Tag: news

A Delta flight from Los Angeles International Airport to Shanghai made an emergency U-turn on Tuesday, dumping fuel on a group of schoolchildren as it returned to LAX, according to CBS Los Angeles. The plane departed shortly after 11 a.m.

pic.twitter.com/tM3WjWk1Bg

— Bodiaz Rising ⭐️⭐️⭐️ (@BodiazRising) January 14, 2020

LA County firefighters report that students at Park Avenue Elementary School report that 17 children and 9 adults were exposed to an unknown type of fuel, and were evaluated by paramedics on scene.

BREAKING: #Delta Flight 89 dumps fuel on approach to Los Angeles International Airport; fire crews are assessing dozens of children at a Cudahy elementary school pic.twitter.com/gFBjKuw21h

— 🌐FNR- FRUM NEWS REPORT🌐 (@FrumNewsReport) January 14, 2020

UPDATE*** Patient count updated to 17 children, 9 adults. All minor injuries w/ no transports to local hospital from school. There are no evacuation orders for the immediate area. Substance was confirmed JET FUEL.

Refer to school regarding plans for child pick-up. #LACoFD

— L.A. County Fire Department (@LACoFDPIO) January 14, 2020

UPDATE*** Patient count updated to 17 children, 9 adults. All minor injuries w/ no transports to local hospital from school. There are no evacuation orders for the immediate area. Substance was confirmed JET FUEL.

Refer to school regarding plans for child pick-up. #LACoFD

— L.A. County Fire Department (@LACoFDPIO) January 14, 2020

LA Unified school officials told CBS they are aware of the situation and are looking into it. There is no word on why the fuel was dumped.

The market’s relationship with The Fed explained…

Market.
Fed.pic.twitter.com/6Jr9wgX8GR

— Sven Henrich (@NorthmanTrader) January 13, 2020

The US market’s price-to-sales ratio has reached a new record high (but it’s different this time)…

Source: Bloomberg

And its PEG ratio has also never been higher…

Nomura’s Charlie McEllligott lays out what is holding this malarkey toegther…

• “perpetually easy” US financial conditions make this an “everything rally” environment for investors, where risk assets / spread product should be supported by “firm” USTs over the course of 2020 (as I do not see scope for a large US Rates selloff as some are expecting, nor a massive rally for that matter)

• “Goldilocks” US economic backdrop with benign inflation

• Fed reaction function clearly skewed asymmetrically (super-low bar to ease, almost impossible bar to hike)

• My belief that the current “QE-Lite” (in that the Fed are NOT buyers of “Duration,” just short-term Bills) will transition to standard “QE” over time, moving toward towards USTs / outright “Duration” purchases in an effort to provide “ample” reserves in the banking system and offset money market stress points

• Long-term view from investors that the “Three D’s” will continue to create secular disinflation which makes will keep policy “easy” and rates “low”—the overall 1) trajectory of Debt growth, 2) fading Demographic impulse and 3) tech Disruption.

And positioning in options is extreme to say the least…

And the market keeps rising on the back of the biggest 2-day short-squeeze in 2 months…

Source: Bloomberg

For a few brief minutes today, the machines hiccup’d on China tariff headlines… but that didn’t last… until NYFed reduced the size of its repo plans and that dipped stocks again (briefly)…  S&P and Nasdaq dared to close red!

 

The Dow topped 29k once again, but couldnt hold it…

 

Bank stocks were mixed after earnings with C and JPM rallying as WFC tumbled…

Source: Bloomberg

The recent gains in the broad market have been driven by a resurgence in a defensive bid…

Source: Bloomberg

TSLA continued its parabolic ride, almost tagging $100bn market cap…

And while BYND continued its epic squeeze, after it was halted, it did start to fade fast…

But AAPL dared to close red…

Credit markets are (for once) leading the shift in protection costs higher (even if VIX was also higher today)…

Source: Bloomberg

But Junk credit spreads collapsed to their lowest since 2007…

Source: Bloomberg

Despite the gains in stocks, bonds were also bid with Treasury yields down 2-3bps (short-end underperformed)… Today’s rally erases yesterday’s losses…

Source: Bloomberg

30Y Yields fell back below pre-Soleimani levels…

Source: Bloomberg

And the yield curve flattened to almost one-month lows…

Source: Bloomberg

The Dollar trod water for a 4th day…

Source: Bloomberg

Yuan ended modestly lower after the trade headlines…

Source: Bloomberg

Cryptos surged today…

Source: Bloomberg

With Bitcoin jumping back above $8800 – 2-mointh highs…

Source: Bloomberg

Copper extended yesterday’s gains as PMs mirrored that to the downside, oil managed a modest gain…

Source: Bloomberg

Gold is back below pre-Soleimani levels…

WTI managed a small gains, bouncing off $58-the figure…

 

And finally, in case you wondered when this malarkey would end, Morgan Stanley’s Global Risk Demand index soared to +2.3 – above 2.00 has historically been a significant turning point for risk…

And don’t forget, stocks have priced-in a dramatic rebound in growth… that is failing to appear for now…

This won’t end well…

Source: Bloomberg

You are here…

..How I feel being long in the Market at these levels.. pic.twitter.com/DrhLqQaupz

— Chris (@Freedomtrader77) January 14, 2020

 

After a video aired on Russian television featuring dialogue between Assad and Putin during the latter’s visit to Damascus last week, The Hill reports of the now viral clip:

“In a video of the conversation between Assad and Putin at the Orthodox Church of the Virgin Mary in Damascus, Assad mentions the Apostle Paul’s conversion to Christianity after a vision at the gate of Damascus.”

The two leaders were standing alongside the Orthodox Christian Patriarch over Syria’s some two million Christians in a famous cathedral on the ‘Street called Straight’ — reputed as the biblical site of Paul’s conversion mentioned in The Book of Acts — when Assad referenced the New Testament story.

Assad then in joking manner said that visiting the ancient biblical site would make Trump a better person:  

“If Trump arrives along this road, he will become a good man.”

Putin jokes Assad should invite Trump to visit Damascus.
The leaders were referring to the Straight Street, which leads to Mariamite Cathedral of Damascus, & to Apostle Paul whose life was transformed after a vision he had as he walked on that road. pic.twitter.com/WfTy90RO9Q

— RT (@RT_com) January 13, 2020

The rare playful dialogue caught on film between the two leaders continued, with Putin responding: “He will change for the better… Invite him!” according to a translation of the interaction.

“I shall,” Assad said. Putin then affirms, “I’ll pass on the invitation!” — as the two continue laughing, with the bishop still smiling on.

Putin had actually made the high level trip unannounced on Russian Orthodox Christmas (Jan.7 every year, Julian calendar). He had attended a high level military briefing with Assad and the two countries’ defense ministers at a headquarters in the Syrian capital, and also toured parts of the city and historic sites and churches. 

Putin and Assad visited the Marian Cathedral, the oldest Cathedral in Damascus which dates back to the beginning of Christianity pic.twitter.com/OV7uSMzX9G

— Ali (@CoolHuh_) January 7, 2020

Even though the invitation appears to have been offered in jest, it would be interesting if it actually did gain Trump’s attention.

Given it was published on state television Rossiya-1 this week, it’s clear the Kremlin possibly packaged it as some kind of message or to suggest to Putin and Assad are legitimately open to such a meeting. 

Putin tells Assad to invite Trump for a visit:
“Invite him. He will come.”https://t.co/5dRxuvku08

— Julia Davis (@JuliaDavisNews) January 13, 2020

Putin’s visit to the Orthodox Christian cathedral in Damascus, seat of the Patriarch of Antioch, is infused with symbolism given Moscow has throughout the war in Syria seen itself as the ‘protector’ of the region’s sizable minority of Christians. 

Syria’s Christian leaders in turn have not only stuck with the Assad government, fearing extermination under the ‘alternative’ of jihadist forces which sought to overthrow him, but have been on record as seeing Russian intervention as good thing. 

With everyone (grudgingly or otherwise) now admitting that the Fed’s repo and QE4 was responsible for the miraculous surge in stocks since the start of Q4 2019, traders were especially focused on today’s release of the next monthly schedule of repo operations to see if the Fed would, as Powell hinted, start reducing the liquidity injection via repo. And sure enough, that’s precisely what happened when the NY Fed announced that starting February, the term repo, which had been kept constant at a level of $35 billion since mid-December, would be reduced by $5 billion to $30 billion for every new term repo.

As shown in the latest schedule below, the New York Fed announced that overnight repos would remain at their prior limit of “at least $120 billion”, but it was the term repos where the Fed confirmed that the massive liquidity glut triggered by JPMorgan the Sept repo crisis would finally being to taper, starting with the Feb 4 two-week term repo, which would decline from $35BN to $30BN.

In the aggregate this is a modest drop, reducing overall liquidity by just $20 BN over the month of February as existing repos roll into smaller operations, but assuming there are no incidents, one assumes that in March (and then April, and May), the shrinkage will continue apace, with the total amount declining by a similar or greater amount.

Of course, on net the total liquidity will actually increase as in February the Fed will inject at least $60BN in liquidity via T-Bill monetizations courtsy of “NOT QE 4”, and then another $60BN in March, then April and so on. In other words, while there Fed confirmed a modest repo shrinkage starting in two weeks, this will be more than offset by permanent open market operations which will see the Fed continuing to grow its balance sheet, in the words of UBS, “indefinitely.”

Almost one month ago we showed in one chart why the core concession in the Phase One trade deal by China – namely the promise for a “best effort” to purchase $40 billion in agricultural products from the US – appeared impossible. In short, assuming a similar export mix as in 2017, this would translate into an unprecedented 235% volumetric increase in 2020 US agricultural exports to China over 2019. The problem is that while US exports to China had declined sharply in 2018, other nations stepped in, in many cases with long-term bilateral contracts in place ensuring the long-term delivery of ag products from mostly Latin American substitute markets. This, as Goldman points out, means that such an increase in Chinese purchases from the US “would likely be hugely disruptive to global agriculture markets, primarily crowding out Argentine and Brazilian supplies that have taken substantial market share since 2017 due to the trade war and much weaker currencies.“

Fast forward to today when Reuters writes that commodity traders and analysts are similarly struggling to map out how China will reach the “eye-popping” amounts it is committing to buy from the United States under Phase 1 of their trade deal.

As we reported previously, China has pledged to buy $50 billion more in U.S. energy supplies, and will raise US agriculture purchases by some $32 billion over two years above 2017’s $24 billion baseline, according to a source briefed on the deal to be signed on Wednesday. The deal also stipulates purchases of an additional $80 billion in manufactured goods, although details still remain scarce. Overall, it was reported that, as a part of the deal, China will buy $200bn more US goods and services than 2017 cumulatively over the next two years.

Those totals would certainly trim the roughly $300 billion annual trade gap between the countries. However, analysts who study Chinese commodity flows remain skeptical that Beijing can absorb such quantities of U.S. goods without threatening trade ties with other suppliers, hurting its own domestic producers, and making substantial changes to import standards and quotas.

“Either China massively increases imports and reduces current account surplus from the current 1.5% of GDP, or it engages in trade diversion away from current providers of goods which compete with the U.S.” said Alicia Garcia Herrero, Chief Economist Asia Pacific at Natixis in Hong Kong. “I see this second scenario as much more likely.”

According to Chinese trade sources and analysts, China will have to include U.S. crude, liquefied natural gas (LNG) shipments and imports of petrochemical raw materials such as ethane and liquefied petroleum gas (LPG) to meet the target. But it would still struggle unless new supply deals are signed that displace other exporters.

The $50 billion target is “too aggressive and unlikely to achieve”, said Seng Yick Tee, an analyst at SIA Energy in Beijing, adding that energy product exports from the United States to China were about $8 billion in 2017 and 2018. “To achieve $25 billion a year, all the imports need to be tripled.”

Gavin Thompson, Vice Chair for Asia Pacific at Wood Mackenzie, was surprised by the energy figure since it would mean tariffs on U.S. crude and LNG imports would have to be removed, particularly for LNG to be competitive. Quality, rather than quantity, may be another hurdle.

“Most of the Chinese refineries were designed to process medium-sour crude, but U.S. oil is mostly light, sweet,” SIA’s Tee said, referring to the density and the sulfur amounts in crude, which dictate the types of fuels that can be refined from an oil.

But it’s China’s agricultural pledge that most found laughable: the pledge to boost U.S. farm imports by over $30 billion over two years is “shocking” since that increment is more than the value of farm products it has purchased from the U.S. in a single year, said a China-based grains trader quoted by Reuters. “It would make (more) sense if the $32 billion is the total number, not the increased number.”

Such a large fixed dollar-figure from one producer would also risk supply disruptions and distort international crop prices, said Iris Pang, Greater China economist at ING in Hong Kong. “Prices of agri (commodities) from the rest of the world could be cheaper, especially after China cut import tariffs (in January). So even after retaliatory tariffs are removed, the U.S. will not have a competitive advantage over other economies,” she said.

Traders also questioned what products China could buy from the United States since African swine fever has dented demand for soybeans for animal feed and quotas to protect domestic farmers limit grain imports. “China will, for sure, buy more soybeans, let’s say, 30 to 40 million tonnes. (For) wheat, maybe we can increase purchases within the import quota,” said a trader with a Chinese grain importer. A third grains trader said: “If such volume (of products) come to China, it will be a disaster for us (in the domestic market).”

* * *

Not everyone is a cynical skeptic, however.

Goldman Sachs has emerged as a believer that what China has promised can actually be done, and in a note published over the weekend writes that “given the size of the total Chinese imports and US exports, there should be sufficient room in theory for China to increase its purchases from the US by $200bn. However, doing so within two years would likely require policy assistance such as lower tariffs and more SOE buying under administrative measures. Commodities and commodity-like goods that are fungible and easy to substitute from one supplier to another probably will feature prominently in the list.”

A quick look at the math: Chinese policymakers have agreed to increase imports from the US by $200bn cumulatively over the next two years relative to the 2017 levels. To put this number in context, an additional $100bn per year would account for 70bp of China’s 2018 nominal GDP and would imply a doubling of China’s 2019 imports of US goods. Which is why many investors have asked Goldman (and everyone else) whether such a large amount of purchases in such a short period of time is achievable, what China is most likely to buy, and what the implications are for the economy and markets.

Annual Chinese total imports and US total exports each exceed $2tn, so increasing the bilateral trade flows by $200bn over the next two years, looks theoretically achievable. However, doing so will not be easy without policy support,due to the lack of economic competitiveness. In Exhibit 1, assuming China is going to buy an additional $200bn of US goods and services in 2020-21, Goldman constructs a potential scenario of how this may be achieved based on product fungibility and hard constraints in major markets.

As Goldman’s analysis suggests, much of the additional purchases would result in trade diversion of commodities and commodity-like goods. However, such re-directing of trade flows, even for the most homogeneous commodities, may not happen instantaneously. Moreover, hard physical constraints such as the sharp decline in US soybean production and the grounding of Boeing’s 737MAX will likely make the purchase ramp-up especially difficult in 2020 compared to 2021.

The parameters of the deal

While not much detail is known – one day before the official signing – a few key parameters have been reported by multiple news outlets. As a part of the Phase 1 deal, China has reportedly agreed to buy $200bn more in US goods and services over two years, focusing on manufacturing, energy, agriculture and services. In particular, per the press reports, US officials have emphasized that at least $40bn of American farm products will be bought per year, and China will make “best efforts” to increase its purchases by another $5bn annually, adding up to the $40-50bn number that President Trump announced on October 11. Wheat, corn and rice are the specific agricultural products mentioned. According to the US Trade Representative Robert Lighthizer, there would be specific targets for Chinese purchases of specific products, but those would not be made public to avoid distorting markets

Based on aggregate numbers alone, there appears to be ample room for Chinese imports from the US to double. For example, the US exported $2.4tn goods and services in 2017 and only 8% went to China ($186bn). Similarly, China imported $2.2tn goods and services in 2017 and only 8% came from the US. Of course, there do exist notable mismatches between what China demands and what the US supplies. For example, China imports $75bn iron ore annually but the total US exports are less than $1bn per year. However, even after taking into account such supply and demand mismatches which impose physical constraints to how much China can buy from the US, the headroom seems wide enough for China to fulfill the $200bn list (Exhibit 2).

A more detailed list of what China may buy

Commodities are most easily diverted in trade flows due to product homogeneity, effectively muting the impact of tariffs on the real economy. In addition to product homogeneity, we have also looked at factors such as regional skew on the US side (e.g., goods produced in Republican-/Democrat-leaning states may receive different weights in the trade deal) and SOE share on the China side (e.g., a higher SOE concentration makes it easier to implement trade policies) to assess which products could feature prominently in the purchase list. Based on an average rank across five factors, Exhibit 3 shows that commodities and commodity-like goods such as chemicals, aircraft, plastics and semiconductors stand at the top of the list.

What about Services

After adjusting for capital outflows disguised as travel spending in the Chinese balance of payment data, China imported $363bn in services in 2017. US data  shows that service exports to China totaled $56bn in 2017, with travel services constituting the largest share (59%) followed by charges for use of intellectual property (11%), financial services (6%) and other business services (6%). Compared to other developing countries, service imports by China are still low relative to its GDP (Exhibit 12). We calculate that, if the service imports to GDP ratio in China (2.9%) were to increase to Indonesia’s level (3.5%), Chinese service imports would increase by $30bn. The OECD Services Trade Restrictiveness Index, which summarizes information on regulations affecting trade in services, shows that there is indeed room for the Chinese government to lessen service trade restrictions. Imports of financial services, for example, are significantly lower in China than in other countries when compared to the size of the country’s financial industry (Exhibit 13). More recently, discussions about financial opening have been gathering steam in China. But this is likely to be a gradual process. Overall, we think it is feasible for total Chinese imports of US services to increase $15bn in 2020 and $30bn in 2021.

If US Wins, who Loses?

As for China’s other trading partners, Goldman applies the same methodology used in its previous research to estimate the GDP impact by combining the type of goods China may buy from the US, the likelihood and patterns of trade diversion, and the world input-output table. Exhibits 14 and 15 show that the effects would be mostly moderate, with Germany, Japan, France and Brazil estimated to experience the largest negative impact in value-added terms and Taiwan, Malaysia, Singapore and Korea in GDP terms.

Market Implications

There are two key potential market implications. First, given the unfavorable economics of raising imports from the US significantly and quickly, the Chinese government may want to keep CNY on the stronger side relative to USD to maintain its purchasing power. Second, there may be price divergence between US and ex-US prices to incentivize diversion of trade flows. Possible examples include US outperforming Brazil soybean price and WTI outperforming Brent crude oil price.

In parting, some caveats.

First, it is worth emphasizing that significant uncertainties remain on the parameters of the purchase agreement. For example, it is unclear whether multi-year contracts can be counted as a part of the $200bn package even when they do not lead to actual trade flows in 2020 and 2021. In the case of LNG, there are several large LNG projects where Chinese companies could potentially sign long-term contracts with the US. Assuming a combined volume of 50mtpa – not too aggressive an assumption based on China’s demand trajectory, the value could be $20bn per year, or $200bn for 10 years. But the actual delivery is unlikely to begin before 2023.

Second, the evaluation of GDP impact on China’s trading partners as shown above is solely based on economic factors such as similarity to the goods exported by the US and the ease of trade diversion. It leaves out political considerations which could be important in practice. For example, China’s state-run newspaper has been quoted saying that “entities from countries which are friendly to China will be favored by the Chinese people” when asked about foreign institutions who might benefit from China’s financial opening. Such political factors could affect the eventual trade outcomes above and beyond a US-China purchase agreement.

Presidential contender Sen. Elizabeth Warren and Sen. Chris Van Hollen co-wrote a letter on Monday  to the Securities and Exchange Commission (SEC) requesting an “investigation into whether there may have been any illegal trading in defense company stocks or commodities related to individuals’ advance knowledge of the United States attack on January 2, 2020, that killed Iranian Major General Qasem Soleimani.”

Warren, Van Hollen ask SEC and CFTC to investigate possible insider trading by Mar-a-Lago members reportedly given advance notice on Iran action.

Letter references rise in $NOC, $LMT, $RTN shares and the price of crude oil after strike.

— Kayla Tausche (@kaylatausche) January 14, 2020

The letter alleges that President Trump told guests at the Mar-A-Lago resort that military action was pending in the Middle East. 

The senators pulled a quote from a story that was featured on the left-leaning Daily Beast that detailed how three unnamed sources at the resort heard President Trump talking to guests about an upcoming military operation: 

“In the five days prior to launching a strike that killed Iran’s most important military leader, Donald Trump roamed the halls of Mar-a-Lago, his private resort in Florida, and started dropping hints to close associates and club-goers that something huge was coming … Trump began telling friends and allies hanging at his perennial vacation getaway that he was working on a ~big’ response to the Iranian regime that they would be hearing or reading about very •soon.’ [T]he president specifically mentioned he’d been in close contact with his top national security and military advisers on gaming out options for an aggressive action that could quickly materialize.” 

The letter went onto say that “guests at President Trump’s resort may have obtained confidential market-moving information and had the opportunity to trade defense industry stocks or commodities or make other trades based on this information.” 

It also said, “Between January 2, 2020, before the announcement of the attack, and the end of the day on January 3, 2020, Northrop Grumman stock prices increased by over 5%; Lockheed Martin’s stock prices increased by 3.6%… Additionally, immediately following the killing of Soleimani, the price of crude oil increased by over 4%.” 

However, as the charts below show, defense stocks were actually down ahead of the attack on the embassy, which triggered the first push higher, and then surged on Soleimani’s death headlines…

We’ve noted in the past how left-leaning news organizations have played politics and tried to suggest President Trump and his associates were front-running equity futures, commodities, and or stocks ahead of trade headlines. 

The Chicago Mercantile Exchange (CME) called the infamous Vanity Fair piece titled – “The Fantastically Profitable Mystery of the Trump Chaos Trades” – a “fantastical” story:

“CME Group regularly monitors its markets for suspicious activity.

As it relates to the Vanity Fair article published on October 17, 2019, regarding activities in the E-mini S&P 500 futures contract, the allegations about the trading activity are patently false.

These transactions were entered into by a significant number of diverse market participants.”

And at the time the Vanity Fair piece was released, we did not run a comment on the article because of our initial skepticism of the reporting, and as Bloomberg  reported, experts who examined the story said any implication that people traded on inside information fell short of being proven.