

In 2008, for example, collateral gold was unleashed in the immediate aftermath of Bear Stearns – which makes sense given what Bear taught the marketplace about illiquid securities and the need for repo reserves. Gold was down sharply as collateral became very hard to source.

It gained a lot after Lehman because, well, fear. And then it promptly collapsed again when the repo market totally seized up in early and middle October once collateral became the most valuable commodity on the planet.

But then fear won out again late in October 2008 as it became (more) clear that the Global Financial Crisis was one of those historical events that changes things. Among the factors that would be changed was interest rates.

The cost of owning gold as a hedge is determined by the opportunity cost of not holding something else while you do. The metal pays no interest and if the market expects interest rates to rise or stay high, then it is a relatively more expensive and therefore unappealing hedge.

If, however, the market expects otherwise, that interest rates will fall, maybe even to less than zero, gold becomes a much more attractive prospect. Small wonder what happened for the final phase of the panic period where gold was concerned. As market expectations for interest rates (indicated by balance sheet constraints like swap spreads) fell sharply, gold took off even though stocks and other risky assets suffered a third wave of liquidations into early 2009.

Not only do lower rates reduce the opportunity costs for gold, they also signal the often-desperate instability which drives the demand for that kind of severe hedging in the first place. Fear gold and the expectation for, as well as the consequences of, lower rates go together.

All in all, gold performed a whole lot better than many other assets – if you were willing to sit through its severe ups and downs.

This is a different take on how gold is conventionally viewed – seen often as an inflation hedge exclusively. That’s not true, not entirely. It is an instability hedge which includes inflation as one form. As we saw in 2008 and 2009, it is also a deflationary hedge as nothing more than one other form of instability.

Why has gold had such a tremendously positive run in 2019 despite the lack of inflation? Fear gold is much less expensive to hold if the market also expects interest rates to tumble. And as interest rates do tumble, that merely reinforces the deflationary message as it relates to expected elevated instability and uncertainty. Higher demand and lower perceived cost equal much higher price.

The resulting pricing of fear gold simply reinforces perceptions which have already proliferated throughout bond markets around the world. It is corroborating the general sense of unease and maybe fear, along with the expectation that such instability will continue to lead bond markets to lower interest rates (and maybe that central banks will have no choice but ditch their yield curve denial and get with reality) which will make the gold hedge even less expensive as one.

There are those who still believe a rising gold price is indicative of only inflation. To this other view, what gold in 2019 might mean is a negative event which forces central banks into overdrive. In other words, supposedly, gold is rising in anticipation of the “money printing” that will be unleashed once central bankers are made to realize the seriousness of this situation; they’ll surely overdo it on the “accommodation.”

But if that was so, why aren’t bond market inflation expectations also rising? TIPS and euro-denominated inflation-protected bonds would be trading that way and they aren’t. The bond market sees disinflation even though bond investors, meaning banks buying up balance sheet tools, are very well aware of what central banks are most likely going to be doing at some point.

That’s what eurodollar futures are also telling us; that the market is already pricing a serious probability of a return to ZIRP in the US which in all likelihood won’t be the only component; it will almost certainly include a restart of QE if not more. The ECB has already practically confirmed as much on its end.

The reason the bond market isn’t pricing in a resulting burst of inflation is because the banks buying the balance sheet tools in the bond market (and maybe gold, too) know from experience and practice central banks are incapable of creating inflation. That much has been fully established by the last twelve years. The fact that central bankers don’t know it yet further strengthens the case; they’ll try and simply repeat the same failures even if they go full BoJ QQE shock and awe.

For fear gold, it doesn’t matter. Gold demand is against instability, which takes many forms not just inflation. And since the rising dollar tends to also indicate the deflationary form, gold can, has, and does rise at certain times the dollar’s exchange value is also rising.

via ZeroHedge News https://ift.tt/2Zyq1gx Tyler Durden

Stock Surge Erases All Trump-China Trade War Escalation Losses

Well, that was easy…

The last small leg higher, to entirely erase the losses from last Friday were sparked by Trump saying on Fox Radio that “China wants to make a deal… sort of has to make a deal” and was enough to trigger the algos…

But bonds ain’t buying it…

Source: Bloomberg

 

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Elites “Going Rogue” Suggests The Global Neoliberal Architecture Is Collapsing

Authored by Michael Every via Rabobank,

Listen carefully. That is the sound of going rogue – and bond yields further through the floor.

Yesterday UK PM Boris Johnson announced he is going to prorogue–or close–Parliament, meaning that when MPs come back to sit next week they will only do so briefly, and will then not return until 14 October, when there will be a new Queen’s Speech to launch BoJo’s slate of legislation as the new PM. So far, so technical. Yet what this effectively means is that there will be a very narrow window next week, and then a slightly larger one in the final two weeks of October, for Parliament to act to prevent Hard Brexit on Halloween.

This is explosive and unprecedented stuff, politically. The British constitution is largely unwritten and so allows wiggle room, and the government insists they have checked the legality of all they are proposing; nonetheless, as the press and opposition note, it smells awful. This is clearly a case of Erskine May (the ‘parliamentary bible’ that looks and sounds like it belongs in a Harry Potter tale) turning into Erskine Maybe or Erskine Might.

Indeed, BoJo is being accused of a “coup”, a “constitutional outrage”, an “abomination”, and of being a “tinpot dictator”, though this being the UK, perhaps that should be “teapot”; but there is not just tea but a genuinely revolutionary atmosphere brewing. Bob Kerslake, former head of the civil service, is quoted in the Guardian as stating:

We are reaching the point where the civil service must consider putting its stewardship of the country ahead of service to the government of the day.

AGuardian op-ed advocates the current head of the civil service should follow the advice. Even the British royal family, already facing one scandal, risks getting sucked into this given some had expected the Queen might not accept the privy council’s advice to prorogue at all.

Of course, this all comes just after Bill Dudley publicly suggested the US Fed has a duty not to help ameliorate a Trump trade war via cutting rates and to instead hold fast to ensure he isn’t re-elected. As such, what we are seeing transcends Brexit, though I will return to it in a moment. Rather, this is the broad warning from my 2016 ‘Thin Ice’ report:

the global neoliberal architecture collapsing, and perhaps taking some liberal-democratic architecture with it.

If you think that is hyperbole, consider this benchmark – how would we be reacting if the armed forces in any country were saying what Kerslake and Dudley just suggested?

This is not going to change for the better until we get a global new paradigm emerging – and that is a long way off. (Yes, Italy might cobble together a Europhile-PD/Europhobe-5 Star government, but how sustainable is that going to be, and will 5 Star’s party members support it?)

None of this is to take a stance on what any particular executive or legislature is doing on any particular policy front. Rather, it is an analytical view of how bitterly, deeply divided many countries are between a status quo ante, with its neat technocratic rules and regulations, and a populist backlash from those who feel these no longer provide a path to what they used to have and still want. One can argue “executive vs. legislature” or “executive vs. gate-keepers”; yet when the executive speaks of the “will of the people” as its justification it gets very Hannah Arendt very fast. Equally, however, what if the legislature and gate-keepers really are refusing to recognise the need for wrenching populist change, no matter how painful short term? One can argue it left and right and back and forth – but ultimately we will need to see a winner. And that is what markets need to focus on: not who is ‘right’, but who wins and what that means.

So back to the practicalities of Brexit. Parliament has only a few options: sit in another location and call themselves Parliament regardless of the prorogue – is that legitimate or also a dangerous precedent?; pass a law which would cancel the proroguing, which ironically would have to be signed by the Queen who just signed off on the prorogue; call for judicial review of the proroguing, which is on shaky ground according to government lawyers; pass a law to repeal Article 50, which would trigger an inverse political crisis as large as what BoJo is doing; or call a vote of no confidence in BoJo…at which point figures close to him have stated he will wait the allotted 14 days and then dissolve Parliament for new elections…AFTER the Brexit deadline of 31 October. In short, this is all likely to come to a neo-Cromwellian head next week, and Hard Brexit odds are right up there with an election leading us back to the same Revoke vs Hard Brexit binary.

What was the market reaction to the UK heading into such deep, dark waters? GBP initially sold off and then recovered to hold around 1.22. Hardly an emerging market seeing meltdown; by contrast, look at what happened to the Argentinean Peso yesterday, which is currently around 58 when it started the year at below 38. Likewise, Gilt yields declined 2bp at the short end and 6bp at 10s and 5bp at 30s. That is hardly the reaction to a country about to implode and default. Then again, it is hardly a ringing endorsement of the economic outlook either…which, together with US 10s at 1.46% and German 10s at -0.72% explains why we are crashing through our self-made Thin Ice in the first place.

That and the fact that China continues to slow due to its vast self-made problems, according to the Bloomberg Economics gauge. On which final note, today’s CNY fixing was 7.0858, again slightly lower than the previous day, but again much stronger than where the fix was implied (7.1085) and where the market currently is at 7.1652. That’s another piece of neoliberal convention going rogue – the PBOC is saying something, markets are saying otherwise,…and nothing is happening to them as a result.

via ZeroHedge News https://ift.tt/345yCah Tyler Durden

Trump Slams “Horrible, Corrupt Fake News” After MSNBC Anchor Admits “Was Wrong” On Trump-Russia Story

Following MSNBC anchor Lawrence O’Donnell’s tweeted retraction of his ‘thinly-sourced’ lies that Russians had co-signed loans for President Trump, he took to his show last night to talk further about the fake news (but note the barely apologetic tone)…

 “I should not have said it on air or posted it on Twitter. I was wrong to do so. This afternoon attorneys for the president sent us a letter asserting the story is false. They demanded a retraction. Tonight we are retracting the story. We don’t know whether the information is inaccurate. But the fact is, we do know it wasn’t ready for broadcast, and for that I apologize.”

This lack of apology retraction appears to have ‘triggered’ President Trump who took to Twitter to remind his followers just how ‘normal’ this strategy of “loud/dramatic fake news headlines followed by quiet retraction/apology.”

We can’t blame him for the anger.

via ZeroHedge News https://ift.tt/34jycx4 Tyler Durden

Argentine Currency Crashes To Record Low After Debt-Restructuring Plan

As we detailed last night, Argentina’s embattled government will ask its creditors including the IMF for more time to pay off $101bn of debts, as the country struggles to avoid a ninth sovereign default.

Hernán Lacunza, the finance minister, late on Wednesday, said confidently

“The government is aiming to clear the outlook for the financial programme in the short, medium and long-term horizon,”

“This is due to short-term liquidity stresses and not due to problems with the solvency of the debt.”

But the currency markets suggest investors are selling first and asking questions later…

Source: Bloomberg

And JPMorgan agrees, warning that pressure on Argentina’s international reserves may linger amid foreign-exchange deposits withdrawals and dollarization of peso deposits despite the government’s plans to extend debt maturities.

“A political gesture of the main opposition candidate and favorite to win the elections is a necessary condition to break the prevailing vicious cycle that has taken a toll on reserves,” analysts Diego Pereira and Lucila Barbeito write in a note.

By announcing the debt re-profiling late Wednesday, government aims to address short-term liquidity problems with the clear intention of safeguarding reserves, they write.

JPMorgan says the reaction of local law debt holders “is not clear,” particularly if the Congress addresses the local debt re-profiling bill only after the October election.

However, for now, judging by the collapse in the peso, traders are taking the “Fool me once, shame on you, Fool me a ninth time, shame on me!” road…

 

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For The First Time Ever, The Fed Stands Alone

Authored by James Bianco via BiancoResearch.com,

Summary

For the first time ever, the fed funds rate is the highest rate in the developed world. The Fed has some explaining to do.

Comment

This morning the yield of 30-year Italian bonds fell below the fed funds rate. This means the Fed is now in charge of the single highest interest rate in the developed world.

The next chart shows 3-month rates for developed countries back to the 1950s. For the first time in over 50 years, the U.S. 3-month rate (a proxy for the policy rate) is the highest in the developed world.

Restated, this is the first time in modern history that the federal funds rates is the highest short-term rate in the developed world.

U.S. long rates are at a similarly extreme level relative to other developed nations. The next chart shows 62 years of data and, for the first time, U.S. long-rates are the highest in the developed world (this trend began in 2018).

The market has made its opinion known about this situation via the yield curve.

The 3m/10y curve continues to sink further into inversion, approaching its most extreme level in 19 years.

While the yield curve is screaming for a 50 basis point cut, the market is not yet pricing in such a move. As the chart below shows, the probability of a 50 basis point cut is between 5% and 16%.

So why is in the fed funds market not pricing in as aggressive a stance as the yield curve?

As we noted yesterday:

Fed fund futures (and OIS) are not pricing in a 50bps cut because Powell and Fed officials are hinting they are not willing to cut 50. The inverted curve says this is a mistake.

So what gets the market to price in a 50 basis point cut? As we also pointed out yesterday:

Currently, the S&P 500 is trading around 2890. Given a drop to 2822 pushed the implied odds of a 50 bps cut to 36%, it is looking like a trade under 2800 (about an 8% correction from the all-time high) would push fed funds futures to price in a 50% chance of a 50 bps cut.

The next chart illustrates how the odds of a 50 basis point cut (as measured by the October fed funds futures in orange) closely follow the stock market (blue).

Conclusion

When the Fed meets on September 18, officials should ask themselves the following:

The federal funds rate, the rate we administer, is now the single highest interest rate in the developed world. Market measures, like the yield curve, are saying this is wrong.

Are we sure we have the correct policy? What set of economic indicators suggest this is the first time in 60 years that the U.S. should stand alone with the highest rate in the world, led by our administered rate as the highest point of all?

We have argued that an inverted curve damages the economy. Accumulate enough damage and the economy sinks into recession. So, the curve does not predict a recession, it causes it. What is not known is how much damage the economy can withstand.

If the Fed does not get aggressive and cut rates, we are going to find out how much the economy can withstand. And until they do cut aggressively, long-term rates will continue to sink and the inversion will get deeper.

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Q2 GDP Revised Lower To 2.0% Despite Surge In Personal Spending

There were no surprises in today’s first revision of Q2 GDP, which the BEA reported moments ago printed at 2.0% (2.040% to be precise), just as expected, and down modestly from the 2.1% (2.060%) initial estimate; the number was also down from the 3.1% annualized GDP growth in Q1.

The Q2 increase in real GDP reflected an even greater increase in consumer spending and government spending, while inventory investment, exports, housing investment, and business investment decreased. Imports, which are a subtraction in the calculation of GDP, increased. The increase in consumer spending reflected increases in both goods and services that were widespread across major categories. The increase in government spending reflected increases in both federal and state and local government spending.

The decrease in inventory investment reflected decreases in manufacturing, retail trade, and wholesale trade industries. Goods led the decrease in exports.

Curiously, even as overall GDP growth eased somewhat, personal consumption jumped, rising from 4.3% in the first estimate to 4.7% currently: this was the highest PCE in almost five years, since Q4 2014, and up shaprly from just 1.1% in Q1:

As detailed by he BEA, the revision to GDP growth reflected downward revisions to state and local government spending, exports, inventory investment, and housing investment. These revisions were partly offset by an upward revision to consumer spending. Broken down by item, the Q2 GDP of 2.04% looked as follows:

  • Personal Consumption: 3.10%, up from 2.85% in the first estimate
  • Fixed Investment: -0.20%, down from -0.14%
  • Change in Private Inventories: -0.91%, down from -0.86%
  • Net Exports: -0.72%, down from -0.64%
  • Government consumption: 0.77%, down from 0.88%

Inflation remained stable, with the GDP price index rising 2.4% in 2Q, in line with expectations, after rising only 1.1% prior quarter; there was some weakness in core PCE, which rose rose 1.7% in 2Q, missing expectations of a 1.8% increase, after rising 1.1% prior quarter.

Finally, the BEA also reported that in Q2, profits increased 5.3 percent at a quarterly rate in the second quarter after decreasing 3.8 percent in the first quarter. Specifically:

  • Profits of domestic non-financial corporations increased 4.0 percent after decreasing 9.0 percent.
  • Profits of domestic financial corporations increased 1.0 percent after increasing 5.8 percent.
  • Profits from the rest of the world increased 11.7 percent after increasing 1.5 percent.

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Beijing Condemns Washington’s Interference After Latest ‘Freeop’ In South China Sea

The endless back-and-forth of provocations between the US and China in the South China Sea continued apace on Thursday as Bejing condemned the latest US “freedom of navigation” operation near a set of disputed reefs in the South China Sea, according to the SCMP.

On Wednesday, the guided missile destroyer USS Wayne E. Meyer sailed within 12 nautical miles of Fiery Cross and Mischief reefs, the two biggest artificial islands – or, as Steve Bannon calls them, ‘stationary aircraft carriers’ – in the disputed Spratlys.

According to the SCMP, it was the first time an American warship had challenged two Chinese military outposts at once in a “freedom of navigation” operation. On Thursday, Senior Colonel Li Huamin, spokesman of the People’s Liberation Army’s Southern Theater Command, accused Washington of “acting as a hegemony in ignorance of the international laws and rules” and urged itto stop its “provocative actions” to avoid an “unpredictable incident.”

Suggesting that the mission almost resulted in a confrontation, Li said the PLA Navy and Air Force monitored and warned the destroyer, ultimately driving it out of Chinese territory.

Meanwhile, Reann Mommsen, a spokeswoman for US 7th Fleet, said US forces operated in the Indo-Pacific region on a daily basis, including in the South China Sea, and that these operations were simply to make sure the US can still operate in accordance with international law.

“All operations are designed in accordance with international law and demonstrate that the United States will fly, sail and operate whatever international law allows,” she said.

Beijing claims most of the South China Sea, an area rich in resources and through which trillions of dollars in trade passes each year. Despite international court rulings contradicting this claim, Beijing has occupied the Paracel Islands, built up the Spratlys, and assigned significant military forces to them.

The US Navy has sent ships into waters around the Chinese-controlled islands and reefs on an almost monthly basis since the end of last year “to challenge excessive maritime claims.”

“Our troops will [take] all necessary measures to resolutely defend national sovereignty and security and firmly safeguard the peace and stability in the South China Sea,” Li said.

This has greatly angered Beijing, and contributed to the worsening tensions between the world’s two largest economies. Beijing has regularly threatened military retaliation, and on at least one occasion nearly provoked a confrontation between US and Chinese ships.

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8 Reasons To Hold Some Extra Cash

Authored by Lance Roberts via RealInvestmentAdvice.com,

Over the past few months, we have been writing a series of articles that highlight our concerns of increasing market risk.  Here is a sampling of some of our more recent newsletters on the issue. 

The common thread among these articles was to encourage our readers to use rallies to reduce risk as the “bull case” was being eroded by slower economic growth, weaker earnings, trade wars, and the end of the stimulus from tax cuts and natural disasters. To wit:

These “warning signs” are just that. None of them suggest the markets, or the economy, are immediately plunging into the next recession-driven market reversion.

However, The equity market stopped being a leading indicator, or an economic barometer, a long time ago. Central banks looked after that. This entire cycle saw the weakest economic growth of all time couple the mother of all bull markets.

There will be payback for that misalignment of funds.

As I noted on Tuesday, the divergences between large-caps and almost every other equity index strongly suggest that something is not quite right.  As shown in the chart below, that negative divergence is something we should not discount.

However, this is where it gets difficult for investors.

  • The “bulls” are hoping for a break to the upside which would logically lead to a retest of old highs.

  • The “bears” are concerned about a downside break which would likely lead to a retest of last December’s lows.

  • Which way will it break? Nobody really knows.

This is why we have been suggesting raising cash on rallies, and rebalancing risk until the path forward becomes clear. Importantly:

“The reason we suggest selling any rally is because, until the pattern changes, the market is exhibiting all traits of a ‘topping process.’ As the saying goes, a market-top is not an event; it’s a process.”

With no trade deal in sight, slowing global growth, a Fed that doesn’t appear to want to cut rates aggressively, and weakness in markets continuing to spread, it is now time to take some actions.

Time To Take Some Action

Investors tend to make to critical mistakes in managing their portfolios. 

  • Investors are slow to react to new information (they anchor), which initially leads to under-reaction but eventually shifts to over-reaction during late-cycle stages.

  • Investors are ultimately driven by the “herding” effect. A rising market leads to “justifications” to explain over-valued holdings. In other words, buying begets more buying.

  • Lastly, as the markets turn, the “disposition” effect takes hold and winners are sold to protect gains, but losers are held in the hopes of better prices later. 

The last point is relevant to today’s discussion. Investors tend to identify very “specific” price targets to take action. For example, in the chart above, the 50-dma, our previous target, currently resides at roughly at 2950. 

The mistake is only taking action if a specific target is met. If the price target isn’t precisely reached, no action is taken. As prices begin to fall, investors start hoping for a “second shot” at the price target to get out. More often than not, investors wind up disappointed.

As Maxwell Smart used to say: “Missed it by that much.” 

In our own portfolio management practice, technical analysis is a critical component of the overall process, and carries just as much weight as the fundamental analysis. As I have often stated:

“Fundamentals tell us WHAT to buy or sell, Technicals tell us WHEN to do it.”

In our methodology, technical price points are “neighborhoods” rather than “specific houses.” While a buy/sell target is always identified BEFORE a transaction is made, we will execute when we get into the general “neighborhood.”

We are now in the “neighborhood” given both the recent struggles of the market, the deteriorating technical backdrop, and our outlook over the next several months for further acceleration of the trade war. 

This all suggests that we reduce equity risk modestly, and further increase our cash hedge, until such time as there is more “clarity” with respect to where markets are heading next. 

This brings me to the most important point.

8 Reasons To Hold Cash

In portfolio management, you can ONLY have 2-of-3 components of any investment or asset class:  Safety, Liquidity & Return. The table below is the matrix of your options.

The takeaway is that cash is the only asset class that provides safety and liquidity. Obviously, this comes at the cost of return.  This is basic. But what about other options?

  • Fixed Annuities (Indexed) – safety and return, no liquidity. 
  • ETF’s – liquidity and return, no safety.
  • Mutual Funds – liquidity and return, no safety.
  • Real Estate – safety and return, no liquidity.
  • Traded REIT’s – liquidity and return, no safety.
  • Commodities – liquidity and return, no safety.
  • Gold – liquidity and return, no safety. 

You get the idea. No matter what you chose to invest in – you can only have 2 of the 3 components. This is an important, and often overlooked, consideration when determining portfolio construction and allocation. The important thing to understand, and what the mainstream media doesn’t tell you, is that “Liquidity” gives you options. 

I learned a long time ago that while a “rising tide lifts all boats,” eventually the “tide recedes.” I made one simple adjustment to my portfolio management over the years which has served me well. When risks begin to outweigh the potential for reward, I raise cash.

The great thing about holding extra cash is that if I’m wrong, I simply make the proper adjustments to increase the risk in my portfolios. However, if I am right, I protect investment capital from destruction and spend far less time “getting back to even” and spend more time working towards my long-term investment goals.

Here are my reasons why having cash is important.

1) We are not investors, we are speculators. We are buying pieces of paper at one price with an endeavor to eventually sell them at a higher price. This is speculation at its purest form. Therefore, when probabilities outweigh the possibilities, I raise cash. 

2) 80% of stocks move in the direction of the market. In other words, if the market is moving in a downtrend, it doesn’t matter how good the company is as most likely it will decline with the overall market.

3) The best traders understand the value of cash. From Jesse Livermore to Gerald Loeb they all believed one thing – “Buy low and Sell High.” If you “Sell High” then you have raised cash. According to Harvard Business Review, since 1886, the US economy has been in a recession or depression 61% of the time. I realize that the stock market does not equal the economy, but they are highly correlated. 

4) Roughly 90% of what we’re taught about the stock market is flat out wrong: dollar-cost averaging, buy and hold, buy cheap stocks, always be in the market. The last point has certainly been proven wrong as we have seen two declines of over -50%…just in the last 19-years. Keep in mind, it takes a +100% gain to recover a -50% decline.

5) 80% of individual traders lose money over ANY 10-year period. Why? Investor psychology, emotional biases, lack of capital, etc. Repeated studies by Dalbar prove this over and over again. 

6) Raising cash is often a better hedge than shorting. While shorting the market, or a position, to hedge risk in a portfolio is reasonable, it also merely transfers the “risk of being wrong” from one side of the ledger to the other. Cash protects capital. Period. When a new trend, either bullish or bearish, is evident then appropriate investments can be made. In a “bull trend” you should only be neutral or long, and in a “bear trend” only neutral or short. When the trend is not evident – cash is the best solution.

7) You can’t “buy low” if you don’t have anything to “buy with.” While the media chastises individuals for holding cash, it should be somewhat evident that by not “selling rich” you do not have the capital with which to “buy cheap.” 

8) Cash protects against forced liquidations. One of the biggest problems for Americans currently, according to repeated surveys, is a lack of cash to meet emergencies. Having a cash cushion allows for working with life’s nasty little curves it throws at us from time to time without being forced to liquidate investments at the most inopportune times. Layoffs, employment changes, etc. which are economically driven tend to occur with downturns which coincide with market losses. Having cash allows you to weather the storms. 

Importantly, I want to stress that I am not talking about being 100% in cash. 

I am suggesting that holding higher levels of cash during periods of uncertainty provides both stability and opportunity.

With the political, fundamental, and economic backdrop becoming much more hostile toward investors in the intermediate term, understanding the value of cash as a “hedge” against loss becomes much more important. 

Given the length of the current market advance, deteriorating internals, high valuations, and weak economic backdrop; reviewing cash as an asset class in your allocation may make some sense. Chasing yield at any cost has typically not ended well for most.

Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.

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Global Markets Soar After China Hints At Trade Talk Optimism

It is a sea of green across global markets as European stocks and US equity futures rallied sharply and Asian shares pared earlier declines, after after comments from China that Beijing is in “effective contact” with the US on trade and that they are discussing the upcoming September talks. The Chinese Yuan soared while Treasury yields jumped.

The bullish sentiment emerged after China’s Commerce Ministry spokesman Gao Feng said that both US and China trade teams have been in touch, adding that China has ample retaliatory measures and are lodging solemn representations with the US over the additional tariffs, both sides are discussing the September talks and if China officials go the the US then there should be an environment created for progress in the negotiations; calls on the US to cancel the planned additional tariffs to avoid a trade war escalation.

As a result, S&P 500 contracts turned sharply higher, rising 0.7% alongside the 1% move higher in Stoxx Europe 600 Index, just around 3am when China’s commerce ministry spokesman said escalating the trade war won’t benefit either side, and that it was more important to discuss removing the extra duties.

The comments had come after a choppy Asian session. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.15%, Singapore shares hit eight-month lows and Japan’s Nikkei ended fractionally lower.

European bourses are trading at session highs in-spite of a relatively lacklustre open, thanks to the Chinese comments. However, while the market reaction does not reflect this there were some less positive comments as well particularly that China has ample retaliatory measures. Looking ahead, on the US-China front markets are largely awaiting an update on the timeline for Septembers talks. Returning to Europe, the FTSE MIB is the notable outperformer (+1.9%) as the bourse derives strength from the increasing prospect of an Italian coalition forming and thus the budget passing. Similarly to the indices, sectors are all in the green with no notable under/outperformer.

Markets aside, the European economy was hit again as Germany’s labor market looks like it’s starting to crack under the weight of a manufacturing recession, raising the pressure for the government to respond with fiscal stimulus. The number of people out of work increased by 4,000 to 2.29 million in August, the fourth straight month that joblessness failed to drop after six years of almost continuous decline. The unemployment rate remained at 5%, near a record low.

Most European and U.S. government bond yields traded higher on the back of this improved risk sentiment, with BTPs a notable exception. Italian bonds added to the impressive rally in recent days as a new government looks like it will be formed. 10-yr BTP yield trades at record low of 0.93%. That was after the country’s 5-Star Movement and opposition Democratic Party said they would try to form a coalition, setting aside years of hostility to avert a snap election and the economic uncertainty that comes with it.

The two sides still need to agree on a shared policy platform and a team of ministers, but 5-Star chief Luigi Di Maio and his PD counterpart Nicola Zingaretti said they had pledged to find common ground for the good of the country. “We love Italy and we consider it worthwhile to try this experience,” Zingaretti told reporters. Speaking shortly afterwards, Di Maio said: “We made commitments to the Italians…and come what may we want to fulfil them.”

The 10-year Japanese government bond yield had dipped 1 basis point to minus 0.285% overnight too, which is just above its record low of minus 0.300% touched in 2016.

“Falls in global bond yields reflect growing concerns that long-term global growth is slowing down on U.S.-China tensions and worries over subsequent global supply chain disruptions,” said Tomoo Kinoshita, global market strategist at Invesco Asset Management in Tokyo. “Stock markets on the other hand are supported in the near-term by hopes of more stimulus, notably from the Federal Reserve and the European Central Bank,” he said.

Reflecting underlying nervousness, the Merrill Lynch move index, a gauge of investors’ expectations on how volatile U.S. bonds will be, has risen back near three-year highs marked earlier this month.

In FX, there was little reaction from the euro but there was barely any currency market action generally. The Bloomberg USD index was little changed, with CAD leading G-10 gain, NOK lagging, but most G-10 pairs trade in tight ranges. The Japanese yen was a touch higher heading for its biggest monthly rise since May, while sterling was flirting with a January 2017 low of $1.2015 against the dollar after Prime Minister Boris Johnson’s plan on Wednesday to suspend Britain’s parliament increased no-deal Brexit nerves.

China’s yuan initially dipped for an 11th straight session although a firmer-than-expected central bank fixing for the 7th session helped stem deeper losses and against a basket of currencies. The People’s Bank of China set its daily fixing at 7.0858 per greenback, stronger than the average estimate of 7.1085 from a survey of 20 traders and analysts. As a result, the Bloomberg replica of the CFETS RMB Index, which tracks the yuan versus a basket of trading partners’ currencies, rose for the first time in week. However, the far sharper move for the yuan took place in afternoon trading when the currency reversed a drop against the dollar, rising as much as 0.3%, after China signaled it wouldn’t immediately retaliate against the latest U.S. tariff increase announced by President Donald Trump last week.

The MSCI emerging market currency index was also at its lowest levels since mid-November, having fallen 0.9% so far this week and set for its biggest monthly fall in more than seven years. The latest hit came in Argentina as it said it wanted to restructure a large chunk of its bonds by extending their maturities and to “re-profile” the maturities of debt owed to the IMF under a $57 billion standby agreement. The battered peso took another hammering on Wednesday, even though the central bank intervened heavily in the foreign exchange market for a second consecutive day.

Argentine assets have been slammed since business-friendly President Mauricio Macri was trounced in primary elections by centre-left Peronist challenger Alberto Fernandez: “President Macri instructed me to solve the short-term problem to guarantee electoral stability, but also in the medium- and long-term so as not to leave a problem for the person who follows, be it he or another candidate,” Argentina’s Treasury Minister, Hernan Lacunza, said.

In geopolitical news, Iran’s Foreign Minister Zarif said it will not be possible for Iran to engage with US unless they stop imposing a war and conducting economic terrorism, while he added the US must observe 2015 nuclear deal if it wants to meet for talks. Elsewhere, Turkey President Erdogan spoke with US President Trump via telephone regarding latest developments in Syria and bilateral issues, while Erdogan said he is in agreement with US which is a correct step towards ‘safe zone’ in northeast Syria. In other news, Russia and Turkey are considering creating a new fighter jet, according to Russian officials.

In commodities, WTI edges slightly higher ($56.07) while Brent slips slightly lower. Precious metal investors were still on a quest to buy safer assets: gold rose as high as $1,543 per ounce, near six-year highs of $1,556.1 set earlier in the week, while silver rose 1.2% to $18.55 per ounce which is just shy of a 2017 peak of $18.65 an ounce.

Market Snapshot

  • S&P 500 futures up 0.6% to 2,907.25
  • STOXX Europe 600 up 0.7% to 375.61
  • MXAP down 0.01% to 151.08
  • MXAPJ up 0.2% to 488.03
  • Nikkei down 0.09% to 20,460.93
  • Topix down 0.01% to 1,490.17
  • Hang Seng Index up 0.3% to 25,703.50
  • Shanghai Composite down 0.1% to 2,890.92
  • Sensex down 0.5% to 37,257.04
  • Australia S&P/ASX 200 up 0.1% to 6,507.40
  • Kospi down 0.4% to 1,933.41
  • German 10Y yield rose 2.0 bps to -0.694%
  • Euro up 0.01% to $1.1079
  • Brent Futures down 0.2% to $60.36/bbl
  • Italian 10Y yield fell 9.2 bps to 0.702%
  • Spanish 10Y yield rose 2.7 bps to 0.092%
  • Brent Futures down 0.2% to $60.36/bbl
  • Gold spot up 0.1% to $1,540.74
  • U.S. Dollar Index up 0.03% to 98.24

Top Overnight News

  • British Prime Minister Boris Johnson’s move to suspend parliament and come good on his promise to avoid any more delays to Brexit has set the clock running for his opponents to thwart him; the question is whether they can do it in time
  • The Trump administration is giving careful thought to selling something Wall Street may not be ready to buy: ultra-long debt. Treasury Secretary Steven Mnuchin said that offering bonds with maturities of 50 to 100 years is under “very serious consideration,” with officials conducting an intensive review
  • President Sergio Mattarella tapped Giuseppe Conte, Italy’s outgoing prime minister, to iron out the differences between the Five Star Movement and the center-left Democratic Party and form a working coalition that can overcome the groups’ longstanding differences
  • Germany’s labor market looks like it’s starting to crack under the weight of a manufacturing recession, raising the pressure for the government to respond with fiscal stimulus
  • China’s economy slowed further in August as weak domestic conditions, intensifying tensions with the U.S. and worsening global trade all combined to undermine the outlook
  • Mnuchin said U.S. trade officials expect Chinese negotiators to visit Washington, but wouldn’t say whether a previously planned September meeting would take place. He also said U.S. doesn’t intend to intervene on dollar for now
  • Italy’s acting prime minister Giuseppe Conte will be tasked with forming a government supported by the Five Star Movement and the Democratic Party, two long-time rivals who have little more in common
  • Argentina’s government is seeking to extend maturities on tens of billions of dollars of debt and delay repayments to the IMF after a collapse in the peso and its bonds
  • BOJ board member Hitoshi Suzuki stressed the need for caution about further monetary stimulus as other global central bankers act to counter an economic slowdown
  • Low inflation means the U.S. central bank can let a hotter economy draw more people into the labor force, San Francisco Fed President Mary Daly said

Asian equity markets traded mostly lower after failing to sustain the positive, but quiet lead from their counterparts in the US where energy outperformed and the DJIA led the majors higher to reclaim 26000. ASX 200 (+0.1%) and Nikkei 225 (-0.1%) were subdued with focus in Australia centred on earnings including Woolworths. Nonetheless, the downside for the broader market was limited amid gains in mining names with gold lifted by a mild safe-haven bid and after the energy complex benefitted from the recent bullish inventory data, while the Japanese benchmark gave up initial gains after succumbing to the weight of the flows into JPY. Hang Seng (+0.4%) and Shanghai Comp. (-0.1%) were also lacklustre after PBoC inaction resulted to a drain on liquidity and as China plans tighter regulations on share pledging, as well as to reduce risks for small and medium banks. The losses in Hong Kong have also been a function of weak earnings releases including China Construction Bank which was the first of the Big 4 to report and slightly missed on its FY net. Finally, 10yr JGBs received a lift from the downbeat risk tone and after similar advances of their counterparts in US where there was a strong 5yr auction and the yield inversion briefly widened again, while stronger 2yr JGB auction results also added to the upside.

Top Asian News

  • BOJ’s Suzuki Signals More Caution Toward Additional Stimulus
  • H.K. Police Confirm Ban on Saturday Protest March
  • China’s Policy Bank Bonds Fall as Banks Face New Restrictions

European bourses are at present firmly in the green [Euro Stoxx 50 +1.4%] in-spite of a relatively lacklustre open, until comments from China’s Commerce Ministry that the US and China sides have been in touch and that they are discussing the upcoming September talks sparked a general improvement in risk sentiment. However, while the market reaction does not reflect this there were some less positive comments as well particularly that China has ample retaliatory measures. Looking ahead, on the US-China front markets are largely awaiting an update on the timeline for Septembers talks. Returning to Europe, the FTSE MIB is the notable outperformer (+1.9%) as the bourse derives strength from the increasing prospect of an Italian coalition forming and thus the budget passing. Similarly to the indices, sectors are all in the green with no notable under/outperformer. In terms of individual movers, Micro Focus (-22.4%) are at the bottom of the table after cutting their FY19 outlook. At the other end of the spectrum are Eurofins Scientific (+7.4%) and Bouygues (+5.6%) both post earnings where the latter also confirmed their FY19 targets. Elsewhere, UBS (+1.6%) are supported after hiring Iqbal Khan, a former Credit Suisse executive.

Top European News

  • Japan’s DIC Corp. to Buy BASF’s Pigments Unit for $1.1 Billion
  • Italy Gives ‘Mr. Nobody’ Second Shot at Forging Stable Coalition
  • Ajax Shares Rise After Win Secures Champions League Group Spot
  • Miners and Steelmakers Jump After China’s Soft Tone on Trade

In FX, the broad Dollar remains mixed and rangebound, with the DXY still floating above 98.000 amidst relatively benign month end selling signals for portfolio rebalancing countered by weakness/underperformance in currency counterparts. However, risk sentiment in general has been boosted by latest updates from China’s Ministry of Commerce confirming that trade teams from Beijing and Washington have been conversing and face-to-face talks in the US next month are contingent on the right atmosphere to nurture constructive negotiations. The index is currently hovering just shy of 98.322 vs 98.156 at one stage.

  • AUD/CAD/NZD – All now firmer than their US peer having underperformed prior to the aforementioned US-China trade update, with the Aussie paring losses post an unexpected drop in Q2 Capex and the Kiwi rebounding from lows hit in the aftermath of ANZ’s August business sentiment survey showing a further deterioration in already weak morale, as expectations fell below zero. Similarly, the Loonie has rebounded from worst levels alongside the Yuan and now eyeing Canadian data for some independent impetus later (Q2 current account and June average earnings). Aud/Usd, Nzd/Usd and Usd/Cad currently around 0.6745, 0.6345 and 1.3285 vs circa 06715, 0.6305 and 1.3320 at the other extremes.
  • CHF/JPY/GBP/EUR – In stark contrast to the recoveries noted above, safe-haven unwinding has pushed the Franc and Yen down further from their recent peaks, with Usd/Chf and Usd/Jpy nudging up towards 0.9850 and 106.35, and the latter through 10/21 DMAs in the 106.20-21 area that could be pivotal from technical perspective. Meanwhile, the Pound is straddling 1.2200 following all the midweek drama in Whitehall and the Euro is weighing up softer Eurozone inflation against firmer GDP and mixed sentiment indicators with little reaction/traction via confirmation that Italy’s Conte has been given the mandate to try again as PM, albeit in charge of a different coalition. Indeed, Eur/Usd has slipped a fraction deeper below 1.1100, but holding above bids seen at 1.1050 and ahead of the 2019 low (1.1027).
  • EM – Although risk appetite has improved overall, pre-long holiday weekend and early positioning for the final trading session of August appears to be taking its toll on the Turkish Lira, while the Argentine Peso seems destined to come under even more pressure after the Government unveiled its debt rescheduling plan. Usd/Try hovering just under 5.8300 at present and Usd/Ars closed at 57.9400 for reference.

In commodities, WTI and Brent are in positive territory thus far, with the complex recovering somewhat from the downturn in sentiment overnight on this mornings aforementioned US-China updates. Specific newsflow for the complex has been light, though recent reports have indicated that the Adrian Dary is unloading its crude cargo in Turkey. Turning to metals, where spot gold remains comfortably above the USD 1500/oz mark but has drifted somewhat in-line with the improvement in risk sentiment thus far; to a session low of USD 1536/oz. Conversely, copper prices have derived considerably upside from the risk-on tone though prices remain constrained by the USD 2.60 mark.

US Event Calendar

  • 8:30am: Wholesale Inventories MoM, est. 0.15%, prior 0.0%
  • 8:30am: GDP Annualized QoQ, est. 2.0%, prior 2.1%
  • 8:30am: Core PCE QoQ, est. 1.8%, prior 1.8%
  • 8:30am: Advance Goods Trade Balance, est. $74.4b deficit, prior $74.2b deficit, revised $74.2b deficit
  • 8:30am: Retail Inventories MoM, est. 0.3%, prior -0.1%, revised -0.3%
  • 8:30am: Personal Consumption, est. 4.3%, prior 4.3%
  • 8:30am: Initial Jobless Claims, est. 214,000, prior 209,000; Continuing Claims, est. 1.69m, prior 1.67m
  • 10am: Pending Home Sales MoM, est. 0.0%, prior 2.8%; YoY, est. 1.8%, prior -0.6%

DB’s Jim Reid concludes the overnight wrap

A memorable date today for me for two reasons. Firstly, 25 years ago on this day one of the most important albums in my life was released – namely “Definitely Maybe” by Oasis. Time flies. It shaped my final year at university and the next few years thereafter. There aren’t many better songs than “Live Forever” or “Slide Away.” Secondly, two years ago an event occurred that shaped my life in a much more challenging way and I’m fortunate it didn’t send me down the path of “Cigarettes and Alcohol.” Yes my identical twin boys Jamie and Eddie are two today! They’re off to Peppa Pig World to celebrate. I genuinely think I have the better deal by being in the city today.

August 2019 continues to throw up lots of interesting themes for those in the city with yesterday seeing the first ever print below 1% for Italian 10yr government bonds and a step towards a constitutional crisis here in the UK as PM Boris Johnson announced plans to effectively prorogue parliament from September 10th to October 14th when the government will hold a Queen’s Speech. As DB’s Oli Harvey noted in his report yesterday, this limits the ability of MPs to table legislation to prevent a no deal Brexit and signals that the Johnson government may be prepared to break constitutional precedent to take the UK out of the EU without a deal. However, Oli also highlights that at the same time, it could crystallise opposition to a no deal Brexit next week in the House of Commons leading to a confidence vote and a new unity government.

The reality now is that under the new schedule, UK parliament has just under a week in early September followed by just over a week in late October to prevent a no deal outcome. Assuming the timings are too tight and therefore legislation to block a no deal Brexit fails, the only option left for MPs would be a motion of no confidence in the government – either next week or in the last two weeks of October. Oli notes that much will now depend on the strategy taken by anti no deal MPs over the next two weeks. Our house view is still 50/50 for a no deal Brexit with the most likely path to preventing one being the formation of a national unity government either in early September or late October. There’s much more on the move in Oli’s note here including further scenario probabilities. My take on this is that it is partly a political move aimed at shoring up the support of leavers in the country and removing the need for such minded voters to support the Brexit Party at a General Election. The gamble is that the remain vote (probably also solidified the other way by this decision) would be more split across other parties (especially Labour and the Liberal Democrats). The more Parliament tries to blocks the move the more it could shore up support for Boris Johnson amongst the “leave” vote ahead of what might be a General Election before year-end. A fascinating and turbulent two months awaits us here in the UK.

In terms of markets the initial impact on Sterling was a drop of -1.08% from the highs to hit an intraday low of $1.216. However it did recover through the afternoon to end just -0.63% lower at $1.221 – not far off where it is in Asia this morning.

From a constitutional crisis to a political crisis which is at least showing signs of coming to a more peaceful end for now. In Italy it was another good day for Italian bonds as the PD confirmed that they support the current attempt to form a new government with Conte as premier. While the details over the exact coalition makeup is uncertain, President Mattarella did give Conte a fresh mandate to form a government last night. Markets took the news as broadly positive, with 10y BTPs at one stage dipping below 1% for the first time ever, before ultimately closing at 1.045% and -9.4bps on the day. A relentless move lower for bonds in Europe also saw Bunds close -2.0bps lower at -0.714% (a new all-time record after 8 days without one!) meaning the BTP-Bund spread is now at 176bps. At the end of May that spread was as much as 287bps so it’s been a remarkable rally. Elsewhere, Gilts closed -6.0bps lower at 0.442% as they tracked the move for Sterling. Across the pond Treasury yields edged lower again for much of the day but eventually moved higher on comments from the US Treasury Secretary Steven Mnuchin that issuing ultra-long debt is “under very serious consideration”. Yields on 10yr USTs (+0.8bps) ended at 1.481% while 30yr yields which were at one time trading at a fresh all-time low of just 1.942%, moved up +2.1bps to end the day at 1.972%. Meanwhile the 2s10s curve did steepen on Mnuchin’s comments to -2.2bps. However Treasury yields are again falling this morning with 10yrs down (-2.6bps) to 1.455% and just 9.7bps from all-time lows while the 30yr yield is down -4.5bps to an all-time low of 1.927%. The 2s10s curve has reversed much of the late steepening yesterday and is back down to -4.0bps this morning. Elsewhere oil rallied +1.82% yesterday after US inventories showed a -10mn barrel drawdown in crude stockpiles last week, which did appear to cap some of the move for bonds in the afternoon.

Overnight we’ve seen some fresh trade headlines which have highlighted the continued uncertain nature of the US-China trade talks. Firstly, the US Treasury Secretary Steven Mnuchin said that the US trade officials expect Chinese negotiators to visit Washington, but declined to say whether the September encounter would happen. He also added that “we will have a separate dialog and discussion on currency as part of the trade discussion but separate from the trade discussion,” and said, “we’ve had conversations with the IMF and directly with our counterparts in China, including the governor of the PBOC,” since the U.S. formally labeled China a currency manipulator on August 5. Separately, the White House trade adviser Peter Navarro said in an interview that market optimism on a US trade deal with China is neither misplaced nor well placed but “somewhere in the middle,” while adding that it’s “unlikely anything quick will happen,” from the talks because the U.S. is asking China to make big, structural changes. He also commented on the Fed, saying the Fed needs “to do its job and cut rates” in the next month or two. Elsewhere, Mnuchin said that the Trump administration doesn’t intend to intervene in the dollar market right now but added, “situations could change in the future but right now we are not contemplating an intervention.”

This morning in Asia markets are trading down with the Nikkei (-0.23%), Hang Seng (-0.36%), Shanghai Comp (-0.12%) and Kospi (-0.24%) all lower. In FX, the Japanese yen is trading up +0.189% this morning while the onshore Chinese yuan is trading flattish at 7.1667. Elsewhere, futures on the S&P 500 are down -0.33% while spot gold prices are up +0.33% to 1,544/ troy ounce.

We’ve also heard from the BoJ board member Hitoshi Suzuki overnight with him casting doubt on the stimulative effects of record-low Japanese government bond yields, while emphasizing the importance of monitoring their impact on financial stability. He further said that bank lending could also be hurt if rates are too low and added, “I think there’s a need to consider monetary policy more cautiously than we have so far.” 10yr JGBs yield are down -0.8bps this morning at -0.291% and just -0.4bps away from the September 2016 low of -0.295%.

Back to yesterday and equity markets were a bit more choppy as they sat in the shadows of the bond rally. Despite opening lower, the S&P 500 (+0.66%) ultimately finished higher. The energy sector (+1.40%) led gains, while other cyclical sectors gained as well. However the NASDAQ (+0.38%) and FANGs (+0.11%) indexes underperformed as tech struggled once more. On that, the Nikkei reported that Google was moving production of its Pixel smartphone out of China to Vietnam and plans to eventually move production of its US-bound hardware outside of China. Shares in Google closed +0.25% higher. As for trade headlines, there wasn’t much to report. Xinhau reported that China will start accepting waivers of additional tariffs between September 2 and October 18 which is perhaps a sign of flexibility from China and therefore slightly risk positive. From the US side, President Trump did tell reporters that he could do a deal, which would make him a “hero,” which was also, at the margin, a positive signal.

As for the data yesterday, there was very little to report. In Germany consumer confidence was unchanged in September at 9.7 while the July import price index reading was down a little more than expected at -0.2% mom. Meanwhile, the M3 money supply reading for the Euro Area was up +5.2% yoy, exceeding estimates for +4.7% and up from +4.5% in June. The only notable release in the US was the MBA mortgage index, which fell -6.3% last week. Given the recent collapse in rates, it’s somewhat worrying that mortgage activity hasn’t responded in a positive way.

On the Fed front, Richmond President Barkin spoke and gave a mostly balanced representation of the US economy. He said that “the US consumer appears to be very strong but business confidence appears to have weakened.” He explicitly said that he doesn’t know if he would support a rate cut in September, though in truth his opinion is not that important since he is not a voter. Fed fund futures continue to price in a near-certain rate cut next month, plus around a 12% chance for a larger, 50bps cut instead. We also heard from Kaplan and Daly overnight with both reinforcing last week’s message from central bank Chairman Jerome Powell that a September rate reduction is likely. Kaplan said, while consumer spending has been “strong,’’ the central bank needs to be “forward-looking’’ in setting interest rates and voiced concern that continued weakness in manufacturing would eventually seep into the jobs market, undermining consumer outlays. On dramatic decline in bond yields, Kaplan called it a “reality check” and attributed the decline in yields partly to global liquidity but added, “part of it is expectations of future growth have gotten a lot more pessimistic.”

Looking at the day ahead, this morning we’re due to get the final Q2 GDP revisions in France before August unemployment data is released in Germany and August confidence indicators due out for the Euro Area. This afternoon we’ll then get the August preliminary CPI release in Germany before all eyes turn to the second revision of Q2 GDP in the US. A reminder that the preliminary estimate showed growth of a stronger than expected +2.1%, with the consensus expecting a small roundown to +2.0% today. Also due out is the July advance goods trade balance, July wholesale inventories, latest jobless claims data and July pending home sales.

via ZeroHedge News https://ift.tt/2Hv5tLM Tyler Durden