Month: September 2014

This month’s Bill Gross letter, notably shorter than usual, is as close to the bond manager discussing an Austrian economics worldview as we will likely ever see him: in brief, it’s all about the credit/money creation, with an emphasis on the use of proceeds of said creation under ZIRP, i.e., malinvestment , or as Gross puts it: “credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.”

From Pimco’s Bill Gross:

For Wonks Only

The unmodeled (for lack of historical example) experiment that all major central banks are now engaged in is to ask and then answer: What growth rate of credit is enough to pay prior bills, and what policy rate/amount of Quantitative Easing (QE) is necessary to generate that growth rate? Assuming that the interest rate on outstanding debt in the U.S. is approximately 4.5% (admittedly a slight stab in the dark because of shadow debt obligations), a Fed governor using this template would want credit to expand by at least 4.5% per year in order to prevent the necessary sale of existing assets (debt and equity) to cover annual interest costs. That is close to saying they would want nominal GDP to expand at 4.5%, but that’s another story/ Investment Outlook.

How are they doing? Chart 1 shows outstanding credit growth for recent quarters and all quarters since January 2004. The chart’s definition of credit includes the standard Fed definition of private non-financial credit (corporations, households, mortgages), public liabilities (government debt), as well as financial credit. The current outstanding total approximates $58 trillion and has been expanding at an average annual rate of 2% for the past five years, and 3.5% for the most recent 12 months.

Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest. They are underachieving that target in the U.S., which is the reason why GDP growth struggles at 2% real or lower and nominal GDP growth seems capped at 4.5% or lower. Credit creation is essential for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers. Its velocity/turnover is critical as well.

The velocity/turnover of credit mentioned above, in turn, is a function of price or the yield of credit. No central banker knows what that appropriate yield/price is and so Yellen/ Carney/Draghi/Kuroda walk up forward interest rates carefully so as not to cause a credit collapse. As a general rule, the projected return on financial assets (relative to their risk) must be sufficiently higher than the return on today’s or forward curve levels of cash (overnight repo), otherwise holders of assets sell longer-term maturities and hold dollar bills in a mattress – lowering velocity and creating a recession/debt delevering. We are dangerously close to the crossing of the lines between long-term asset returns and forward levels of cash yields, which currently rest at 2.5%+ in 2017 and beyond. If the forward levels are not validated, however, the danger is lessened.

Today’s levels of interest rates and stock prices offer a historically unacceptable level of risk relative to return unless the policy rate is kept low – now and in the future. That is the basis for The New Neutral, PIMCO’s assumption that the fed funds rate peaks at 2% or less in 2017 versus others’ assumptions (Taylor, Fisher, Lacker, the market) that it goes much higher. BOE’s Carney, by the way, believes his country’s New Neutral is 2.5%, a level consistent with PIMCO’s 2% in the U.S. If so, existing asset prices in the U.S., while artificially high and bond yields artificially low, may continue to be so unless the Fed oversteps its interest rate line. 

This global monetary experiment may in the short/intermediate term calm markets, support asset prices and promote economic growth, although at lower than historical levels. Over the long term, however, economic growth depends on investment and a rejuvenation of capitalistic animal spirits – a condition which currently does not exist. Central bankers are hopeful that fiscal policy (which includes deficit spending and/or tax reform) may ultimately lead to higher investment, but to date there has been little progress, as seen in Chart 2. The U.S. and global economy ultimately cannot be safely delevered with artificially low interest rates, unless they lead to higher levels of productive investment.

“For Wonks Only” Speed Read

1. Cross your fingers, credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.

via Zero Hedge http://ift.tt/Wb4nuf Tyler Durden

• Confusion as Ukraine and Russia announce progress towards peace (Reuters)… but not for stock buying algos, they know everything
• Obama Expresses Skepticism About Possible Ukraine Cease-Fire (WSJ)
• Fighters Unwind in Russia Where Beer Doesn’t Spell Death (BBG)
• Despite dangers, U.S. journalist Sotloff was determined to record Arab Spring’s human toll (Reuters)
• New Beheading Video Spurs Calls for Global Response (BBG)
• Christie’s Spending on Outside Lawyers Passes $50 Million (BBG)
• IEX to Apply for Exchange Status (WSJ)
• UK says not ruling out airstrikes against Islamic State, says hostage video genuine (Reuters)
• Murdered journalist Steven Sotloff had dual US-Israeli citizenship (Guardian)
• Netflix Reaches Global Licensing Pact With Warner Bros. for ‘Gotham’ (WSJ)
• West Africa struggles to contain Ebola as warnings and deaths mount (Reuters)
• Money Chases Non-U.S. Real Estate at Record Rate in ETFs (BBG)
• U.S. bank regulators set to adopt liquidity, swaps margin rules (Reuters)

 

Overnight Media Digest

WSJ

* The extremist group Islamic State posted a video purporting to show the beheading of American journalist Steven Sotloff, bringing calls for the U.S. to more forcefully confront the militants in both Iraq and Syria. (http://on.wsj.com/1nV1kxG)

* California regulators want PG&E Corp’s utility to pay $1.4 billion in fines and penalties over a fatal natural-gas pipeline explosion in San Bruno, California. The state Public Utilities Commission proposed fining Pacific Gas & Electric Co $950 million over allegations that the company violated federal and state pipeline safety rules before the 2010 pipeline explosion. (http://on.wsj.com/1ly45JF)

* Private-equity firm KKR & Co LP said Tuesday it agreed to buy a minority stake in Savant Systems LLC, a closely held Hyannis, Massachusetts, company that sells systems that let homeowners control everything from thermostats and stereos to lighting and lawn sprinklers, from their smartphones. KKR is leading an investment of about $90 million in the company and the firm will have a roughly 35 percent stake in Savant, according to a person familiar with the matter. (http://on.wsj.com/1BaH17E)

* Home Depot Inc is working with banks and law enforcement agencies to investigate a potential breach of customer credit- or debit-card data. The home-improvement retailer said on Tuesday it is looking into what it called unusual activity and said that if it confirms a breach occurred, it will immediately notify customers. (http://on.wsj.com/1nwyEem)

* A key employee leading Google Inc’s efforts to beam Internet access from satellites has abruptly left the company and is now working closely with Space Exploration Technologies Corp and its founder Elon Musk, according to people familiar with the matter. (http://on.wsj.com/1tsh3LA)

* The Federal Bureau of Investigation hasn’t found any evidence to suggest the hacker or hackers who successfully penetrated the computer system at JPMorgan Chase & Co scored any similar successes against other big U.S. banks, four people close to the investigation said. (http://on.wsj.com/1pGzVFa)

* IEX Group Inc, an upstart private trading venue launched less than a year ago, plans within a week to seek U.S. regulatory approval to become a full-fledged stock exchange, according to people familiar with the company’s plans. (http://on.wsj.com/1lH58HC)

* An internal Credit Suisse Group AG investigation into allegations of inappropriate employee behavior has roiled the bank’s European stock-trading desk, according to people familiar with the probe, in the latest example of a major bank uncovering potential problems as it sifts through employees’ electronic communications. (http://on.wsj.com/1ux5LTD)

* Halliburton Co will pay $1.1 billion to Gulf Coast residents, local governments and businesses affected by the 2010 Deepwater Horizon oil spill, moving to limit its liabilities ahead of a court ruling that could have increased its costs. (http://on.wsj.com/1x6PJVT)

* Wet Seal Inc disclosed Tuesday that its chief executive left the company, effective Aug. 26, according to a filing with the Securities and Exchange Commission. (http://on.wsj.com/Z6vhW1)

 

FT

Luxury eyewear maker Luxottica Group SpA’s founder and Executive Chairman Leonardo Del Vecchio is expected to pursue acquisitions and wants to double the groups revenue to more than 14 billion euros ($18.38 billion)in the next decade.

BP Plc asked a U.S. court on Tuesday to fire the court-appointed lawyer tasked with paying out compensation to people affected by the 2010 Gulf of Mexico oil spill.

Aston Martin has hired senior Nissan executive Andy Palmer as its new boss, as the company tries to bridge the gap with its competitors.

Danone said that Chairman and Chief Executive Franck Riboud would split his role after 18 years at the helm of the French yoghurt maker.

A Frankfurt court has issued a temporary injunction against U.S. car service Uber, saying the company could no longer offer its phone apps to connect drivers with passengers.

 

NYT

* The European Central Bank’s negative rates strategy has not worked as planned, which is why it is under increasing pressure to try something else when it meets on Thursday. The central bank’s so-called negative deposit rate has rippled through European markets, reinforced by fear that the eurozone economy is in decline and by nervousness about war, not only in Ukraine but also in the Middle East. (nyti.ms/W8Auub)

* Halliburton Co, the company contracted by BP Plc to cement the ill-fated Macondo oil well in the Gulf of Mexico, has reached a $1.1 billion settlement with thousands of businesses, individuals and local governments that suffered losses from the 2010 Deepwater Horizon oil rig explosion, the company and plaintiffs announced on Tuesday. (nyti.ms/1q9xuKF)

* Dollar General Corp is willing to pay more to win the bidding war over Family Dollar Stores Inc. And its takeover effort could go hostile if Family Dollar does not begin sale negotiations. Dollar General offered on Tuesday to raise its bid for Family Dollar to $9.1 billion after the rejection of an earlier offer that would have beaten a rival $8.5 billion deal with Dollar Tree, agreed to in late July. (nyti.ms/1pGpH7Q)

 
* Online fantasy sports site FanDuel, one of the biggest homes for amateur general managers, disclosed on Tuesday that it had raised $70 million from investors led by Shamrock Capital Advisors, NBC Sports Ventures and Kohlberg Kravis Roberts & Co . Existing investors like Comcast Ventures, Pentech Ventures and Bullpen Capital also participated. (nyti.ms/1rj6yrJ)

* Compuware Corp has agreed to sell itself to the private equity firm Thoma Bravo for about $2.5 billion, finally bowing out after years under pressure from the activist hedge fund Elliott Management. (nyti.ms/1qZv4KL)

* Norwegian Cruise Line Holdings Ltd agreed on Tuesday to buy the privately held Prestige Cruises International for $3 billion in cash and stock, including the assumption of debt, to add higher-end trips to its fleet of offerings. (nyti.ms/1vLl0Me)

* Home Depot Inc said on Tuesday that it was investigating a report that customer credit and debit card data was stolen from its systems and put up for sale online. The retailer issued a statement after Brian Krebs, an independent security reporter, said that multiple banks had pointed to Home Depot as the potential source of a large data breach. The company said it was working with law enforcement authorities and banks on the matter. (nyti.ms/1vLmkyU)

* IEX Group Inc, the stock trading platform created to temper high-frequency traders’ advantages and profiled in Michael Lewis’s book “Flash Boys” has raised $75 million in a new round of financing. That money will help the start-up become a full-fledged stock market. (nyti.ms/1vLrAT1)

 

Canada

THE GLOBE AND MAIL

* A new report is questioning the merits of the Canada Pension Plan Investment Board’s increasing use of “active” investments to boost returns. In a Fraser Institute report to be released Wednesday, former Statistics Canada chief economic analyst Philip Cross and Fraser Institute fellow Joel Emes express concern that these new investments come with much higher costs that should be more clearly explained. (bit.ly/1ul5OCD)

* Canada has reached a compromise with North Atlantic Treaty Organization allies in which member states will commit to trying to increase defence spending to 2 percent of their annual economic output, rather than embracing a hard target for boosting military expenditures. (bit.ly/1lyAY9d)

Reports in the business section:

* Allen Chan, the Hong Kong-based businessman at the centre of the Ontario Securities Commission’s (OSC) fraud allegations against Sino-Forest Corp, maintains he has done nothing dishonest, his lawyer told a packed hearing room on Tuesday. Chan – the company’s former chairman and chief executive – along with four other former Sino-Forest executives, face OSC allegations they committed fraud and misled investors in the company, which once had a market capitalization of C$6 billion and a listing on the Toronto Stock Exchange. (bit.ly/1qnD4J3)

NATIONAL POST

* With a 42 percent share of the voting public, John Tory has emerged as the clear front-runner in the Toronto mayoral race as Olivia Chow languishes in third place, according to the results of a new poll. The Nanos Research poll shows Chow has the support of only 26 percent of the electorate, just behind the 28 percent held by sitting Mayor Rob Ford. (bit.ly/1qatedN)

* Toronto mayoral candidate Olivia Chow will raise money for more student nutrition programs and bus service by increasing the land transfer tax for houses over C$2-million – a scheme she said is aimed at making taxes more progressive. (bit.ly/1Cp96cO)

FINANCIAL POST

* Propel Capital Corp, which brought eight funds to markets, raising about C$400 million from mostly retail clients, was acquired by Montreal-based Fiera Capital Corp. The publicly listed buyer will pay about C$12 million for the right to manage the funds. At C$12 million the purchase price – which will be paid mostly in cash but also in stock, works out to be about 3 percent of assets under management. (bit.ly/1sZ4FyS)

* Canada’s broadcast regulator has approved an application for a broadcast license by an extreme sports specialty channel, EDGEsport headed by the former chief executive of media conglomerate CanWest Global Communications. (bit.ly/1nVCZrn)

 

China

SHANGHAI SECURITIES NEWS

– Shanghai plans to consolidate the city’s media sector by merging Bestv New Media Co Ltd and Shanghai Oriental Pearl Group Ltd, while injecting other unlisted media assets into the combined, listed company.

– Sohu.Com Inc has forayed into Internet financing by setting up a platform that facilitates lending between individuals and small- and medium-sized companies.

– China Securities Regulatory Commission spokesman Deng Ke said the recent strength in the country’s stockmarket reflects improvements in the environment, including a stabilising economy, ample liquidity, effects of capital market reforms and lowering financing costs.

SECURITIES TIMES

– China’s anti-monopoly watchdog slapped fines worth 110 million yuan ($17.8 million) on 23 property insurers over price-fixing. The National Development and Reform Commission said 23 insurers in China’s eastern Zhejiang province were found to have colluded on discounts on car insurance premiums during multiple meetings organised by the Zhejiang insurance association.

 

Britain

The Times

CITY LAWYERS FACE ARREST IN CRACKDOWN ON LAUNDERING

Britain’s elite criminal agency is planning a crackdown on money laundering in the City of London that is expected to lead to the arrest of lawyers linked to the movement and washing of billions of pounds of criminal proceeds. (http://thetim.es/1nSdIyj)

FINANCIAL OMBUDSMAN DEALS WITH 5,000 PPI COMPLAINTS A WEEK

Complaints about payment protection insurance remained the biggest problem the Financial Ombudsman Service dealt with this year as it revealed it waded through 5,000 grievances a week. (http://thetim.es/1BahiMx)

The Guardian

SKILLS SHORTAGE FEARS TEMPER SURGE IN UK CONSTRUCTION

Britain’s builders enjoyed the strongest growth for seven months in August but the surge in activity put further strain on already tight supplies of materials and skilled workers. (http://bit.ly/1tXktEM)

BETFAIR ATTACKS PIRC’S QUESTIONING OF ACCOUNTS

A row has broken out between the corporate governance adviser Pirc and the online betting company Betfair Group Plc , with the bookmaker accusing the former of “materially misrepresenting” facts. (http://bit.ly/1vKOObU)

The Telegraph

INDEPENDENT SCOTLAND COULD NOT KEEP POUND AND JOIN EU

Scotland must choose between independence and keeping the pound if it wants to be part of the European Union, Olli Rehn, a top European official has warned. (http://bit.ly/1nTVexu)

EMERGENCY MEASURES TO PREVENT BLACKOUTS THIS WINTER AS POWER CRUNCH WORSENS

Emergency measures to fire up mothballed power stations could be used to keep the lights on this winter, after a series of power plant fires and closures left Britain more vulnerable to blackouts. (http://bit.ly/1qxnauG)

Sky News

CBI CAMPAIGN AIMS TO RESTORE TRUST IN UK PLC

Britain’s biggest employers’ lobbying group is mounting an attempt to rebuild public confidence in business just months before a general election campaign that is likely to include pledges to tackle private sector misconduct. (http://bit.ly/W6d1K3)

UBER TAXIS BANNED FROM OPERATING IN GERMANY

The Uber ridesharing service has been banned from operating in Germany pending a court hearing on whether it meets transport safety laws. (http://bit.ly/1x7BKiu)

The Independent

COMPANIES FACE PROSECUTION IF THEY FAIL TO STOP ECONOMIC CRIME

Firms will face huge fines for failure to report economic crime, under measures being considered by the government, the coalition’s top legal officer said today. (http://ind.pn/1w2vlRf)

ROYAL MAIL TO TRIAL SUNDAY DELIVERIES THIS WEEKEND

The Royal Mail Plc is to implement a pilot scheme of Sunday deliveries and office openings this weekend with customers in London and surrounding towns set to receive packages through their doors. (http://ind.pn/1pkNN1O)

 

 

Fly On The Wall Pre-Market Buzz

ECONOMIC REPORTS

Domestic economic reports scheduled for today include:
ISM New York PMI for August at 9:45
Factory orders for July at 10:00–consensus up 10.9%
Beige Book to be released at 14:00

ANALYST RESEARCH

Upgrades

ABB (ABB) upgraded to Buy from Neutral at BofA/Merrill
Aviat Networks (AVNW) upgraded to Buy from Hold at Needham
Boulder Brands (BDBD) upgraded to Buy from Neutral at Longbow
CRH Plc. (CRH) upgraded to Neutral from Underweight at HSBC
Cinemark (CNK) upgraded to Buy from Hold at Stifel
PharMerica (PMC) upgraded to Outperform from Market Perform at Cowen
Quest Diagnostics (DGX) upgraded to Conviction Buy from Buy at Goldman

Downgrades

ASM International (ASMI) downgraded to Neutral from Overweight at JPMorgan
Alere (ALR) downgraded to Sell from Neutral at Goldman
American Tower (AMT) downgraded to Equal Weight from Overweight at Morgan Stanley
C.H. Robinson (CHRW) downgraded to Hold from Buy at Stifel
Concur (CNQR) downgraded to Neutral from Outperform at RW Baird
Echo Global (ECHO) downgraded to Sell from Hold at Stifel
Frontier downgraded to Underweight from Equal Weight at Morgan Stanley
Stericycle (SRCL) downgraded to Neutral from Buy at Goldman

Initiations

Advanced Drainage (WMS) initiated with a Buy at Deutsche Bank
Advanced Drainage (WMS) initiated with an Outperform at RBC Capital
Advanced Drainage (WMS) initiated with an Overweight at Barclays
Ally Financial (ALLY) initiated with a Buy at Drexel Hamilton
AmSurg (AMSG) initiated with a Neutral at Goldman
Ambarella (AMBA) initiated with an Outperform at Imperial Capital
Genco Shipping (GSKNF) initiated with a Buy at Jefferies
Hersha Hospitality (HT) initiated with a Sector Perform at RBC Capital
Knightsbridge Tankers (VLCCF) initiated with a Buy at Jefferies
Mood Media (FDMCF) initiated with an Outperform at Imperial Capital
Orion Engineered Carbons (OEC) initiated with a Buy at KeyBanc
Scorpio Bulkers (SALT) initiated with a Buy at Jefferies
Square 1 Financial (SQBK) initiated with a Buy at SunTrust
Star Bulk Carriers (SBLK) initiated with a Buy at Jefferies

COMPANY NEWS

Apple (AAPL) said no breach in iCloud or Find my iPhone. The company said “Certain celebrity accounts were compromised by a very targeted attack on user names, passwords and security questions, a practice that has become all too common on the Internet. None of the cases we have investigated has resulted from any breach in any of Apple’s systems including iCloud or Find my iPhone”
Netflix (NFLX) announced that Gotham to be released exclusively on Netflix
CVS (CVS) to change name to CVS Health, end tobacco sales early 
Wet Seal (WTSL) said CEO John Goodman leaves company, Edmond Thomas named as CEO
KKR (KKR) sold its stake in Versatel to United Internet for EUR 1.25B
Tetraphase (TTPH) announced positive data from lead-in portion of its IGNITE 2 clinical trial
Flextronics (FLEX) received shareholder approval to purchase up to 20% of its outstanding shares

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Toll Brothers (TOL), Guidewire (GWRE), eGain (EGAN), Vince Holding (VNCE), Box Ships (TEU)

Companies that missed consensus earnings expectations include:
Paragon Shipping (PRGN), Aviat Networks (AVNW)

Office Depot (ODP) backs FY14 sales to be lower than FY13 combined pro forma sales
Guidewire (GWRE) sees Q1 non-GAAP EPS 1c-5c, consensus 0c, sees FY15 EPS 35c-45c, consensus 55c. Sees Q1 revenue $71.5M-$ 78.5M, consensus $74.8M, sees FY15 revenue $364.2M-$381.9M, consensus $386.2M
PepsiCo (PEP) backs FY14 constant currency EPS growth guidance of 8%

NEWSPAPERS/WEBSITES

Concur (CNQR) explores sale, talks to SAP (SAP) and Oracle (ORCL), Bloomberg says
FBI hasn’t found evidence JPMorgan (JPM) hack hit other big banks, WSJ reports
JPMorgan (JPM) in talks to sell oil-supply agreement to Bank of America (BAC), WSJ says
EBay (EBAY) hiring settlement with DOJ approved by judge, Reuters reports
Time Warner’s (TWX) Warner Bros. studio said to plan buyout offers to boost profit, Bloomberg reports
Novartis (NVS) heart drug LCZ696 could drive shares to new highs, Barron’s says

SYNDICATE

AerCap (AER) files to sell 29.85M ordinary shares for holders
CDW (CDW) commences public offering of 15M shares for holders
Capital Product (CPLP) announces offering of 15M common units
Ellington Financial (EFC) announces public offering of 8M common shares
GrubHub (GRUB) announces proposed follow-on offering of 10.03M shares
Martin Midstream Partners (MMLP) files to sell 6.26M common units for holders
Voya Financial (VOYA) announces secondary offering of 30M shares by ING

via Zero Hedge http://ift.tt/1vN1z5I Tyler Durden

As reported earlier, the biggest overnight news took place just around 4am Eastern when futures exploded to new ATH on headlines of a new ceasefire in Ukraine, which was promptly refuted by both Putin and the rebels, but futures don’t care and have continue raging higher, in hopes of sweeping the latest batch of ugly economic news out of Europe, this time in the form of Europe’s non-mfg PMIs, under the rug.

As RanSquawk summarizes, heading into the North American open, the bulk of the morning’s price action has been provided by news that Ukrainian President Poroshenko said that he reached an agreement with Russia’s Putin on a “permanent cease fire” in Eastern Ukraine’s Donbass region. This saw an immediate spike higher in European equities with the DAX future rallying and breaking above its 100DMA seen at 9644.50, thus extending earlier gains that stemmed from the strong performance in Asia-Pacific equities, while the e-mini S&P once again printed a fresh record high. However, these moves staged a partial reversal amid comments from Russia’s Putin that he denied that such an agreement had been reached as Russia is not a party to the Ukraine conflict. In stock specific news, Russian exposed Raiffeisen Bank outperforms Europe (+7%) in reaction to the geopolitical developments, while Hugo Boss have underperformed throughout the session following a share placement which came in at the lower end (-5.3%).

A quick recap of the Euroarea final, and disappointing, composite PMI data from Goldman.

The August Euro area Final Composite PMI came in at 52.5, 0.3pt weaker than the Flash (and Consensus) estimate. Relative to July, the Composite PMI declined by 1.2pt. Today’s data showed a surprised 3pt decline in the Italian services PMI to just below 50, while the Spanish counterpart in contrast gained close to 2pt and now stands at a very robust 58.1.

1. The Final manufacturing PMI (released last Monday) came in 0.1pt lower than the Flash estimate. Today’s data showed that the Final Services PMI printed 0.3pt below the Flash. Similar to the manufacturing PMI on Monday, the German services PMI also contained a sizeable (1.2pt) negative Flash/Final revision. France also recorded a downward revision to its services PMI relative to the Flash (0.8pt) (the French manufacturing PMI was revised up 0.4pt on Monday).
2. The August data showed that the manufacturing PMI declined 1.1pt to 50.7. Meanwhile, today’s data show a 1.2pt decline in the Services PMI to 53.1. The Manufacturing PMI rose above the Services PMI in late 2013, but this relative outperformance has reversed over the past six months (Chart 1).
3. The breakdown of forward-looking components was mixed. New manufacturing orders fell by 1.4pt to 50.7 and stocks remained stable, thus decreasing the orders-to-stocks ratio by 1.3pt. Meanwhile, within the Services PMI (the headline figure is not aggregated up from the subcomponents), ‘Business Expectations’ eased 3.1pt while ‘Incoming New Business’ was unchanged.
4. The Final PMI data show a mixed country breakdown. The German manufacturing PMI contacted 1.0pt in August, while the services PMI declined by a sizable 3.0pt, resulting in a 2pt decrease in the German Composite PMI (to 53.7). The French Composite PMI, on the other hand, remained broadly stable on the month (at 49.5). The gap between the German and French Composite PMIs narrowed from 6.3pt to 4.3pt, on the back of weaker German PMIs. This gap is considerably smaller than the 8pt differential seen during late 2013/early 2014.
5. Today’s data showed a large divergence in Italy and Spain. The Italian Composite PMI contracted by 3.1pt to 49.9 (Chart 2), reflecting a 2.9pt contraction in today’s services PMI (to 49.8, Cons: 52.0) and Monday’s 2.0pt decline in the manufacturing PMI (to 49.8). In sharp contrast, the Spanish Composite PMI continued to gain momentum, increasing by 1.2pt on the month to a robust 56.9. Today’s Spanish services PMI showed a 1.9pt gain, outweighing the 1pt decline in the manufacturing counterpart. The gap between Italian and Spanish Composite PMIs widened substantially from 2.6pt to 7.0pt in August.

In Asia, The Shanghai Comp (+0.6%) and Hang Seng (+2.3%), the former touching the highest level since June 2013. This follows better than expected Chinese PMIs with the non-manufacturing reading recording its first increase in 3 months and HSBC services PMI printing a 17 month high. The Nikkei 225 (+0.38%) pulled of the session’s best levels after Yasuhisa Shiozaki was appointed as the Japanese Health Minister (the post responsible for GPIF reform), as analysts see Shiozaki taking a cautious and gradual stance on increasing Japanese stock allocation in the pension fund’s portfolio. This also resulted in strength in both the JPY and JGBs, last seen unchanged at 146.16.

Bulletin headline summary from Bloomberg and RanSquawk

• Putin throws cold water over initial reports from Kiev that Russia and Ukraine have reached a permanent ceasefire, thus partially reversing the initial gains in European and US equities.
• A lacklustre slew of Eurozone PMIs provided markets with further concerns over the fragility of the area’s economy, although failed to place substantial weight on EUR/USD as geopolitical events take centre-stage.
• Looking ahead, attention now turns towards the US ISM New York release, factory orders, the Bank of Canada rate decision and any further developments on Russia/Ukraine ceasefire talks.
• Treasuries decline for a third day amid heavy corporate calendar before ECB meeting/Draghi press conference tomorrow, nonfarm payrolls Friday.
• Yesterday’s $21.35b of IG issuance was among heaviest year to date, with 13 issuers including five financials selling 23 tranches
• China’s service industries strengthened in August, contrasting with declining manufacturing gauges and suggesting a transition away from factory-led growth
• Russia’s Putin and his Ukrainian counterpart Petro Poroshenko agreed on steps toward a cease-fire in Ukraine’s easternmost regions, where a bloody conflict has raged for more than five months
• A video showing the beheading of a second American journalist by Islamic State brought fresh calls for an international alliance to combat the extremist group as well as renewed condemnation of its barbarism
• Economist Pippa Malmgren, a former adviser to George W. Bush, is calling attention to “shrinkflation,” where companies charge consumers the same, or more, for less; this may foreshadow an overall jump in prices, an alarm she’s been sounding for a while
• Abe’s new cabinet appointments signal his determination to deliver on pledges to overhaul Japan’s pension system and bring more women into the workforce to revive the economy as the population ages
• Australia’s economic growth slowed last quarter in response to a stronger currency and weaker commodity prices, as RBA Governor Glenn Stevens indicated he wants to avoid cutting interest rates further
• The Labour Party is blitzing Scotland in a bid to stop supporters in its traditional heartland from defying the party line and backing independence, according to two people familiar with the campaign’s tactics
• The White House acknowledged that Obama may miss a self- imposed deadline for taking executive action on immigration as his advisers debate delaying an announcement until after the election
  Sovereign yields higher. Asian and European stocks, U.S. stock-index futures gain. WTI crude and gold higher, copper falls

US Event Calendar

• 7:00am: MBA Mortgage Applications, Aug. 29 (prior 2.8%)
• 9:45am: ISM New York, Aug. (prior 68.1)
• 10:00am: Factory Orders, July, est. 11% (prior 1.1%)
• TBA: Domestic Vehicle Sales, Aug., est. 16.6m (prior 16.4m)
• Total Vehicle Sales, Aug., est. 13.2m (prior 12.95m) Supply
• 10:00am: Bank of Canada seen maintaining benchmark interest rates of 1%
• 2:00pm: Federal Reserve Beige Book
• 6:15pm: Money Marketeers of New York University dinner featuring Fed’s Powell as speaker
• 11:00am: Fed to purchase $950m-$1.15b notes in 2036-2044 sector

FIXED INCOME

Following the news from the Ukraine fixed income products saw an immediate move lower with Bunds falling around 35 ticks and the German 10yr yield rising back towards 0.96%, with USTs slipping back below 125.00 before staging a modest recovery following the response from Putin. In terms of this morning’s Bobl auction, the offering was technically uncovered although did little to alter German fixed income prices. Elsewhere, the PO/GE spread is tighter by around 2.8bps with the order book for Portugal’s 15 year bond in excess of EUR 6bln and the spread tightening from 240bps to 235bps.

FX

The session’s main data releases have come in the form of the plethora of Eurozone PMIs which painted a relatively lacklustre picture of the Eurozone services sector, although failed to place too much downward pressure on EUR/USD, with the pair later lifted following the initial Ukraine headline. Furthermore, UK services PMI came in above the top end of expectations at a 10-month high, although failed to provide UK asset classes with much in the way of a reaction as markets continue to place focus on the recent geopolitical developments. In the commodities complex alongside the move lower in palladium, spot gold saw a sharp move lower, with prices touching 2.5 month lows, although both metals saw a substantial paring of these losses in reaction to the comments from Putin. Elsewhere, the RUB is stronger against the USD as participants responded positively to the initial reports of a ceasefire between Ukraine and Russia.

COMMODITIES

Palladium is the underperformer in the precious complex following a fast-money move lower of around USD 12.00 amid the erosion of the war premium that had been providing the precious metal with recent support, with spot gold touching a 2.5 month following the initial Ukraine headline. Elsewhere, in the energy complex both WTI and Brent crude futures are seen higher as Brent crude futures pull off their 16-month low and further support provided by yesterday’s strong US manufacturing data.

* * *

Finally, the balance of the overnight summary comes from DB’s Jim Reid

As we slowly build up to the main events of the week, namely the ECB meeting and payrolls, markets are seemingly returning from holidays wondering whether bonds have extended too low in yields in recent months. US 10 year treasuries rose 8bp yesterday, the worst performance in just over a month. The sell off had already started before the stronger than expected ISM manufacturing (59.0 vs 57.0 expected) but the beat provided extra momentum. Away from the US, yesterday was also a fairly poor day for the European government bond market. Ten year yields in Germany, France, UK, Italy and Spain rose 5bp, 6bp, 6bp, 4bp and 2bp to close at 0.93%, 1.31%, 2.44%, 2.45%, and 2.27%, respectively.

Otherwise the day was a fairly muted one for DM equities. Key indices on both sides of the Atlantic were little changed on the day. The S&P 500 (-0.05%) was weighed by a weak performance in Energy (-1.25%) likely driven by a sharp drop in oil prices. Brent and WTI prices have come off by about 11-12% from their recent highs in June after having extended their fall further yesterday by around 2-3%. A strong Dollar has been one factor used to explain the recent moves and it might lead to further downward pressure on inflation in the months ahead. On the greenback the Dollar index has risen by over 4% since the end of June.

Bringing the focus back to fixed income, European credit spreads outperformed the softness in equities yesterday with Xover and Main closing 2.5bp and 1bp tighter on the day. Senior financials are now back to being within a bp off Main having traded around 10bp wider through the BES episode. We’ve long felt that the Sen Fin index will trade through Main before year-end and still believe that its just a matter of time before it does. Whilst on credit we have just published our latest HY monthly which reviews the market and our view on it after the summer. Having started to look expensive relative to its own history as well as relative to IG, HY credit looks to be more attractive on both counts as we enter September. The latest downgrade/upgrade ratios are supportive of defaults remaining at their current low levels into year end and beyond and ultimately the spread weakness we saw from late June to early August has left us more comfortable with a constructive view on credit going forward. We accept that the deterioration of the technicals (e.g. lower cash balances, an expected increase in issuance and a less accomodative Fed) probably means that the journey might now be increasingly more bumpy than over the 18-24 months to mid-summer this year. However as well as supportive fundamentals, in the background we do have the potential for further action from the ECB that may add further support to fixed income markets around any future wobbles. Therefore any spread weakness should probably be seen as an opportunity to add risk until fundamentals turn considerably more negative.

On to more present matters, Asian equities have largely ignored US and European weakness overnight. Indeed key bourses across the region are trading higher on the day with the Hang Seng, Nikkei, and Shanghai Composite adding 1.3%, 1.0% and 0.6% respectively. A strong China services PMI print and continued weakness in JPY are helping. On China, the official non-manufacturing PMI rose by 0.2pt to 54.4 in August. The HSBC variant rose by 4.1pt to 54.1, the highest since March 2013. The JPY is over 1% lower this week (now 105.28) against the Dollar with the appointment of Shiozaki (pro market reform and advocate of reducing GPIF’s allocation in bonds) as the Health Minister being cited as a main driver. In fact the appointment has been confirmed by the wires (Bloomberg) as we go to print. Asian credit new issues are also performing as they break firmer in secondary although the new issue pipeline is building up rapidly. Vietnam is already planning for a USD sovereign bond issue (Bloomberg) after Indonesia’s lowest yielding Dollar sukuk deal in two years.

In terms of geopolitics the European Commission is set to decide on new sanctions on Russia today. According to Reuters, the recommendations will basically broaden the measures that were approved in July. Notably it would widen a ban on Russian state banks raising capital in EU markets to cover all Russian state-owned firms. The capital markets borrowing ban would be extended to include syndicated loans from EU banks, and a ban on sales in Europe of Russian debt instruments for periods of less than 90 days would be reduced to 30 days. The WSJ noted that the EU is also likely to widen restrictions on exports of dual-use goods to Russia, which are currently banned for military end-users. Reuters reported that more symbolic actions such as banning the Russian Minister of Defence from travelling to the EU are also being considered. On top of all these, EU diplomats seem to be also actively considering boycotting the next world cup although FIFA President Sepp Blatter also said that Russia’s role as a host is not up for discussion. England effectively boycotted the last world cup so it wouldn’t make much difference here.

Taking a closer look at the ISM report yesterday, the 59.0 print was just shy of its post-recession peak of 59.3 seen in February 2011. Joe LaVorgna noted that the improvement in two of the main underlying components (ie new orders (66.7 v 63.4) and production (64.5 v 61.2) suggests that the headline ISM gain should prove to be somewhat durable. As the ISM is highly correlated to quarterly GDP growth the current level of new orders is more consistent with a GDP growth closer to 4.4% according to Joe (DB now forecasting 3.5% in Q3 GDP). The employment sub-reading was broadly unchanged (58.1 v 58.2) although we note that prices paid has fallen more than expected (58.0 vs 58.5 expected and 59.5 previously). Moving on to today, the Fed’s Beige Book, factory orders, and auto sales are the notable US releases. In Europe, we’ll get a full slate of PMI services data for August which will be a nice lead in to Draghi’s showtime tomorrow.

via Zero Hedge http://ift.tt/1CpyrTZ Tyler Durden

The comedic value of developments out of Ukraine, especially when it comes to “de-escalation”, truly has no equal. Case in point, events from the past three hours. The fun started just after 4 am eastern, when the first of many headlines hit as follows:

• POROSHENKO AGREES TO PERMANENT CEASE-FIRE IN UKRAINE WITH PUTIN
• POROSHENKO REACHED UNDERSTANDING ON STEPS FOR PEACE W/PUTIN

Bloomberg clarified by saying that Ukrainian President Petro Poroshenko comments were sourced on his website after phone call with his Russian counterpart Vladimir Putin over unrest in nation’s east. To be sure, risk loved this “news”, which the algos decided this time would be different from all the other ceasefires.  The reaction was swift:

• USD REVERSES LOSSES VS JPY AFTER UKRAINE CEASEFIRE AGREEMENT
• EUR RISES VS USD TO SESSION HIGH ON UKRAINE CEASEFIRE AGREEMENT
• BUND FUTURE DROPS TO DAY LOW AS UKRAINE CEASE-FIRE ANNOUNCED
• FORINT GAINS 0.4%/EUR ON UKRAINE CEASE-FIRE
• RUBLE RALLIES 1.43% VS USD, MOST SINCE JUNE 24 ON CEASEFIRE
• U.K. 10-YEAR GILTS EXTEND DROP; YIELD RISES 6 BPS TO 2.50%
• UKRAINE 2017 USD BOND YIELD FALLS 76BPS ON TRUCE

Further news and headlines seemed just as promising, although suddenly the word “conditions” emerged, signally not all may be well:

• DONETSK REBELS READY FOR POLITICAL SETTLEMENT WITH KIEV: IFX
• REBELS SAY SETTLEMENT CONDITIONAL ON UKRAINE HALTING FIRE: IFX

The WSJ triumphantly blasted:

Russia, Ukraine Agree to Cease-Fire

 

The presidents of Russia and Ukraine agreed on a permanent cease-fire in eastern Ukraine, the Ukrainian president’s office said.

 

Russian President Vladimir Putin and Ukrainian President Petro Poroshenko also reached an understanding on steps to promote peace, the presidency said.

 

The Kremlin said the presidents exchanged opinions on what should be done to end the bloodshed as soon as possible.

And then things suddenly started to go sour, because this time again wasn’t different after all: 

• PUTIN DIDN’T AGREE ON CEASE-FIRE, RUSSIA NOT PARTY TO CONFLICT
• PUTIN, POROSHENKO DISCUSSED STEPS TO CEASE-FIRE: PESKOV

Instead, PUTIN BACKS IDEA OF IMMEDIATE CEASE-FIRE IN UKRAINE: PESKOV, something the Kremlin has been pushing all along.

Wait, so… no ceasefire? But, the algos… Oh crap, U-turn, U-turn now!

• EUROPEAN STOCKS, U.S. FUTURES PARE GAINS
• GERMAN 10-YEAR BUNDS PARE DROP ON RUSSIAN CEASE-FIRE COMMENTS
• JPY GAINS AS PUTIN SAYS RUSSIA NO PARTY TO CEASEFIRE AGREEMENT

Then, just as it was unclear if there is a deal or not, the president of Estonia decided now is the time to make some more demands on Russia:

• ILVES: RUSSIA MUST ADMIT THAT IT’S PARTY TO CONFLICT IN UKRAINE
• ILVES: RUSSIA MUST `TAKE GENUINE STEPS’ TO EASE UKRAINE CRISIS
• ILVES SAYS EU, U.S. `READY TO TAKE MORE RESTRICTIVE MEASURES’

At this moment none other than Obama, fresh from his vacation and currently touring Europe, also chimed in:

• OBAMA SEES `CHANGED LANDSCAPE’ IN NATO-RUSSIA RELATIONS
• OBAMA: NO UKRAINE SETTLEMENT POSSIBLE IF RUSSIA BACKING REBELS
• OBAMA: NATO SUMMIT TO PROJECT UNITY ACROSS ALLIANCE ON UKRAINE
• OBAMA SAYS `WHAT’S HAPPENED IN UKRAINE IS TRAGIC’
• OBAMA SAYS NATO `POISED’ TO DO MORE TO AID UKRAINE
• OBAMA: ESTONIA `MODEL ALLY,’ HELPS NATO AGAINST CYBER THREATS
• OBAMA SAYS `ESTONIA WILL NEVER STAND ALONE’
• OBAMA: ESTONIAN AIR BASE `IDEAL’ TO HOST AIRCRAFT, PERSONNEL

Obama’s punchline – order more US defense stuff:

• OBAMA URGES NATO MEMBERS TO REVIEW, UPDATE DEFENSE CAPABILITIES

But then things got really wierd, when the usual Poroshenko website revisionism hit in earnest:

• POROSHENKO CHANGES WEBSITE STATEMENT ON CEASE-FIRE IN UKRAINE
• KIEV STATEMENT NOW REFERS TO `CEASE-FIRE REGIME IN THE DONBAS’
• POROSHENKO SAYS AGREEMENT REACHED ON `CEASE-FIRE REGIME’

WSJ once again promptly chimed in to “explain” the muddied situation:

Kremlin Takes Issue With Term ‘Cease-Fire’ in Ukraine

 

The Ukrainian president’s office said Petro Poroshenko and Russian President Vladimir Putin agreed to a cease-fire regime in eastern Ukraine. The Kremlin took issue with that wording, saying the two leaders only discussed steps toward peace.

 

It wasn’t immediately clear whether the differences reflected diplomatic semantics–admitting that Mr. Putin had agreed to such a deal would contradict months of Kremlin assertions that they don’t control the separatists in Ukraine–or a more fundamental disagreement. Neither side provided details of what was agreed to.

Ah yes, semantics. And then, to confirm that once again Ukraine did not even follow the CIA playbook, the counterparty to the “ceasefire” negotiations, apparently was never consulted to begin with!

• REBELS SAY POROSHENKO DIDN’T AGREE CEASE-FIRE WITH THEM: RIA

Finally, to celebrate the de-escalations:

• UKRAINE KILLED 100 REBELS NEAR SNIZHNE, LYSENKO SAYS
• BORDER GUARDS SEE INCREASED RUSSIAN TROOP ACTIVITY: LYSENKO
• LYSENKO SAYS INSURGENTS ARE DAMAGING LOCAL GAS PIPELINES

And just to make sure Putin is really pissed off:

• UKRAINE SEEKS STATUS OF SPECIAL U.S. ALLY: YATSENYUK
• YATSENYUK URGES PARLIAMENT TO ADOPT BILL ON UKRAINE’S NATO BID
• YATSENYUK: NEW DEFENSE DOCTRINE MUST DEFINE RUSSIA AS AGGRESSOR
• YATSENYUK SAYS WAR IN EAST ISN’T INTERNAL UKRAINIAN CONFLICT
• YATSENYUK SAYS RUSSIA INSTIGATED, CONTINUES CONFLICT IN UKRAINE
• YATSENYUK SAYS ENTIRE UKRAINIAN ECONOMY IS ON WAR FOOTING
• RUSSIA HAS DONE EVERYTHING TO DERAIL UKRAINE-EU DEAL: PREMIER

To summarize: despite pent up hopes for pent up “de-escalation” everything is again back on square one with the civil war raging as usual, but there were some more confused headlines, coupled with promises of a ceasefire that apparently does not exist. End result – the algos are happy because US equity futures just pushed to fresh all time highs. As for the people of Ukraine, oh well: who cares about them.

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Thanks to The Fed-inspired fast-money flood driving up asset prices, owning or even renting a home has become unaffordable to most. Working a 40-hour-week, a single-earner in D.C. would need to be paid a $28.25 minimum wage for afford to rent a home… and if you live in California (and earn minimum wage), you will need to work 18.6 hours-a-day, 7 days-a-week to afford rent. Thank you Ben and Janet…

 

Of course, if you rent, you have flexibility… perhaps move to Montana instead of earning minimum wage in California or D.C.

 

Source: The Washington Post

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While Markit’s Manufacturing PMI fell in August, the apparent demand for ‘services’ in China exploded. China Services PMI jumped from the worst on record 50.0 in July to 54.1 in August (18-month highs). This is the biggest MoM rise in the data on record... because they can. We have nothing to add because it’s simply becoming too surreal and manipulated for rational explanation.

 

 

HSBC is quick to note that it’s not all unicorns and ponies and that more stimulus sis till needed.

“The headline HSBC China Services PMI rebounded to a seventeen-month high of 54.1 in August, after registering an all-time low reading in July. Apart from the rebound in the headline number, other indices suggest a mixed picture rather than a broad-based improvement. The economy still faces downside risks to growth in the second half of the year from the property sector slowdown. We think policy makers should use further easing measures to help support the recovery.”

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