President Donald Trump’s decision to carry out a targeted assassination of Iran’s top military leader, Gen. Qassem Soleimani, has resurrected a much-needed debate about America’s use of military power in the world. After two decades of occupying and bombing large swaths of the Middle East, most American politicians now treat war-making like any other government action: how they feel about it depends on who’s in the White House, not who it hurts.
It was just nine years ago that the House of Representatives voted on a War Powers resolution to limit former President Barack Obama’s military actions in Libya, which he pursued without congressional oversight. Speaker Nancy Pelosi (D–Calif.) announced yesterday that she would similarly move to rebuff Trump this week. (It’s worth noting, however, that the resolution may be on hold in the wake of Iran’s attack on two bases holding U.S. military personnel early on Wednesday.) Writing to House Democrats, she said that the resolution “reasserts Congress’s long-established oversight responsibilities by mandating that if no further Congressional action is taken, the Administration’s military hostilities with regard to Iran cease within 30 days.”
Yet when it came to Obama, Pelosi departed from bipartisan consensus and voted in favor of military intervention without approval from Congress.
There are differences, of course, between the two conflicts. The White House wrote in 2011 that U.S. efforts in Libya “do not involve sustained fighting or active exchanges of fire with hostile forces, nor do they involve U.S. ground troops.” That amounts to little more than semantics. The deposition and subsequent killing of Col. Muammar Gaddafi in 2011 sparked chaos in North Africa and the Libyan Civil War, which is still ongoing. (Obama would go on to call his failure to plan for that the “worst mistake” of his presidency.)
In other words, the major difference between Gaddafi and Soleimani is Trump.
There is a long list of Republican culprits here, as well. The House GOP voted overwhelmingly in 2011 to admonish Obama for participating in NATO combat operations in Libya without congressional approval, despite the fact that Gaddafi had ordered the downing of Pan Am Flight 103 in 1988, which was flying from Frankfurt to Detroit and carrying both American civilians and American government officials. Republicans did not consider that fact—nor Gaddafi’s slaughter of Libyan civilians during a popular uprising in 2011—justification enough for waging war without congressional consent. Yet, conservatives thus far have overwhelmingly supported the assassination of Soleimani.
“As a father, this isn’t complicated: The United States took out an evil terrorist who killed thousands of people so he couldn’t kill more people,” Rep. Steve Scalise (R–La.), the second-ranking member of the House’s Republican minority, tweeted. “Amazing how many on the far left will cover for a terrorist rather than give credit to @realDonaldTrump.”
Did Scalise vote to rein in Obama’s military interference in Libya in 2011? Reader, he did.
House Minority Leader Kevin McCarthy (R–Calif.) placed some blame on Adam Schiff (D–Calif.), the head of the House Intelligence Committee, telling Fox and Friends that, had the congressman not been so focused on impeachment, he might’ve been able to protect the U.S. from Iranian aggression. “The world is safer today because this president took action,” McCarthy said. “I don’t think it’s a place for them to play politics.”
McCarthy also voted with the majority of his Republican colleagues in 2011 to admonish Obama for waging war without congressional approval.
Speaking of Schiff: the Democrat recently called for open hearings on Trump’s airstrike. “The president has put us on a path where we may be at war with Iran,” he toldThe Washington Post. “That requires the Congress to fully engage.”
Schiff sided with the Obama administration in 2011.
Are you sensing a pattern here?
While ideological inconsistency is the norm, there are a few notable exceptions. Just 10 House Republicans sided with Obama in 2011. Of that cohort, only two are still serving: Reps. Louie Gohmert (R–Texas) and David Schweikert (R–Ariz.). Neither member has released a statement in response to Trump’s actions in Iraq.
Forty-five House Democrats in 2011 voted against their party and in favor of constitutionality, pushing back against Obama’s lack of restraint in Libya. That resolution, although it was non-binding, declared “that the President shall not deploy, establish, or maintain the presence of units and members of the United States Armed Forces on the ground in Libya.” It also requested that Obama give Congress more information on the administration’s military objectives and provide lawmakers with reasons for why the president chose to circumvent them.
Rep. Dave Lipinski (D–Ill.), a pro-life Democrat, formally expressed his desire for congressional oversight and will likely do so again in this week’s vote. Reps. Dave Loebsack (D–Iowa), Paul Tonko (D–N.Y.), and Peter DeFazio (D–Ore.) also voted to constrain Obama’s actions in Libya. DeFazio told the East Oregonian this week that “there is still time to stop this risky escalation, but Congress must assert its constitutionally-granted war powers immediately to do so.”
Rep. Justin Amash (I–Mich.), a Republican in 2011 and now an independent, is also expected to vote with most Democrats.
“When a president engages in war without congressional authorization and Congress does nothing to stop him, the two branches cut the American people out of the process, in violation of our Constitution’s design,” he tweeted. “This undermines both the liberty and the safety of the people.”
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Only 11% Of Large Active Funds Beat Their Benchmark Last Decade
There is a reason why, depending on how one calculates it, passive, i.e. index and ETF, fund assets under management have either already surpassed active, or will do so in the next two years…
… and more so than the exorbitant fees charged by active investors which can reach 3% and 50% in some grotesque, megalomaniacal cases, it is due to the dismal performance of the actively managed fund industry, which for 10 years in a row failed to outperform the broader market (although with central banks now actively micromanaging the stock market, one can hardly blame them – after all, with no risk of a drop, there is no need to hedge exposure).
However, it’s not just failing to outperform the market that has resulted in a near record 8 consecutive months in hedge fund outflows and the fewest hedge fund launches since the year 2000.
According to Bank of America, only 11% of large cap active funds beat their benchmarks for the decade, which was not only a “tough environment for active managers”, but was catastrophic for the confidence of their LPs, who redeemed the most capital in years despite 2019’s stellar S&P performance.
Here, according to BofA’s Jill Carey Hall, is why the 2010s was a decade hedge funds and active investors can’t wait to forget: “Only 11% of large cap active funds beat their benchmarks for the decade. The past 10-year period posed unique challenges for active funds.”
The most deleterious aspect was the fight against a wave of redemptions, a fight which countless hedge funds lost, and led to the shuttering or family office conversion of some of the most respected funds in 2019.
As a result of this tremendous industry shift, passive funds now represent almost half of all US domiciled fund assets vs. just ~20% back in 2009.
Meanwhile, if hedge funds wish to rage at someone for their dismal performance, they may as well address their grievances to the Marriner Eccles building: the benchmark itself was particularly hard to beat, as the 257% return for the S&P beat almost every other broad market index.
And another fascinating fact from BofA: within the S&P 500, the percentage of stocks that outperformed the benchmark for the decade was a mere 32% vs. almost half in the prior decade. In other words, just a handful of stocks generated the bulk of the S&P’s return, someone we discussed over the weekend in “Just Two Companies Accounted For Nearly 20% Of The Market’s Entire 2019 Return.“
Finally, and as shown in the chart above, leadership was concentrated amongst mega cap companies which according to BofA, “are difficult to overweight given the amount of fund concentration required.“
Below we present some more observations on active management courtesy of BofA:
While benchmarks posted the best year since 2013, large cap active managers closed 2019 with just 28% outperforming their Russell 1000 benchmarks, the lowest hit rate since 2016 when only 19% of funds beat their benchmarks. This follows two straight years of over 40% hit rate (48% in 2017 and 43% in 2018). Quantitatively-focused funds struggled even more in 2019, with just 12% beating the Russell 1000 index, underperforming by 4% on average.
Why the struggle? Anti-yield and anti-quality bias
With persistently low interest rates over the past decade, the reach for yield was prevalent. Amid equity factors, High Dividend Yield was the best performer of the decade, returning 315% over the 10-year period vs. the S&P 500’s 257% gain. But large cap active managers consistently maintained a lower dividend yield than the benchmark (32bps lower on average) during the period.
Additionally, dividends drove more than a quarter of the S&P’s total return during the decade and active managers’ lower yield exposure likely dragged on their performance. Large cap active managers were also consistently underweight High Quality stocks (“B+ or better”), which outperformed Low Quality (“B or worse”) stocks by 68ppt during the decade. Active funds’ exposure to High Quality stocks were 2.5% lower on average during the period.
One final reason why outperforming the market was nearly impossible in 2019, and the past decade, performance dispersion for large cap equities rose in 4Q, but remains below the long-term average of 45%. Meanwhile, performance dispersion increased within small caps in 4Q to above average, while it declined within mid caps and remained below average.
I have been quite critical of how academics tweet. Reactions to my post on social media were savage. Indeed, academics routinely assail my work on Twitter. Readers of this blog may assume that this sort of hostility bleeds into real life (IRL, if you will). Thankfully, it doesn’t.
Last weekend I attended the annual conference for the Association for American Law Schools. Law professors from every law school attend. I was happy to catch up with many friends. I also visited with many professors who have been extremely critical of my work on social media, and in the blogosphere. And those interactions were always cordial and friendly. None of us brought up our Twitter tiffs.
As a general matter, academics are well equipped to compartmentalize disagreements, and find common ground during common times.
Do not take social media snips as an indication of how academics interact in the real world.
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1/8/1973: Trial begins for seven men accused of illegal entry into Democratic headquarters at Watergate hotel. The break-in would give rise to U.S. v. Nixon.
The Watergate Complex
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Rabobank On The Iranian Attack: This Is Either Theater… Or Theater Of War
Submitted by Michael Every of Rabobank
Theatre; or Theatre of War
The day starts with news from Iranian TV, confirmed by the Pentagon, that Iran’s Revolutionary Guards Corp has fired “tens” of surface-to-surface missiles from within Iran itself at a US airbase in Iraq. US President Trump is aware of the situation and is monitoring it.
Iranian forces have not directly confronted the US like this before: previous attacks have come through proxies like militias. To attack so openly, and in defiance of US Trump’s recent warnings, and from within Iran itself, is a clear escalation that is also an act of war by any definition. For an Iranian economy in free-fall, which despite home advantage has no hope of actual military victory in a face-to-face confrontation with the States, this seems a remarkable, dramatic, and, most worryingly, illogical move.
At this stage, with news hazy and facts on the ground absent, there appear two realistic scenarios. One is that this attack is theatre to placate the large crowds who were so recently on Iran’s streets. The alternative is that Iran has genuinely decided to test Trump by also upping the ante. The only way to tell is if there are US casualties.
If we get images of dead and injured US soldiers, then the worst-case scenarios begin to open up. If no real damage has been done by these missiles, but Tehran gets to show the crowds it responded, then more positive possibilities are still available. We will find out shortly – but breaking news is that there are ‘only’ Iraqi casualties, according to its Ministry of Defence. It remains to be seen if that is a red line for Trump, or is the kind of collateral damage he was expecting after taking out former IRGC head Soleimani.
Given that this move from Iran appears totally out of keeping with their usual strategic acumen, either the loss of Soleimani has meant a total loss of talent, and/or self-control, or this is indeed a token level of revenge. I will *cautiously* stick to that interpretation for now.
However, as we go to press–and bearing in mind that much news at this stage of the fog of what might be war often proves not to be true in hindsight–Iran might have launched a second wave of attacks, Iraq announce military operation “Overwhelming Response”, and the Iranian air force has apparently been deployed and is in Iraqi airspace. Iran is also warning that if the US responds to this attack, the next wave of Iranian missiles will “destroy Dubai and Haifa” (in Israel).
Indeed, in Asia this morning we see oil up again, gold up again, USD/JPY at 107.7, AUD/USD at 0.6851, and US 10-year yields at 1.71%, down over 10bp – and all on this news, not due to a data-release.
Meanwhile, yesterday also saw China’s Global Times arguing that there is no rush for the US and China to sign a trade deal, and while underlining that it wants a deal, also implies that it does not agree to the terms set out publicly by the US side. Is this a last-minute negotiating tactic? Or is it a genuine reflection that the two sides are once again not on the same page, and that the deal will collapse, or not be complied with, or perhaps not even be signed? Again, this comes down to either theatre from China, or the US and China going back to the theatre of trade war. That should be injecting a high degree of uncertainty into markets – but Iran obviously just eclipsed them.
Following November’s dismal disappointing employment change (+66.9k – 2nd weakest since March 2010), analysts expected a rebound in jobs growth in December, and it rebounded dramatically.
November’s +67k was revised dramatically higher to +124k and December printed +202k (vs +160k expectations). This is the highest employment gain since April
Source: Bloomberg
Both Services ands Goods sectors added jobs, with a adramtic rebound in manufacturing…
Source: Bloomberg
“As 2019 came to a close, we saw expanded payrolls in December,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute.
“The service providers posted the largest gain since April, driven mainly by professional and business services. Job creation was strong across companies of all sizes, led predominantly by midsized companies.”
Mark Zandi, chief economist of Moody’s Analytics, said, “Looking through the monthly vagaries of the data, job gains continue to moderate. Manufacturers, energy producers and small companies have been shedding jobs. Unemployment is low, but will begin to rise if job growth slows much further.”
“Optically Quite Dramatic” But Officials Confirm No US Casualties From Iranian Missile Strike
Senior White House reporter for Bloomberg News Jennifer Jacobs has reported there were “no American casualties from last night’s Iranian missile strikes that targeted two airbases in Iraq that host U.S. troops.”
BREAKING: There were no American casualties from last night’s Iranian missile strikes that targeted two airbases in Iraq that host U.S. troops, sources tell me.
With no American casualties, President Trump tweeted late Tuesday that “All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well-equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”
All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.
Iranian Foreign Minister Javad Zarif said the attack on American airbases in Iraq “took & concluded proportionate measures in self-defense.” He added that “we do not seek escalation or war, but will defend ourselves against any aggression.”
It appears Iran has taken President Trump’s playbook in Syria: launch missiles and purposely miss their intended targets.
Iran has superior missile technology that can hit whatever they want – this could be in an attempt to save face as a public relations event for its citizens while attempting to de-escalate the situation and avoid war.
Pentagon saying that Iran intentionally missed US troops at bases.
“The live situation was optically quite dramatic but the important thing to focus on is the no-human-casualty dimension, which gives ample space to de-escalate the situation,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers.
“The Trump factor is the random factor but what’s visible is that no one wants war and that’s what markets are focusing on.”
As Craig Murray concludes, there is this morning a chink of light to avoid yet more devastation in the Middle East.
Iran’s missile strikes last night were calibrated to satisfy honour while avoiding damage that would trigger automatically the next round. The missiles appear to have been fitted out with very light warhead payloads indeed – their purpose was to look good in the dark going up into the night sky. There is every reason to believe the apparent lack of US casualties was deliberate.
Even more important was the Iraqi statement that “proportionate measures” had been “taken and concluded” and they did not seek “further escalation”.
…
Wars are easy to start but hard to stop. Trump appears to have calmed, but we cannot rule out a stupid “last word” attack bu the USA. It is to be hoped that Iran now concentrates on using the immense political leverage it has gained to get western troops out of Iraq, which would be a tremendous result for all of us after 17 years. But we cannot rule out hotter heads in the Iranian government insisting on further attacks, or attacks from regional forces whose Tehran authorisation is uncertain. On either side this could yet blow up badly.
I am a sucker for hope, and the best outcome would be for the US and Iran to start talking directly again, and a deal to be made from this break in the logjam that is wider than, and Trump can portray as better than, “Obama’s” nuclear deal and would enable the lifting of sanctions. I am sure Trump will be tempted by the chance to go for this kind of diplomatic coup under the political cover provided him by Soleimani’s assassination. But the US is now so tied in to Saudi Arabia and Israel, and thus tied in to irrational hostility to Iran, that this must be extremely unlikely.
For now, it appears markets believe the worst is over.
Watch Live: Ghosn Speaks For First Time Since Arrest & ‘Great Escape’
Speaking from his hideout in Beirut, former auto executive and infamous fugitive from justice Carlos Ghosn is preparing to deliver his first press conference since his Nov 2018 arrest and subsequent “great escape” from house arrest in Tokyo.
Some reporters joked that they couldn’t see Ghosn, who is relatively short of stature, over the heads of hundreds of journalists gathered to hear him out.
Iran Refuses To Hand Over Crash Data, Stoking Speculation Plane Was Accidentally Shot Down
Iran will reportedly refuse to hand over black box data from the Boeing 737 that crashed over Tehran last night to Boeing, stoking speculation that the aircraft was shot down by an Iranian missile.
Video of wreckage from the crash, which shows shattered bodies and debris spread over a wide area, has surfaced on social media.
As we reported overnight, the 737 800, which is very different from the 737 MAX and has an excellent safety track record, crashed over Tehran just minutes after takeoff, killing all 176 people onboard.
Ukraine International Airlines said in a statement that the plane that crashed was in excellent condition, adding that it was “one of the best planes” in UIA’s fleet, and had undergone necessary maintenance just days before the crash, RT reports.
The Boeing 737-800, which was delivered to UIA in 2016, was “in excellent condition” before its last flight from Tehran to Kiev, Evgeny Dykhne, the company’s president, told reporters in Kiev, also describing the aircraft as “one of the best.”
Overnight, the rumor mill pointed to mechanical errors, which caused Boeing’s shares, already under pressure from the 737 MAX fallout, to slide.
The crash happened shortly after the plane departed Tehran’s airport Wednesday morning
UIA flight director Ihor Sosnovsky even ruled out pilot error as a potential cause of the crash, explaining that the ill-fated flight was manned by a “reinforced crew,” including Captain Volodymyr Yaponenko, Pilot Instructor Oleksiy Naumkin and First Officer Serhiy Khomenko.
All of this makes Iran’s rumored decision not to fork over the black box data more suspicious. Was the plane accidentally struck by an Iranian missile? The timing sure seems suspicious, given that the plane crashed over Iran during the same timeframe that the country was lobbing missiles at American bases in Iraq.
All 176 passengers and crew on board the plane died in the crash, officials said. (AP)
To us, if the plane just happened to crash over Iran just as the country was firing off missiles, well, that certainly would be one hell of a coincidence, wouldn’t it?
As one analyst claimed, there was “absolutely no way” the crash was due to mechanical difficulties, offering an explanation that sounds fairly convincing.
There is absolutely no way that the Ukrainian plane crash in Iran is due to mechanical difficulties.
Which mechanical failures immediately drop all ADS-B transmissions on a new plane in a conflict zone? None.
So how does a trader exploit this? The most obvious play would be to take a look at Boeing shares. If it’s confirmed the manufacturer and airline aren’t to blame for the crash, we imagine Boeing shares will rebound.
Most of the passengers on board were making connecting flights via Kiev’s Boryspil airport, the main hub for UIA. Among the dead were citizens of Iran, Canada, Germany, the UK, Sweden and Afghanistan.
Ukrainian President Volodymyr Zelensky directed the government to launch an inquiry and to “consider all possible versions [of the crash].”
Boeing has launched an investigation into the crash, while Iran has launched a criminal investigation – or what might be more accurately described as a hunt for a scapegoat.
In other news, a complete list of passengers has been released by the airline:
Stock Futures Stage Tremendous Rebound From Overnight Crash On Optimism Worst Of Iran Crisis Over
S&P500 index futures erased their earlier crash, after tumbling more than 50 points following news Iran launched ballistic missiles at US airbases in Iraq, as investors turned optimistic and looked past the missile strikes focusing instead on Iran’s comments that the country isn’t “seeking escalation or war” and Trump’s tweet that “all is well.” As a result, S&P 500 e-mini futures up around 0.1%, after earlier sliding as much as 1.7%, with global markets broadly in the green too.
Following the targeted strikes, both Iran and U.S. President Donald Trump left the door open for lowering tensions: Iran’s Foreign minister Javad Zarif said the country had “concluded proportionate measures” and didn’t seek war, while Trump tweeted “All is well!” and plans to make a statement later Wednesday.
Oil had surged above $70 a barrel, while gold held at new seven-year highs after the missile attack on the Ain Al-Asad air base and another in Erbil in Iraq, hours after the funeral of an Iranian commander who was killed by a U.S. drone strike last week. But with no human casualties from the attack, the dash for safe-haven assets petered out, allowing S&P500 futures, down almost 2% at one point, to trade around flat.
The Japanese yen, which surged almost 1% to three-month highs after the attacks, also eased back to trade flat on the day at 108.450. Brent crude futures slipped off highs to below $69 a barrel.
“The live situation was optically quite dramatic but the important thing to focus on is the no-human-casualty dimension, which gives ample space to de-escalate the situation,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers. “The Trump factor is the random factor but what’s visible is that no one wants war and that’s what markets are focusing on.”
Separately, Boeing shares slipped in pre-market trading after one of its 737s crashed after take-off in Iran, with early assessments suggesting the incident was caused by a technical issue.
In Europe, the Stoxx Europe 600 Index erased most of an earlier decline after opening 0.5% lower, while all major Asian equity markets fell earlier as they closed before the wave of “optimism” spread across markets. The MSCI Asia Pacific Index declined for a third time in four days, with regional markets a sea of red. Japanese shares were some of the biggest losers, with Toyota Motor Corp. and Mitsubishi UFJ Financial Group Inc. leading the drop in the Topix index. The Shanghai Composite Index fell the most in two weeks, with Industrial and Commercial Bank of China Ltd. and China Life Insurance Company Ltd. down. World leaders have urged restraint and moved to recall their citizens after Iran fired the missiles in its first counterattack since the killing of General Qassem Soleimani by American forces. U.S. President Trump said in a tweet that “all is well,” and he will be making a statement. Get Used to the Swings
A gauge of high-yield credit risk in Europe rose to the highest in about a month. Gold punched above $1,600 an ounce for the first time since 2013 before the move eased.
MSCI’s index of global equities pulled back 0.2% but remained less than 1% off recent record highs.
That said, some are stunned at the market’s reaction, pointing out that there is no reasonable argument why stocks should be higher than their Tuesday close.
The idea of futures being green is the market literally saying “things are better off since yesterday’s close”
Since yesterday’s close Iran has fired a dozen missiles at a US base without a response from Trump & an airliner that’s a major Dow component suffered another crash
Wednesday’s swings mark the latest bout of volatility sparked by U.S.-Iran tensions, as investors tried to assess how far the situation will escalate. As Bloomberg notes, the nervousness is denting optimism spurred by the improving outlook for global commerce, with a Sino-American trade deal expected to be signed next week.
The missile attacks “triggered a short period of market volatility overnight but FX and bond moves have largely been reversed,” Kit Juckes, the chief currency strategist at Societe Generale SA in London, wrote in a note. “The consensus view is still that major escalation is unlikely.”
Some argue it will take a hawkish statement from Trump or more attacks by Iran to drive the next phase of the risk selloff.
“We are looking out for whether the U.S. is going to retaliate, so it’s going to be a big wait-and-see mode until we hear from Trump,” Ashley Glover at CMC Markets in Sydney. “We are seeing that ‘buy the dip’ mentality creeping in as big long-term investors like to buy into these weaknesses.”
Bond-buying also faded, with yields on benchmark 10-year U.S. Treasury notes at 1.81%, down one basis point on the day but well off session lows around 1.705%. The 10-year German government bond yield was unchanged on the day at -0.284% after earlier falling to -0.299%. U.S. 10-year Treasury futures had earlier peaked at their highest level since November, and were last up 0.18%.
On currency markets, the attacks had sent the yen spiralling to three-month highs beyond 107.7 per dollar but gave up all those gains to trade flat at 108.4. Another safe-haven currency, the Swiss franc, also gave up knee-jerk gains. “If the market was really worried that the end of the world was nigh, dollar/yen would have collapsed, and that’s clearly not been the case,” said Stuart Oakley, global head of flow FX at Nomura in Singapore. The euro was 0.2 weaker, buying $1.1129 and the dollar index was up 0.1% at 97.10.
The buying of gold and oil also eased as the trading session wore on – Brent crude futures which had shot to $70 per dollar, were last up 0.5% at $68.1 per barrel. Gold, which earlier brushed through $1,600 an ounce, eased to $1,582.
Lombard Odier’s Ahmed said he had not reduced equity holdings overall but had increased exposure to energy stocks. “We adopted a long oil hedge to portfolio and we are maintaining that… Oil may be one market that’s not reflecting geopolitical risks.”
Economic data include mortgage applications, ADP jobs report. Walgreens, Constellation Brands are due to report.
Market Snapshot
S&P 500 futures little changed
MXAP down 0.8% to 169.90
MXAPJ down 0.6% to 551.59
Nikkei down 1.6% to 23,204.76
Topix down 1.4% to 1,701.40
Hang Seng Index down 0.8% to 28,087.92
Shanghai Composite down 1.2% to 3,066.89
Sensex down 0.1% to 40,811.86
Australia S&P/ASX 200 down 0.1% to 6,817.63
Kospi down 1.1% to 2,151.31
STOXX Europe 600 down 0.2% to 416.67
German 10Y yield rose 4.5 bps to -0.24%
Euro down 0.1% to $1.1137
Brent Futures up 0.5% to $68.62/bbl
Italian 10Y yield rose 1.6 bps to 1.207%
Spanish 10Y yield rose 0.7 bps to 0.404%
Gold spot up 0.5% to $1,581.82
U.S. Dollar Index unchanged at 97.01
Top Headline News from Bloomberg
President Donald Trump tweets “All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning”
The Islamic Revolutionary Guard Corps claimed responsibility for the barrage, which the Pentagon said was launched from Iran. A total of 15 rockets were launched, 10 of which hit the Ayn al-Asad base in western Iraq and another facility in Erbil, according to two U.S. officials. Another struck the Taji air base near Baghdad while four fell out of the sky. Iranian Foreign Minister Mohammad Javad Zarif said on Twitter that the government took “proportionate measures in self-defense” after the Soleimani strike
Iranian Foreign Minister doesn’t have any statistics on fatalities in the Iranian attacks on U.S. targets in Iraq, he told reporters in comments broadcast on TV. Zarif said he’s sent a message to the Americans “immediately after the attack” but did not elaborate on its contents; both Iran and Trump left the door open for lowering tensions after the Islamic Republic’s retaliation for the killing of General Qassem Soleimani last week
U.S. aviation regulators issued new restrictions barring civilian flights over Iraq, Iran, the Persian Gulf and the Gulf of Oman, the agency said Tuesday night in an emailed statement. A Boeing Co. 737 jet carrying at least 170 people crashed in Iran due to technical problems shortly after taking off, according to a local media reports
Global crude markets are well supplied, and OPEC and allied producers will respond if necessary to spiking tensions in the region, U.A.E. Energy Minister Suhail Al Mazrouei told reporters in Abu Dhabi
Currency traders in Asia were left nursing losses after algorithmic programs exacerbated a whipsaw session caused by Iran’s response to the U.S. attack
Riksbank Governor Stefan Ingves signaled that the Swedish central bank’s decision to raise its main rate to zero last month won’t be followed by more tightening for a very long time. German manufacturing orders unexpectedly fell in November, adding to signs that Europe’s largest economy is still struggling to overcome its worst industrial downturn in a decade
Boris Johnson will tell European Union Commission President Ursula von der Leyen on Wednesday that his government is only interested in negotiating a free trade agreement with its largest market, and that he’s determined to achieve it by the end of the year
House Speaker Nancy Pelosi said she wants to see the resolution that Senate Majority Leader Mitch McConnell plans to put forward setting out the rules for Trump’s impeachment trial. McConnell says Republicans have votes to set Trump trial terms
Asian equity markets traded lower across the board, albeit well off lows – as sentiment took a hit after Iranian forces carried out multiple attacks on Iraqi bases housing US personnel and allies, as part of the IRGC’s operation to avenge its commander’s assassination. Nikkei 225 (-1.6%) initially plumbed the depths and underperformed amid headwinds from a geopolitically bid JPY and with the index briefly dipping below the 23k level as almost all its stocks traded in the red. ASX 200 (-0.1%) fared better as downside was cushioned by the large-cap miners and energy names benefitting from price action in the respective complexes. Elsewhere, Hang Seng (-0.9%) and Shanghai Comp (-1.2%) conformed to the risk aversion, with losses in the mainland initially mitigated to an extent by the anticipated US-Sino Phase One trade deal signing next week. Finally, KOSPI (-1.1%) failed to glean support Samsung Electronics’ (+2.3%) prelim earnings – which flagged a smaller-than-forecast fall in quarterly operating profits, with some analysts noting it indicates that memory chip prices have bottomed out quicker than anticipated. APAC bourses climbed off lows after reports that US President Trump will not be addressing the nation – seen as a positive at the time as it indicates the US may not immediately retaliate. Furthermore, sentiment showed a slightly more pronounced turnaround after President Trump acknowledged the missile attack and noted that “all is well”.
Top Asian News
China’s 58 Home Is Said to Seek U.S. IPO of Online Services Arm
Why in India, 5% GDP Growth Is Cause for Alarm: QuickTake
EF Education First Is Said to Shortlist Bidders for Chinese Unit
Ghosn Nearly Crossed Paths With Japan Prime Minister as He Fled
European bourses are softer this morning, as sentiment has switched from yesterday’s cautious optimism back into a firm risk-off frame of mind. Losses across indices are not too pronounced, recovering from overnight price action in futures, as we await the response from US President Trump; further analysis available in the Commodity section and the Newsquawk headline feed. In terms of sectors, this has also switched from yesterday with energy names now the only sector in positive territory; although, similarly to bourses, losses across the remaining sectors are relatively modest. As such, energy names are leading the Stoxx 600 while Co’s which are typically afflicted by higher prices are holding up relatively well roughly unchanged on the day e.g. easyJet (EZJ LN). Elsewhere, its comparatively quiet on the European stock stories front. Although, the situation is significantly different in the US where focus is on Boeing (BA), -1.9% in pre-market trade, after a 737-800 craft crashed in Iran shortly after take-off. This is reportedly due to technical issues and is not, at present, believed to be linked to the ongoing Middle-East tensions; interestingly, reports note that the Iranian Civil Aviation Chief will not be returning the black box from the craft to Boeing.
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In FX, the Dollar’s broad recovery from post-Iran retaliatory strike lows is fairly representative of the overall retracement in currency and other financial markets amidst a relatively rapid turnaround in sentiment from aversion bordering on a scramble out of risk assets into safe-havens, albeit less pronounced. The DXY has reclaimed 97.000+ status and eclipsed yesterday’s high even though US Treasuries retain an underlying bid and the curve is marginally flatter awaiting the official US response after a full inspection of the bases hit in Iraq, and ahead of the next pre-NFP proxy for Friday in the form of ADP, assuming attention returns to fundamentals at some point.
EUR – The G10 laggard after yet another shallower rebound vs the Greenback and what looks like a fix-related run against the Pound that tripped stops in the cross through 0.8465, but stopped short of testing 0.8450 or last week’s low. The single currency now appears vulnerable to Eur/Usd sell orders said to be residing near/on Tuesday’s circa 1.1125 low that could then expose decent option expiry interest at 1.1120 and even between 1.1100-05 (in 1 bn and 1.2 bn respectively).
CHF/JPY/XAU – Very volatile trade given the aforementioned risk-off flows followed by a sharp/abrupt unwind of safe-haven premiums, as the Franc reverses from around 0.9665 back below 0.9700, Yen rotates more than a full big figure either side of 108.00 where there is a 1 bn expiry and Gold slides to circa Usd1573/oz compared to over Usd1610 at one stage.
NZD/GBP/AUD/CAD – All narrowly mixed vs the Buck, or holding up better amidst its revival, as the Kiwi keeps tabs on 0.6650, Aussie holds off fresh 0.6850 lows, with the aid of some welcome better news on the data front via building approvals, Sterling maintains 1.3100+ status and Loonie pares some of its losses around the 1.3000 handle. However, price action remains choppy/fluid across the board, and the Pound may be prone to more Brexit headlines in wake of UK PM Johnson’s date with new EC President von der Leyen to discuss the post-January 31 transition period and Britain’s relationship with the EU thereafter.
NOK/SEK – Some Norges Bank and Riksbank diversions for the Scandi Crowns to ponder, but not a lot new in comments from Governor Olsen or the December policy meeting minutes in truth. Hence, Eur/Nok and Eur/Sek are both largely tracking wider developments and the much improved risk tone, with the former lagging as crude prices come off the boil.
EM – Most regional currencies are benefiting from the considerably calmer mood, bar those with close commodity links that are underperforming/hampered by the retreat in oil, bullion etc.
In commodities, another tumultuous day for markets, particularly the commodity complexes, due to the magnitude of news-flow and in the interest of time, a full briefing on recent events, including what’s next, responses so far and market reaction, is available on the Newsquawk feed. To briefly surmise the main points, overnight Iran launched missiles at two Iraqi bases (Al-Asad and Erbil), currently reports indicate that no US troops were killed but we await official confirmation of this. Markets took a firm risk-off tone, with WTI and Brent experiencing significant upside; high prints of, USD 65.65/ bbl and USD 71.75/bbl respectively. Subsequently, much of this move has pared back, with WTI now below the USD 63/bbl handle, given that comments have pointed towards a de-escalation in tensions between the US and Iran; notably, from POTUS himself. Looking ahead, focus is almost entirely on the announced press conference from US President Trump at some point today; the timing of this is currently unclear. Middle-East updates aside, we do have the weekly update from the EIA where headline crude is expected to print a draw of 3.572mln barrels which, if correct, would be a smaller draw than the 5.9mln barrels reported via API. Although, it is worth caveating that the release may draw less attention than normal given the Middle-East developments. Moving to metals, where spot gold overnight printed a fresh six-year high surpassing Monday’s just above the USD 1610/oz mark. However, similarly to crude, the yellow metals prices have drifted to reside within proximity to the USD 1580/oz figure.
US Event Calendar
7am: MBA Mortgage Applications
8:15am: ADP Employment Change, est. 160,000, prior 67,000
3pm: Consumer Credit, est. $16.0b, prior $18.9b
DB’s Jim Reid concludes the overnight wrap
Morning from Copenhagen for my first trip in a busy month that will take me to 11 European cities before January ends and not one of them coincides with a Liverpool game! Shame but anything to get away from the germs at home.
While I’ve slept Iran has retaliated to the killing of General Qassem Soleimani by American forces last week by firing a series of missiles at two US-Iraqi airbases. A total of 15 missiles were launched, 10 of which hit the Ayn al-Asad base in western Iraq and another facility in Erbil, while another struck the Taji air base near Baghdad and four fell out of the sky, according to US officials. Iranian Foreign Minister Mohammad Javad Zarif said after the attack on twitter that the government “concluded proportionate measures in self-defense” after the Soleimani strike. He further said that, “We do not seek escalation or war, but will defend ourselves against any aggression”. However, the Islamic Revolutionary Guard Corps (IRGC) said that further responses will be on the way while, calling the attack as the start of its “Martyr Soleimani” operation. The IRGC also said in a statement on its Sepah News website that any US response “will be met with much more pain and destruction.” There were also some unconfirmed reports that there were no US casualties in the attacks (Iranian TV says the opposite) which might be an important part of whether they feel the need to respond. Meanwhile the Pentagon said in a statement post attacks that “As we evaluate the situation and our response, we will take all necessary measures to protect and defend U.S. personnel, partners, and allies in the region.” President Trump refrained from making a statement right away after the attack and subsequently tweeted that “All is well!” and “So far, so good!” while adding that battle damage assessments continued. He said that he will make a statement this morning Washington time. It’s also of note that in the past President Trump has shown restraint in previous attacks in the region blamed on Iran which didn’t kill any US citizens. This gives a glimmer of hope that this might not lead to an all-out escalation in the conflict. There are already some commentators saying that if the US doesn’t ratchet up tensions further this could be good news for risk as it might be spun by Iran as a big response and the world can move on for now. In what seems like a tragic coincident a Boeing 737 has crashed in Iran after take off killing all on board. Usually the aircraft manufacturer will be involved in the investigations but given the tensions between the countries this story may have an unusual outcome.
The price action in the financial markets post the attack also gave a feeler that markets might not be expecting an all-out confrontation, with the futures on the S&P 500 paring losses to -0.35% after being down as much as -1.7% immediately after the attack. Similarly, Gold initially advanced +2.35% to 1611.42/ ounce, the highest since 2013 and is currently trading up +1.12% to 1591.96/ ounce while brent crude oil prices jumped to 71.75 before settling at 69.18 this morning.
Elsewhere in Asia, equity markets are seeing losses but are off their lows with the Nikkei (-1.68%), Hang Seng (-1.11%), Shanghai comp (-1.22%) and Kospi (-1.15%) all down alongside almost every index in the region. Elsewhere, yields on 10y USTs are down -4.4bps this morning while those on 10y JGBs are down -1.1bps. As for overnight data releases Japan’s November real cash earnings came in at -0.9% yoy (-0.7% yoy expected) and December consumer confidence stood at 39.1 (vs. 39.5 expected).
Back to yesterday and markets were in a bit of a stalemate before the overnight attacks with investors still cautious on geo-politics but remembering that it was only three business days ago that everyone was discussing a January melt-up for markets after the first day of NY trading. Maybe the most notable development was the first decline of this calendar year for oil, with Brent ending the session down around -1% at $68.4. As we discussed above we’ve had a bit of a round trip overnight but as we discussed yesterday our oil analysts doesn’t think that oil infrastructure is as obvious target as people might think for Iranian retaliation if it comes. So he therefore doesn’t think the elevated oil risk premium will be long-standing. Here is a reminder to his piece and reasoning (link here).
US equities did fall though making the 2020 S&P 500 count even at two sessions up and two down. It fell -0.28% mirroring moves in the Dow Jones (-0.42%) and the NASDAQ (-0.03%). Market were probably a bit nervous about Iran’s comments that it was considering 13 scenarios for retaliation. They may have also been slightly concerned at the chaos around the Soleimani funeral procession that saw 50 dead (plus over 200 injured) in a stampede and pictures of hundreds of thousands, if not millions, of Iranians take to the street these past few days. This US action has certainly stoked feelings/emotions in the Middle East.
European equities were stronger than the US though, with the STOXX 600 up +0.25%, while the DAX outperformed to advance +0.76% but is still one of the few Western equity markets down in the early stages of the year.
In sovereign debt markets, Treasuries edged higher into the close (+1.2bps) after a relatively quiet day. Meanwhile in Europe, gilts underperformed again, with 10yr yields up +2.4bps, while both Germany (+0.3bps) and France (-0.2bps) were fairly flat. In FX, the dollar performed strongly with the dollar index being up +0.35% yesterday.
In terms of economic data releases yesterday, things were more positive in the US, with the ISM non-manufacturing index for December rising to a better-than-expected 55.0 (vs. 54.4 expected), its strongest level since August. This contrasts with the ISM manufacturing index out on Friday, which fell to 47.2, its lowest level since June 2009. The gap between the two (7.8) is the highest since late 2015 and close to the highest levels of the last couple of decades.
We also got data on the US trade deficit, which fell to $43.1bn in November (vs. $43.6bn expected), its lowest level since October 2016 before President Trump’s election. Data also showed the goods deficit with China fell to $25.6bn, which was the lowest since April 2013. Reducing the US trade deficit has been a key policy goal for President Trump, and it comes ahead of next week’s expected signing of the Phase One US-China trade deal, which is taking place on the 15th.
There were a number of data releases out in Europe as well. The main one was the Euro Area inflation reading for December, with the flash estimate in line with expectations at +1.3%, and its highest level since April. That said, there doesn’t seem to be a great amount of confidence that inflation over the medium term is going to rise much higher than this, with Euro five-year forward five-year inflation swaps trading at 1.311%. Over in Italy meanwhile, data showed inflation was lower still, at just +0.5%, though this was up from +0.2% in the prior 3 months. In more positive news, Euro Area retail sales rose by +1.0% in November (vs. +0.7% expected), while the German construction PMI came in at 53.8 in December, a 9-month high.
Turning to Spain now, and Prime Minister Sánchez’s coalition government received the narrow backing of the Spanish parliament yesterday, with a vote of 167-165 in favour, thanks to 18 abstentions. The country has experienced sustained political gridlock over the last year, having gone to the polls twice in 2019 after no government could be formed following the first election in April. The subsequent election in November then saw the formation of a new coalition between Sanchez’s Socialist party and the left-wing Podemos, but they still only have a minority of seats in Parliament, having relied on the abstention of Catalan separatists in order to win yesterday’s vote.
Now to the day ahead, and the data highlights include German factory orders for November, the Euro Area’s final consumer confidence reading for December, as well as French consumer confidence also for December. From the US, we’ll get the MBA’s weekly mortgage applications and the ADP’s employment change for December. On central bank speakers, we’ll hear from ECB Vice President de Guindos along with the Fed’s Brainard. Finally, European Commission President von der Leyen and chief Brexit negotiator Michel Barnier will be visiting Prime Minister Johnson in London.
