Brexit Is What Happens When The Pie Is Shrinking

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

This process of withdrawal into the relative safety of internally cohesive groups and group identities is intrinsically messy in globalized, multicultural societies.

A great many narratives are drifting around the Brexit pool: a return to sovereignty, class war, "controlled demolition," nothing-but-another-political-Kabuki- spectacle, end of the European Union, etc.

I think it boils down to something much simpler: the pie is shrinking, and the illusion that it's about to start growing has been shattered. For many communities in the developed world, the pie started shrinking in the 1970s, and has been shrinking (despite the narrative of "45 years of strong growth") since then.

Labor's share of the GDP has been declining for 45 years. Occasional blips higher during debt-fueled bubbles quickly fade when the bubble du jour pops, and the decline of labor's share of the economy resumes its trendline decline.

Since 2008, the only group who feels the pie is growing is the class that has benefited from the unparalleled expansion of debt and leverage, financialization, globalization and central planning–roughly 20% of the work force, with the top 5% gathering most of the gains in income and wealth, and the top .1% gathering most of the increase in wealth. (See chart below)

For seven long years, the citizenry has been told the economy is expanding and therefore they're "doing better." But this narrative is not supported by their actual lived experience. Inflation is woefully under-reported by official statistics, and the rosy "rising employment" narrative is based largely on part-time jobs in hospitality and food services (bartenders, waiters, etc.) that are highly contingent on the spending of the top 10%.

While supporters of the status quo are quick to deride supporters of Brexit, the cold reality is the economic pie is shrinking, and Brexit is a direct result of that reality.

A shrinking economic pie generates widespread insecurity that pressures every status quo arrangement as people circle the wagons in an attempt to protect their remaining slice of the pie from others' claims for a larger piece of the dwindling pie.

The general media line is that the Brexit vote arose out of anger with the status quo's inequalities and asymmetries of wealth and power. While this is largely self-evident, it isn't the most fundamental dynamic at work. I see Brexit as a reflection of our naturally-selected defensive response to insecurity and instability: circle the wagons.

By circle the wagons, I mean our tendency to withdraw into an internally cohesive group with defined membership and boundaries.

The largest such political group is the nation-state, and so it is natural for people with strong national identities to circle the wagons around their national identity.

We can also expect people to circle the wagons around ethnic, religious, localized and economic-social class identities. (Some people might feel more kinship with other fans of Manchester United than they do with any religion, ethnicity or state.)

As people identify themselves as members of the class that has not benefited from neoliberal/globalized crony capitalism, the ruling Elites become the "other," i.e. "foreigners" with whom we have little contact, people who "aren't like us"– in effect, an "enemy class" that is inherently opposed to our self-interests.

This process of withdrawal into the relative safety of internally cohesive groups and group identities is intrinsically messy in globalized, multicultural societies. No wonder populations are dividing into camps of increasingly angry people with little interest in compromise. Our instinct is to seek clear delineations of "us" and "them" and to seek the relative comfort of "us," which in a multicultural nation, can contain quite a mixed bag of people who nonetheless feel a shared identity.

Much to the chagrin of political parties whose success is based solely on "identity politics," the emerging group identities are not conforming to the political classes' conventional fault lines. "Us" for many people includes everyone who isn't a protected insider of the status quo, and "the enemy" is any protected insider of the status quo.

That includes virtually the entire political class, the entire class of state nomenklatura/technocrats, the entire banking sector and the wealthy class that's benefited so handsomely from the globalized, debt-leverage bubbles and state / central bank support that characterize this era of neoliberal/globalized crony capitalism.

Nothing to see here–move along, folks–you're better off than ever before.

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How They Hedged Brexit: Soros Was Short Deutsche Bank, Druckenmiller Was Long Gold

As we reported yesterday, one of the bigger losers from the Brexit referendum was none other than Soros, who as it turned out had put his money where his “doom and gloomy” Guardian Op-Ed was and as a spokesman said, Soros was long the pound before Britain’s vote to leave the European Union on Friday, and didn’t “speculate against sterling while he was arguing for Britain to remain.” 

Soros wasn’t the only one long sterling. According to internal UBS flow data, the pound saw the strongest normalized net inflows in G-10 in the lead up to the U.K. referendum on EU membership, recording the second-strongest week of net buying in over a year and a half suggesting hedge funds bought the pound aggressively before the vote. Curiously, as UBS also notes, despite buying GBP at the highest level since 2008, outflows from the pound recorded on the Friday after the referendum outcome were only marginal despite a 17-big- figure sell off in morning trading.

But back to recently bearish Soros, who many were surprised to see have an unhedged position going into such a major event. Well, as it turns out Soros was hedged after all.

As Bloomberg reports, Soros Fund Management took a short position in Deutsche Bank AG of about 7 million shares, or a total notional of about $100 million, as turmoil from the U.K.’s decision to leave the European Union sent bank stocks lower. The position taken on Friday was equivalent to 0.51 percent of Deutsche Bank’s share capital, according to a German filing published on Monday. The document doesn’t show at which price the fund took the position.

Deutsche Bank shares fell 16% at the open on Friday and closed down 14 percent at 13.37 euros. Their highest price that day was 13.95 euros. At that level, a 0.51 percent stake would be worth about 98 million euros ($108 million). After extending losses on Monday, the shares were trading 4.5 percent higher at 10 a.m. Tuesday in Frankfurt.

In other words, Soros’ Op-Ed which was subtitled “The Brexit crash will make all of you poorer – be warned”, should have added that “it will also make me richer via my Deutsche Bank short.”

Soros was not the only one who hedged. As Reuters reported overnight, Stanley Druckenmiller’s Duquesne Family Office LLC was long gold futures ahead of last week’s vote in Britain to leave the European Union, a source familiar with the matter said on Monday.

Gold soared on Friday in its best day since 2009, hitting two-year highs as uncertainty after Britain’s vote to leave the European Union pushed investors to sell equities and seek safer assets. The size of the trade was not known.

In short: while Brexit’s so-called “disastrous” impact on millions of common people has yet to be observed , a process which will take years, the billionaires once again won.

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Brexit a Victory for Xenophobia? Not So Fast.

Brexit wasn’t about xenophobia and the Leave campaign was not alone in appealing to emotion.

J.D. Tuccille writes:

Just weeks before the Brexit vote, the European Union stirred a hornet’s nest with a proposal to require restaurants to serve olive oil only in commercially purchased bottles, not in refillable cruets or bowls. The ban, almost certainly intended to benefit large producers at the expense of local producers unable to package oil in single-use containers, was promptly pulled amidst a righteous outcry.

“What I find really interesting about this story is not the general derision with which the first proposal was greeted: rather, the nakedness of the ambition behind it,” wrote Tim Worstall, a fellow at London’s Adam Smith Institute. “Big business using ‘consumer protection’ legislation to kill off the small producer. Sadly, that’s an all too common part of the way that the E.U. is governed. Regulation which privileges large companies over the small ones that cannot afford to obey the legislation.”

Similar concerns arose around E.U. regulations targeting traditional herbal remedies. Beginning in 2011, they had to meet rigorous requirements regarding manufacturing and dosage. “Some manufacturers and herbal practitioners have expressed concern, arguing the new rules are too onerous for many small producers,” noted the BBC.

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Previewing Today’s Main Event: David Cameron Arrives In Brussels

For the first time since triggering a political earthquake that’s shaken Europe’s foundations with his now massively backfired decision to hold a EU membership referendum in 2015, a decision which won him the parliamentary election battle but lost him, and Europe, the war, UK Prime Minister David Cameron is set to face his fellow – and very angry – European Union leaders at what may be Cameron’s last summit (or supper as Bloomberg puts it) in Brussels, even as back in London, the race to succeed him is heating up.

As BBC puts it, David Cameron wanted to arrive in Brussels triumphant… instead he is coming as a disgraced failure.

“Cameron wanted to come back here today as the man who’d kept the UK in the EU, who’d settled the question that has plagued the UK for decades. And instead, he has to look round the table and say, “I’ve just taken the UK out, with all the consequences that brings”. But of course, these are European leaders, it’s not going to descend into any kind of bickering. I think they’ll all be trying to say, “How do we move forward from here?””

As Bloomberg eloquently adds, Cameron will endure an awkward dinner with his EU cohorts Tuesday after his effort to calm the U.K.’s divided public and soothe investors failed to stop the pound and the country’s biggest banks from getting clobbered. The premier has already announced he will quit after last week’s vote, leaving him little leverage at the table.

His government has signaled it prefers a gradual exit from the EU while the region’s three largest economies are keen to set a timetable to contain the economic damage. Which is contrary to his earlier claims (made when he was confident of Remain winning) that the Article 50 process would be triggered immediately after a Leave vote.

“We don’t know how long he is going to be prime minister for, when a new government could begin to negotiate terms,” said Mark Leonard, director of the European Council on Foreign Relations. “The rest of the EU feel they bent over backwards to accommodate Cameron over the last months and he launched this reckless referendum and lost it so the other EU states are in no mood to do him any favors.”

In Brussels, Cameron will be pressed to give some indication on how he expects the U.K. to trigger Article 50 of the Lisbon Treaty – the mechanism for leaving the EU – and what he thinks Britain’s relationship with the bloc will look like after the divorce, according to diplomats in Brussels.

But the outgoing prime minister has said those details would be up to his successor to hash out, a strategy which Merkel has endorsed in hopes that as the fallout over the Brexit decision settles the UK may collectively change its mind about its depature. 

“He’s likely to talk about a number of factors that he thinks were issues in the campaign, and in the debate,” said Helen Bower, Cameron’s spokeswoman. “He will reiterate that Article 50 is a matter for the next prime minister.”

The EU gathering unfurls against a backdrop of market turmoil, with shares in Barclays Plc and Royal Bank of Scotland Group Plc crashing to their lowest level since the financial crisis. Reeling from the referendum outcome, EU leaders are split on how hard to come down on the U.K. In the meantime, Britons have lost any influence they had in the 28-nation bloc while remaining bound by its rules and membership fees for at least two years.

Another point of confusion: who will the UK be negotiating with next:

For now, the U.K. is stuck in a political impasse. Cameron’s Conservative Party said Monday a new leader should be in place by Sept. 2. Some in the EU are holding out hope that if the U.K. waits a long time to activate the exit trigger, the decision to leave might even be reversed, one European diplomat said.

 

A YouGov poll of Conservative voters for the Times gave Home Secretary Theresa May 31 percent support compared with 24 percent for former London Mayor Boris Johnson, a leading backer of the leave vote.

 

Chancellor of the Exchequer George Osborne, who was criticized by the pro-Brexit camp for scaremongering over the economy, will not be a candidate. The onetime favorite to succeed Cameron wrote in the Times that “I am not the person to provide the unity my party needs.”

Meanwhile, after digesting the shocking news, the EU has calibrated its response to a U.K. departure. The knee-jerk reaction of some had been that the U.K. should trigger Article 50 as early as this week. German Chancellor Angela Merkel is among those calling for a more thoughtful approach, with two EU diplomats saying the alliance could potentially wait until the end of the year.

“We can’t afford an extended waiting game because that would be bad for the economy of both sides of the EU — the 27 members and Britain,” Merkel said. “But I have a certain level of understanding if Britain takes some time to analyze things first.”

Merkel said the U.K. would need to give its official declaration to exit the bloc before formal negotiations on the terms of its future relationship can begin. In a joint statement with her French and Italian counterparts, she urged the EU summit to “set in motion a process based on a concrete timetable and precise commitments.” Speaking from London, U.S. Secretary of State John Kerry called on EU leaders not to take revenge on Britain and to handle the transition with care.

“While there is some uncertainty in the air, leaders have the ability and responsibility to restore certainty, to make wise choices in the days ahead and that means choices that are, in every way possible, not aimed at retribution, not aimed at anger, but ways that bring people together,” he said.

In short: anyone hoping for a resolution from today’s summit will be disappointed. If anything, prepare for a long, hard slog with elevated volatility, as the market twists and turns on every unexpected political development out of the UK, and any hint that the democratic referendum wave started in Britain has spread to the continent.

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The “Synergies” Arrive: Dow Fires 2,500

The Dow Chemical Company announced on June 1 that it had completed the transaction with Corning Inc,. which allowed Dow Chemical to take full control of Dow Corning, a joint venture the two companies entered into years earlier.

Today, less than a month later, the “synergies” which we previewed last December…

… have begun.

This morning it hit the wires that cost-synergies would be achieved through a global RIF, or reduction in force (another of Wall Street’s favorite acronyms) of approximately 2,500 jobs, or 4% of the workforce according to Bloomberg. Dow will take a charge of approximately $410 million to $460 million in Q2 2016 relating to the measures. The June 1 announcement claimed that $400 million a year in cost savings would be achieved by the restructuring actions.

Dow plans to shut down manufacturing facilities in Greensboro, North Carolina, and Yamakita, Japan, as well as other facilities throughout the process.

We are moving quickly and effectively to integrate Dow Corning and deliver the synergies that will drive new levels of value creation for our customers and generate even greater returns for our shareholders. With these difficult but necessary actions, we are bringing together the best of each company’s talent and technology, accelerating Dow’s strategy to go narrower and deeper into attractive, targeted market sectors, and setting the stage for the new Dow – the world’s leading material science company” CEO Andrew Liveris said.

More layoffs, more cash for buybacks – that is the theme of the “recovery.”

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Frontrunning: June 28

  • Brexit vote, UK political confusion keep world markets on edge (Reuters)
  • Cameron Heads to Last Supper in Brussels Amid Impasse in London (BBG)
  • Banks Get Reprieve From Brexit Hammering (WSJ)
  • U.S. Stock Futures Rise as Stimulus Hopes Outweigh Brexit Fears (BBG)
  • Brexit adds to existing troubles faced by banks (FT)
  • Merkel Tells Cameron Before EU Summit: Don’t Delude Yourself (BBG)
  • Draghi Calls for Global Policy Alignment to Lift Economic Growth (BBG)
  • Poll Finds Opening for Third-Party Candidates as Clinton, Trump Remain Unpopular (WSJ)
  • Kremlin: mending ties with Turkey ‘not a matter of a few days’ (Reuters)
  • LendingClub to Cut 179 Positions as Loan Volumes Fall (WSJ)
  • Volkswagen’s U.S. diesel emissions settlement to cost $15 billion (Reuters)
  • Japan Yields All Drop Below 0.1% First Time in Global Bond Surge (BBG)
  • Lyft Hires M&A Banker Qatalyst Partners (WSJ)
  • Soros Wagered Deutsche Bank Would Drop in Brexit Turmoil (BBG)
  • Brexit Steamrolls Fed Model for Stock Bulls as Bond Yields Drop (BBG)

 

Overnight Media Digest

WSJ

– Prime Minister David Cameron, addressing Parliament for the first time since Britain’s momentous decision to leave the European Union, sought to quash discussion about whether the vote would stand as markets remained volatile. http://on.wsj.com/28ZTXG5

– Ride-hailing startup Lyft Inc hired Qatalyst Partners LP, the boutique investment bank best known for helping tech companies find a buyer, WSJ reported, citing people familiar with the matter. http://on.wsj.com/296UWZ1

– The Supreme Court closed its term with a sweeping affirmation of abortion rights, striking down parts of a Texas law that had caused clinics to close and dimming the hopes of anti-abortion forces for a wave of similar measures in other states. http://on.wsj.com/296Vqy1

– PepsiCo said it would reintroduce the aspartame-sweetened version of Diet Pepsi in U.S. stores in September, its latest attempt to halt the plunging diet cola sales. http://on.wsj.com/296VuxL

– The State Department intends to hold “informal, technical discussions” with the United Arab Emirates and Qatar next month about a dispute over Persian Gulf airlines’ funding and access to the U.S. market, WSJ reported, citing people familiar with the matter. http://on.wsj.com/296VKx6

 

FT

Ratings agency Standard & Poor’s stripped the UK of its top-notch status on Monday, the last major rating agency to do so.

David Cameron told the House of Commons that Britain’s decision to exit the EU was final and that work would begin on preparing negotiations for the exit.

Google will face a fresh official complaint from Brussels next month as it sharpens its first case against the company last year.

Nicola Sturgeon will seek cross-party support from the Scottish parliament to secure Scotland’s ties to the EU and access to its single market.

 

NYT

– Volkswagen AG has agreed to pay up to $14.7 billion to settle claims stemming from its diesel emissions cheating scandal, in what would be one of the largest consumer class-action settlements ever in the United States. http://nyti.ms/296mj3O

– The world’ s largest uncut diamond, a 1,109-carat white diamond discovered last fall in the Lucara mine in Botswana will be up for bid Wednesday evening in a public auction at Sotheby’s in London. http://nyti.ms/28ZzQWS

– An airbag made by the auto supplier Takata Corp has been linked to a crash that killed a woman in Malaysia over the weekend, the vehicle’s manufacturer said on Monday. http://nyti.ms/28ZUwzd

– AstraZeneca Plc is trying to get its popular anti-cholesterol pill Crestor approved to treat children, who have a rare disease, characterized by high cholesterol. Critics say AstraZeneca is trying to abuse the law, since the overwhelming use of Crestor is for treating adults with high cholesterol, not children with the rare disease. http://nyti.ms/28X5Nij

– The Supreme Court declined to review a 2015 ruling by the U.S. Court of Appeals for the Second Circuit, limiting debt collectors to state usury laws. http://nyti.ms/28UybUY

 

Britain

The Times

The yield on UK benchmark government bonds fell below 1 percent for the first time as investors continued to sell shares and sterling in favour of safe-haven assets following the vote to leave the EU. (http://bit.ly/296gPrn)

Shares in easyJet have crashed following a damaging profit warning which has put pressure on the airline after it had already outlined significant issues following the UK’s vote to quit the EU. (http://bit.ly/296hj0y)

The Guardian

Credit rating agency Standard & Poor stripped the UK of its last AAA rating as it warned of the economic, fiscal and constitutional risks the country now faces as a result of the EU referendum result. (http://bit.ly/28XT4NI)

Former BHS shareholder Richard Caring has said he was owed more than £850,000 ($1.12 million) when the retailer collapsed, as he told MPs looking into the matter that he was unable to attend parliament this week. (http://bit.ly/28Y4JwT)

The Telegraph

Britain must pursue a Norway-style agreement with the EU if it is to avoid a damaging recession, according to Morgan Stanley . The bank said negotiating membership of the European Economic Area and retaining access to the single market would help the UK to secure a “civilised divorce” from the EU. (http://bit.ly/291Rb5U)

KPMG’s role in assessing HBOS’ finances in the year ahead of its collapse in the financial crisis will at long last come under scrutiny, the UK’s audit watchdog has decided. (http://bit.ly/28YNn5M)

Sky News

British PM David Cameron has said Article 50 will not be triggered “at this stage” and key negotiations over the country’s exit from the EU will wait for the new Prime Minister. (http://bit.ly/28Z942y)

Moody’s has signalled to a number of the largest UK lenders that it plans to revise the outlook for their credit ratings from positive or stable to negative in the wake of the UK’s decision to leave the EU. (http://bit.ly/291GHDx)

The Independent

Sterling has this morning slipped to $1.3218 – a new 31-year low against the U.S. currency, as a result of investor anxiety over the economic implications of Brexit. (http://ind.pn/2942hsa)

Shares in estate agent Foxtons suffered a massive 20-per cent slide on the stock market on Monday morning after the company released a trading update saying that the results of the EU referendum would likely weigh on profits. (http://ind.pn/2985HaG)

 

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This Is What Draghi Said To Spark Speculation Of Another Global Central Bank Bailout

Both Janet Yellen and Mark Carney may have previously announced they would withdraw from the ECB’s Forum in Sintra, Portugal (due to pressing market stabilization issues), but it was what Mario Draghi said here that has captured the market’s attention this morning. The head of the ECB avoided mentioning the U.K.’s vote to leave the European Union but instead called for greater alignment of policies globally to mitigate the spillover risks from ultra-loose monetary measures

“We can benefit from alignment of policies,” Draghi said at the ECB Forum in Sintra, Portugal. “What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all; and a shared commitment to found our domestic policies on that diagnosis.”

Most didn’t read between the lines, and assumed that “alignment of policies” was simple code for the ECB demanding another global intervention. It immediately led to statement such as the following by John Plassard, a senior equity-sales trader in Geneva at Mirabaud Securities who told Bloomberg that “stocks are rebounding on the expectation that there will be a coordinated intervention by central banks. What central banks can do is put confidence back in the market by telling everyone that they are here and ready to act. If we don’t get that sort of support, we’ll see further declines.”

Ironically, what Draghi may have been referring to is not so much a coordinated response, i.e., another global central bank intervention, as much as central banks sitting down to figure out how to move on from a world flooded by central bank intervention, one where overnight every single Japanese bond across the entire curve was yielding less than 0.1%, after the latest overnight rally in Japan pushed yields on the nation’s longest debt, the 40-year bond, to 0.065% on expectation of, you guessed it, more BOJ intervention.

 

As the BIS ranted over the weekend in its latest annual report, central banks’ extraordinary measures to boost inflation since the global financial crisis have depressed interest rates, stoking discontent among savers and drawing accusations that they have helped boost the support for populist parties. Draghi, who has often criticized euro-area governments for inadequate structural reforms, said there is a “common responsibility” to address the sources of low inflation, such as low productivity and an output gap.

As Bloomberg adds, Draghi didn’t explicitly refer to the latest shock to markets, the U.K.’s shock vote to exit the EU, after he said Monday that the best word to describe his sentiment in reaction to the British referendum probably was “sadness.”

ECB Executive Board members Benoit Coeure and Peter Praet are scheduled to chair panel discussions on Tuesday at the ECB Forum, a European equivalent of the U.S. Federal Reserve’s Jackson Hole symposium. A panel discussion between Draghi, Bank of England Governor Mark Carney and U.S. Federal Reserve Chair Janet Yellen that was planned for the final day on Wednesday has been canceled.

“We have to think not just about the composition of policies within our jurisdictions, but about the global composition that can maximize the effects of monetary policy so that our respective mandates can best be delivered without overburdening further monetary policy,” Draghi said. “This is not a preference or a choice. It is simply the new reality we face.”

So did Draghi preview more intervention, or just the contrary, hint that the monetary status quo is no longer working? Expect to say the debate play out across markets today even if as futures indicate the early read is one of even more liquidity about to be injected.

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A Few Thoughts on Brexit: New at Reason

Marian Tupy has a few thoughts on Brexit:

First, I have not been a supporter of David Cameron’s “one nation conservatism,” which eschews fundamental economic reform and embraces the “nanny state,” but I applaud the Prime Minister for fulfilling his election pledge and giving the electorate the referendum that the people of Britain wanted for a very long time. Unlike a frightening number of commentators and politicians on both sides of the Atlantic who now castigate Cameron for being “irresponsible” (i.e., for making the mistake of consulting the British people), I commend him for behaving honorably. Equally honorable was his resignation. It would be nice if more Western leaders had the decency of resigning when the policies they passionately support are rejected by the electorate!

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Global Stocks Rebound, US Futures Jump On Expectation Of “Coordinated Intervention By Central Banks”

After a historic two-day selloff, which as shown yesterday slammed European banks by the most on record…

… the wildly oversold conditions, coupled with hopes for yet another global, coordinated central bank intervention, coupled with modest hope that David Cameron’s trip to Brussels today may resolve some of the Article 50 gridlock, have been sufficient to prompt a modest buying scramble among European stocks in early trading, with the pound and commodities all gaining for the first time since the shock Brexit vote.

“Stocks are rebounding on the expectation that there will be a coordinated intervention by central banks,” John Plassard, a senior equity-sales trader in Geneva at Mirabaud Securities told Bloomberg. “What central banks can do is put confidence back in the market by telling everyone that they are here and ready to act. If we don’t get that sort of support, we’ll see further declines.”

Needless to say, there is a way to go to recover recent losses: the following chart courtesy of Jonathan Ferro shows that there is a ways to go:

 

The Stoxx Europe 600 Index and sterling both rebounded after tumbling 11% in the last two trading sessions. A gauge of the dollar’s strength snapped its steepest rally since 2011 as futures indicated that the next move in U.S. interest rates is now more likely to be a cut. The Bloomberg Commodity Index climbed from an almost four-week low as oil rose to about $47 a barrel and industrial metals gained. Spanish and Italian bonds gained.

As also shown here first over the weekend, any speculation of a Fed rate hike is now dead and buried, and instead the market is now pricing in higher odds of a December rate cut than a rate hike.

 

And while the BIS has loudly warned that expectations of a major central bank intervention are overblown, for now there is a global relief rally, which has seen European stocks advance, snapping their worst two-day losing streak since 2008. All 19 Stoxx 600 sectors rise, with insurance, banks outperforming and chemicals, oil & gas underperforming. Trading volume was twice the 30-day average. The U.K.’s FTSE 100 advanced 2.3 percent, recovering some of its 5.6 percent slide over the previous two days. Italian banks including Mediobanca SpA were among the biggest gainers after the European Commission said it was in touch with Italian authorities over possible support measures following the recent selloff.

S&P 500 jumped 1.1%, recouping some of the market’s worst loss since March. Shares in Japan were buoyed by a Nikkei newspaper report saying a 20 trillion yen ($196 billion) stimulus proposal has been submitted to Prime Minister Shinzo Abe by a senior official in his party.  The MSCI Emerging Markets Index gained 0.8 percent after falling as much as 0.3 percent. Eastern Europe and Africa led the advance, with benchmarks in Poland, South Africa and Turkey climbing at least 1.3 percent.

EU leaders will gather in Brussels on Tuesday for the start of a two-day European Council summit to discuss Britain’s decision to leave the bloc. U.S. data are forecast to show that consumer confidence held close to a six-month low this month, while China’s central bank Governor Zhou Xiaochuan is due to speak at a forum being hosted by the European Central Bank. Bank of England Governor Mark Carney is scheduled to chair a meeting of financial stability officials.

Global Market Wrap

  • S&P 500 futures up 1.1% to 2007
  • Stoxx 600 up 2.3% to 316
  • FTSE 100 up 2.2% to 6111
  • DAX up 1.9% to 9446
  • German 10Yr yield up 2bps to -0.1%
  • Italian 10Yr yield down 7bps to 1.44%
  • Spanish 10Yr yield down 9bps to 1.37%
  • S&P GSCI Index up 1.3% to 368.7
  • MSCI Asia Pacific down less than 0.1% to 126
  • Nikkei 225 up less than 0.1% to 15323
  • Hang Seng down 0.3% to 20172
  • Shanghai Composite up 0.6% to 2913
  • S&P/ASX 200 down 0.7% to 5103
  • US 10-yr yield up 3bps to 1.46%
  • Dollar Index down 0.47% to 96.09
  • WTI Crude futures up 1.8% to $47.15
  • Brent Futures up 1.5% to $47.89
  • Gold spot down 0.9% to $1,313
  • Silver spot down 0.2% to $17.68

Top Global News

  • Cameron Heads to Last Supper in Brussels Amid Impasse in London: two-day EU summit to consider 1st steps after U.K. vote
  • Pound Heads for First Post-Brexit Gain as Dollar Demand Weakens: Yen lags as Japan officials repeat they are watching markets
  • Carney’s Warnings Ring True on Brexit as BOE Meets on Stability: BOE panel meets as more cheap cash offered to lenders Tuesday
  • Osborne Rules Himself Out of Race to Be Next U.K. Prime Minister: U.K. chancellor writes in the Times newspaper
  • North Sea Oil Faces Worsening Investment Drought After Brexit: 2nd Scottish independence poll “very much on the table”
  • Merkel Says EU Won’t Tolerate Cherry Picking in U.K. Exit Talks: comments in speech in German parliament
  • Draghi Calls for Global Policy Alignment to Lift Economic Growth: ECB president speaks at ECB Forum in Sintra, Portugal
  • Italy Ready for ‘Everything Necessary’ on Banks, Renzi Tells CNN: Italian PM says he’s confident about consumer security prospects in banking sector
  • Rajoy’s Waiting Game Endures as Spanish Rivals Threaten Veto: prospect of 3rd election may boost prime minister’s leverage
  • VW’s U.S. Tab Said to Grow to $15b in Diesel Scandal: $10b for car owners, $5b in fines and investment
  • Nestle Shares Advance as New Outsider CEO Presages Shakeup: shares gain 2.7% as investors welcome Schneider’s appointment
  • Monsanto Earnings to Weigh on Prospect of Higher Bayer Offer: 3Q profit seen falling amid lower farmer spending

Looking at regional markets, Asia equity markets traded mixed amid an improvement in sentiment as the region pauses for breath in the wake of the Brexit fallout. Nikkei 225 (+0.1%) opened negative but then rebounded after finding support at the 15,000 level, while a weaker JPY also underpins as Japanese officials continued to urge for additional stimulus. ASX 200 (-0.7%) is the underperformer in Asia as the Brexit-triggered weakness in Financials and decline in energy prices dragged the index lower. Elsewhere, Chinese markets were cautious although have recovered from worst levels with the Shanghai Comp (+0.6%) relatively flat for much of the session, while Financials in the Hang Seng (+0.3%) remain pressured.

Top Asian News

  • Japan Yields All Drop Below 0.1% First Time in Global Bond Surge: Bond yields in Australia, U.K., Korea drop to record lows
  • South Korea Plans Supplementary Budget, Cuts Growth Forecast: Stimulus package of >20t won ($17b) to cushion risks
  • Japan’s Line Aims for $1.1 Billion IPO Amid Market Tumult: Line will debut in New York and Tokyo in rare dual IPO
  • Hutchison, Tata Motors Bonds Among Asia’s Biggest Brexit Losers: Motherson Sumi Systems among bonds to fall on Europe exposure
  • Brexit Market Meltdown Looks Like Overkill to Yen Guru Gyohten: No signs of Lehman-style credit crunch now, Gyohten says
  • Indonesia Approves Tax Amnesty to Help Fund Widening Budget Gap: Central bank says tax amnesty can draw 560t rupiah

European bourses have calmed so far this morning, in the wake of a volatile few days in the wake of the UK’s EU referendum, with equities sharply rising after a historic selloff. Subsequently, the Euro Stoxx (+2.7%) is in the green led by financials names which has seen a mild reprieve with some of the worst impacted companies from the Brexit vote Lloyds and Barclays seeing gains of 6.5% and 5% respectively. Elsewhere, the FTSE MIB (+4%) has notably outperformed amid the gains in Italian banks with optimism rising on the fact that European institutions could possibly act in order to ensure security of Italian banks. In credit markets, Bunds have seen a pullback from elevated levels with the German yield curve seeing an unwind of its recent bull steepening while the 2y-30yr spread has widened by 4.2bps. While Italian and Spanish bonds rise amid the risk on sentiment with the latter seeing yields falling to its lowest level since April 2015.

Top European News

  • Shawbrook Will Take Charge Tied to Lending Irregularities: co. sees $12m charge; CFO Tom Wood resigns, replaced by Minto
  • Rolls-Royce Sticks to Forecast as No Brexit Ballot Effect Seen: 2016 outlook unchanged, with pickup seen in 2H
  • RWE Split Favored Over EON’s in German Utilities Overhaul: German utilities splitting in riposte to nation’s green policy
  • Adidas Extends China Sports Push in Agreement With Billionaire: to sponsor races and promote soccer
  • RBS CEO Says ‘Day One’ Brexit Plan Worked, Uncertainties Ahead: Ross McEwan comments in memo to staff
  • UBS CEO Says Some Bank Share Prices Are Reason for Concern: says some banks’ market value may be less than their book value
  • Redrow Sees Pretax Beating Ests., Too Early to See Brexit Effect: saw no impact on house sales or visitor levels in run up to Brexit referendum
  • Legal & General Names Treasury’s John Kingman as Group Chairman: Kingman was 2nd permanent secretary at U.K. Treasury

In FX, the pound strengthened as high as $1.3360, rising nearly 200 pips overnight supported by technical indicators that suggested the record two-day loss since Thursday’s vote was excessive. The move comes even after the U.K. was stripped of its top credit grade by S&P Global Ratings. Fitch Ratings also lowered the country’s rank.  “There’s a bit of a temporary reprieve after days of volatile and adverse market moves,” said Viraj Patel, a foreign-exchange strategist at ING Groep NV in London. “Today’s EU talks could provide some new news and hence some direction to markets.” The yen weakened 0.2 percent, after surging more than 4 percent over the last two sessions. The Bloomberg Dollar Spot Index retreated 0.4 percent, following a two-day jump of 2.7 percent. The currencies of commodity-exporting nations rallied, with South Africa’s rand leading gains among 31 major currencies, climbing 1.6 percent. Russia’s ruble and Mexico’s peso advanced at least 1 percent as oil rose.

In commodities, the Bloomberg Commodity Index gained 1.2 percent. Crude oil added 2.2 percent to trade at $47 a barrel in New York, while copper and nickel were up more than 1.5 percent in London. Gold slipped 0.7 percent to $1,314.90 an ounce on speculation that recent gains have been overextended. In the previous two days, prices jumped 5.4 percent, the most since 2009. “Those sorts of spikes tend to be followed by a form of retracement, and that’s what we’re seeing,” said David Lennox, a resource analyst at Fat Prophets in Sydney. “We’re not saying that the uncertainty and the safe-haven aspect of Britain pulling out of the EU is over yet. So there’s still going to be some potentially good upside for gold.”

Looking at the day ahead, the main focus for the market and investors will be the EU leader’s summit in Brussels (a two-day event) where we’ll be awaiting further newsflow with regards to Friday’s referendum result. In the US the third revision to Q1 GDP is due out (which is expected to revised up by two-tenths to +1.0% qoq) along with the S&P/Case-Shiller house price index, consumer confidence reading for June and Richmond Fed manufacturing activity index.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

  • Markets are provided with a post-Brexit reprieve, as profit taking is seen, with GBP/USD back above 1.3300
  • Equity markets also remain calmer today, trading in the green across the board as financials outperform after their recent significant downside
  • Highlights today include final reading of US GDP, API crude oil inventories and comments from ECB’s Draghi, Coeure, Praet and Knot

 

US Event Calendar

  • 8:30am: GDP Annualized q/q, 1Q T, est. 1% (prior 0.8%)
  • 8:55am: Redbook weekly sales
  • 9am: S&P/Case-Shiller US HPI m/m SA, April (prior 0.09%)
  • 10am: Consumer Confidence Index, June., est. 93.5 (prior 92.6)
  • 10am: Richmond Fed Mfg Index, June, est. 3 (prior -1)
  • 4:30pm: API weekly oil inventories
  • 7pm: Fed’s Powell speaks in Chicago

 

DB’s Jim Reid concludes the overnight wrap

Risk assets in Europe, after initially opening up relatively OK, declined in a fairly orderly fashion as the day progressed although the closing levels still made for pretty eye opening reading. The FTSE 100 finished -2.55% taking its two day loss to -5.62%. It’s the FTSE 250 mid cap index which has clearly been at the centre of the pain however. That index closed -6.96% yesterday which comes on the back of a -7.19% fall on Friday. The -13.65% two-day loss as a result is the biggest fall since 1987. While Banks in particular have taken the brunt of the pain so far we’re also starting to get the early round of cautious commentary at a corporate level. Indeed yesterday EasyJet (which tumbled 22%) issued a statement citing that second half revenue will likely be ‘down by at least a mid-single digit percentage’. That follows similar comments from IAG on Friday while homebuilders (Barratt -19.42%, Travis Perkins -16.79%, Taylor Wimpey -14.92%) have also been front and centre in the selloff.

Elsewhere, the Stoxx 600 finished -4.11%, the DAX -3.02%, CAC -2.97% and FTSE MIB -3.94%. The Euro Stoxx Banks index plummeted another -6.23% following the staggering 18% fall on Friday. That index is now only a shade above the 2012 lows. Meanwhile across the pond the S&P 500 closed -1.81% and is now at the lowest level since March. All things considered the relative outperformer yesterday was Spain where the IBEX closed ‘just’ -1.83% lower and 10y Spanish yields rallied 17bps (other peripherals were 4bps lower and Bunds were 7bps lower) following those election results from Sunday which we highlighted yesterday. Staying with bonds, 10y Gilts closed below 1% yesterday (at 0.931% to be precise) for the first time ever. The irony was that this also coincided with a double downgrade to UK’s sovereign rating. S&P was the first to act, cutting the rating by two notches to AA (with a negative outlook) before Fitch then cut by one notch also to AA (and also on negative outlook).

Glancing over our screens this morning it’s another relatively mixed session in Asia currently, although the bulk of bourses have crept up off their early intraday lows. The Nikkei is currently -0.33% although did initially fall over 2%, while the ASX is -0.71% and Hang Seng -0.72%. Bourses in China are flat while the Kospi is currently +0.43%. That in part reflects the news out of Korea where a 20tn won fiscal stimulus package is said to be being planned. Meanwhile, the Pound (+0.69%) has rebounded a little this morning and is currently hovering at $1.3316 as we type.

Staying in Asia yesterday our Chief China Economist, Zhiwei Zhang, updated his macro forecasts for China for 2016 and 2017. Zhiwei has cut his GDP forecast to 6.6% in 2016 and 6.5% in 2017, from 6.7% for both previously. The downgrade to growth is mostly driven by domestic concerns. Zhiwei notes that he is particularly worried about the property market where property sales have already peaked. The rebound in the property market has been driven by tier 2 cities more than others which may not justify such rapid rises in land and property prices and a potential slowdown in the property market will likely lead to a negative fiscal shock in Q4 2016 and the first half of 2017. With regards to the policy outlook, Zhiwei continues to expect one more interest rate cut in Q4 2016. He notes that the policy outlook in 2017 faces greater uncertainty. While his baseline call is for no rate cut and a stable exchange rate, if downside risks to his growth outlook rise then he sees a greater chance of further policy easing through rate cuts in 2017.

Moving on. Unsurprisingly the bulk of yesterday’s newsflow was focused on events in the UK. PM David Cameron, speaking in Parliament yesterday, said that ‘the decision must be accepted and the process of implementing the decision in the best way possible must now begin’. Cameron is due to address EU leaders today in Brussels. Meanwhile, German Chancellor Merkel, Italian PM Renzi and French President Hollande confirmed that they will not hold formal or informal talks with the UK until Article 50 is triggered. While Merkel said that she has a certain level of understanding for the UK to analyze things, she also said that ‘we can’t afford an extended waiting game because that would be bad for both sides of the EU’. Hollande added that ‘our responsibility is not to lose time in dealing with the question of the UK’s exit and the questions’.

Also generating a few headlines yesterday was Italy, where the government is said to be considering measures for injecting funds into its domestic banks. After the EU failed to give approval for a bad bank a few months ago, a package of 40bn euros is said to be being considered according to reports on Bloomberg, although that amount is said to be still under discussion.

Wrapping up the price action yesterday, moves in the commodity market largely reflected the poor sentiment all round. WTI finished down -2.75% and back below $47/bbl, with the rest of the energy complex also under pressure. Base metals also edged lower although interestingly iron ore (+6.42%) continues to trade to its own beat. Meanwhile Gold rose another +0.67% to rise to the highest level since July 2014. Elsewhere, there was no hiding in credit markets. In Europe in particular we saw the iTraxx Main and Crossover indices finished 5bps and 26bps wider respectively, while the senior and sub financials indices weakened 10bps and 16bps respectively.

Staying with credit, yesterday we got the latest CSPP holdings data from the ECB (to last Wednesday). The data shows that total holdings now are €4,898m which implies that the latest weekly purchases amounted to €2,650m. As a result that puts the average daily run rate since the CSPP started at €445m.

Before we look at today’s calendar, the economic data is very much taking a back seat at the moment although in truth there wasn’t too much to report yesterday. In Europe the Euro area M3 money supply print increased by three-tenths in May to +4.9% yoy which was a little more than expected. Across the pond the flash June services PMI was unchanged for this month at 51.3 although that was a little disappointing relative to the consensus expectation for a rise to 52.0. Meanwhile the advance goods trade balance for May revealed a slightly widening in the deficit to $60.6bn (from $57.5bn), while the other data of note was the Dallas Fed manufacturing activity index which improved 2.5pts to -18.3 (vs. -15.0 expected).

Looking at the day ahead, the main focus for the market and investors will be the EU leader’s summit in Brussels (a two-day event) where we’ll be awaiting further newsflow with regards to Friday’s referendum result. As mentioned earlier PM Cameron is due to address various EU figureheads. Datawise, this morning in Europe the notable releases come in Germany – where the import price index is due – and in France and Italy where the latest confidence indicators are due out. This afternoon in the US the third revision to Q1 GDP is due out (which is expected to revised up by two-tenths to +1.0% qoq) along with the S&P/Case-Shiller house price index, consumer confidence reading for June and Richmond Fed manufacturing activity index.

via http://ift.tt/29bemsL Tyler Durden

Onward Toward Bullion Bank Collapse

 

 

 

 

 

 

Onward Toward Bullion Bank Collapse


Posted with permission and written by Craig Hemke, TF Metals Report (CLICK HERE FOR ORIGINAL)

 

 


 

The events of Friday not only speed the eventual collapse of the Bullion Bank Paper Derivative Pricing Scheme, they also highlight the fraud of this current system and shine light upon the utter desperation of these Banks to maintain it.

 

We’ve written about this countless times over the past six years. Here are just two recent examples:

 

In short, as a measure of controlling the paper prices of gold and silver, The Bullion Banks that operate on The Comex act as de facto market makers of the paper derivative, Comex futures contract. This gives them the nearly unlimited ability to simply conjure up new contracts from thin air whenever demand for these contracts exceeds available supply and, almost without exception, these Banks issue new contracts by taking the short side of the trade versus a Spec long buyer. Never do these Banks put up actual collateral of physical metal when issuing these paper derivative contracts. Instead, they simply take the risk that their “deep pockets” will allow them to outlast the Spec longs and, without the risk of having to make physical delivery, The Banks almost always win. Eventually, an event like the runup to the Brexit vote or all of the Fed Goon jawboning of May will spook The Specs into selling and this Spec selling is used by The Banks to buy back (cover) their ill-gotten naked shorts and lower total open interest back down. (If you’re confused by this, please click the second link listed above for a more detailed explanation of this process.)

 

How this influences price is simple. If the supply of the paper derivative futures contract was held constant on a daily basis, then price would have to rise or fall based upon simple supply/demand dynamics. When the amount of buyers exceeded sellers, price would have to rise to a point at which existing owners would be willing to sell. But this is NOT how the Comex futures market operates! Because the market-making Banks have the ability to create new contracts from whole cloth, they can instead flood the “market” with new supply whenever it’s necessary. This mutes potential upside moves by imparting fresh new supply for the Spec buyers to devour. Price DOES NOT have to rise to a new, natural equilibrium. Instead, price equilibrium is found where demand meets this new supply.

 

As a case in point, simply study the “market” impact on gold “prices” in the hours that followed the Brexit decision in the UK. As turmoil shook the global markets, gold shot higher and, at one point, was up nearly $100. However, within hours it had given back nearly half of those gains and then spent the remainder of the day in an unusual and very tight trading range while virtually every other “market” was rocked with volatility throughout the trading day. See below:

 

 

The all-important question of the day is: How and why was this done?

 

First, the “how”. At the end of each trading day, the CME Group issues an update that details total open interest changes for both gold and silver. Friday’s preliminary totals can be found here: http://ift.tt/290PeVc What does the data show? On Friday, with global markets in turmoil and precious metals markets rallying significantly, The Bullion Banks on the Comex issued brand new supply of nearly 60,000 new paper gold contracts! At 100 paper gold ounces per contract, this represents a potential future obligation to deliver almost 6,000,000 ounces of gold, should the Spec long buyers ever stand for delivery (which they won’t). So, ask yourself these questions:

 

  • Did the world’s gold producers all suddenly decide to forward sell and hedge 186 metric tonnes of future production yesterday, just as the most significant economic event in eight years was beginning to unfold?

OR

  • Did the Bullion Banks suddenly put up a few million ounces of their own gold and then lever it up a few times and issue 60,000 new contracts based upon this collateral deposit?

 

Obviously, the answer to both questions is a big, bold NO! Instead, the market-making and price manipulating Banks simply played their usual game, writ large. In a desperate attempt to contain price, they simply issued these 60,000 new contracts and fed them to the Spec buyers. So next, ask yourself these vital questions:

  1. Without this added supply…which grew total open interest by over 10% in one day!…how much further would the paper price of gold have risen yesterday?
  2. If a natural equilibrium was forced to be found between buyers and sellers of existing contracts, would price have settled even higher?
  3. And how much higher? Gold was up nearly $60 yesterday. But without the paper derivative supply increase of 10%, would it have risen $100? $200??

 

So now let’s address the more important part of the question: “why”.

 

Simply put, these Banks are desperate and on the run. However, in their arrogance, they are still flailing away and attempting to postpone their demise. The minimal amount of physical gold that they do hold and utilize to backstop the paper derivative market is shrinking rapidly as investors and institutions around the globe seek gold as a safe haven against the financial devastation of negative interest rates.

 

But not only are The Banks attempting to reverse this trend that is rapidly deleveraging their system, they are also desperate to protect their established NET short positions from additional paper losses. Recall that the CFTC generates something that it calls The Bank Participation Report every month and we write about this report almost every month, too. Here’s the latest:
http://ift.tt/1PriyAL

 

So let’s cut to the chase…

 

With gold at $1060 back on December 1, 2015, the 24 Banks covered by this report were NET short just 30,757 Comex gold
contracts. After running this NET short position all the way to 195,262 contracts on May 3, 2016, the report for June showed a NET short position of 133,396 contracts. However, data for this latest report was surveyed on June 7, with price at $1247 and total Comex open interest of 496,330 contracts. By this past Tuesday, in the days before the Brexit total were announced, price had risen to $1318 and then fallen back to $1270. However, total Comex open interest had risen to 571,517 contracts and, by analyzing the latest CFTC-generated Commitment of Traders Report, we can safely estimate that The Banks were likely NET short at least 180,000 Comex gold contracts.

 

Putting this all together, while price rose from $1060 to $1270, these 24 Banks added about 150,000 contracts of NET short liability to their Comex trading operations. So, with a NET position of 180,000 contracts short and with every contract representing 100 ounces of paper gold, the paper losses to these Banks for every $10 move in the gold price amounts to about $180,000,000. Multiplying that out…When gold was up nearly $100 early Friday, these Banks were on the losing side of a $1,800,000,000 move. Even for the likes of JPM et al, that’s a lot of fiat!

 

So, what did they do? Like any arrogant and addicted gambler, they doubled-down! They put “good money after bad” and, in doing so, likely increased their NET short position to nearly 250,000 contracts! All of this in order to suppress price and get it back under their control. This also allows them to somewhat control the message gold was sending. Can you even imagine the headlines if gold was up $200 yesterday? By holding the gains to just $50, The Banks hope to:

  • Manage the increased physical demand these higher prices are causing AND
  • Mitigate their paper losses. All of those new shorts lowered price by nearly $50 and nearly cut their one-day paper losses in half.

 

In the end, what’s the point of this post? First and foremost, it’s simply the latest installment of our efforts to shine the light of truth upon the incredible fraud and sham that is the current paper derivative pricing scheme. The Comex-derived price is not at all related to the price/value of true physical gold. Rather, the price discovered on Comex is simply the price of the derivative, itself, with the price of this derivative determined by changes of supply and demand of the derivative. Barely any physical metal ever exchanges hands on Comex so it is entirely inaccurate to say that the price discovered there has any connection at all to the underlying physical.

 

That said, though, we’ll leave you with one last link that you simply must read. Mark O’Byrne at Goldcore is closely-connected on the ground in London. In all of the hubbub of the Thursday and Friday, you may missed his daily report. If Mark and his sources are correct, we may be rapidly approaching the demise and destruction of these criminal Bullion Banks and their fraudulent pricing scheme. Demand for unencumbered, true physical gold is the key to ending this system and finding justice for gold holders, miners and producers around the globe…and this link may prompt you to think that we are closer to The End than at any other time in the past 40 years: http://ift.tt/28OYwnf

 

Friday’s Brexit vote truly was a game-changer and the single most important financial event since 2008. That it might accelerate the death throes of the Bullion Bank Paper Derivative Pricing Scheme is not something that is fully appreciated by the global gold “community”. Hopefully, this post has helped you to understand where we are at present, the reasons behind the price action of Friday and the
significance of global physical supply/demand versus paper price going forward.

 

Please email with any questions about this article or precious metals HERE

 

 

 

 

 

 

 

Onward Toward Bullion Bank Collapse


Posted with permission and written by Craig Hemke, TF Metals Report (CLICK HERE FOR ORIGINAL)

 

via http://ift.tt/297EpnH Sprott Money