Month: February 2016

As we anxiously await the results out of Iowa, where we’ll get the first real test of whether “protest” candidates Donald Trump and Bernie Sanders have a legitimate shot at upending America’s political establishment, Hillary Clinton is fighting to convince the electorate that the scandal involving her use of a private e-mail server to transmit state secrets is largely a distraction dreamed up by the GOP to derail what might otherwise have been a largely uncontested run for The White House.

Last week, the State Department admitted that 22 of the e-mails Clinton sent on her private server were indeed “top secret” and would not be released to the public. 18 additional e-mails from Clinton to President Obama are also being withheld. “The disclosure of the top secret emails, three days before Iowans vote in the first-in-the-nation caucuses, is certain to fuel the political debate over the unclassified computer server,” The New York Times wrote on Friday. “The top secret emails lent credence to criticism by Mrs. Clinton’s rivals in the presidential race of her handling of classified information while she was secretary of state from 2009 to 2013.” 

The Clinton campaign respondeed by saying that the process for reviewing the e-mails “appears to be over-classification run amok” – whatever that means.

“This is very much like Benghazi,” Clinton said during an interview with ABC. “Republicans are going to continue to use it, beat up on me. I understand that. That’s the way they are.”

The extent to which the controversy has dented Clinton’s reputation with voters is still up for debate but it’s probably safe to say that the former First Lady would be polling stronger had she kept state business out of her personal inbox when she was Secretary of State.

Put simply, to the extent Americans trusted Clinton in the first place, the e-mail controversy undermines their faith in one of Washington’s most seasoned politicians. 

On Monday, Clinton spoke to CNN about the e-mails and about what separates her from Bernie Sanders, the only serious challenge she faces for the Democratic nomination. 

In what may go down as one of the most amusing soundbites of her campaign, Clinton told CNN she that she’s “asking people to hold her accountable.” 

“I know how you get things done. I am a progressive who wants to make progress and actually produce real results in people’s lives. That’s what I’m offering,” Clinton said.

“I’m not over-promising,” she continued. “I’m laying out the plans that I have, I’m asking people to look at them and I’m asking people to hold me accountable, because I want to get back to working together, to try to unite this country.”

We assume that since Clinton wants us to “hold her accountable”, she’ll happily march over to the Justice Department and indict herself.

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As we first noted last week, something absolutely astounding has happened.

 

Two weeks ago, the head of the Bank of Japan, Haruhiko Kuroda stated that Japan has a “potential growth rate of 0.5% or lower.”

 

By way of context, remember that the Bank of Japan has been at the forefront for ALL monetary policy for decades. The US Federal Reserve launched its first QE program in 2008. The European Central Bank launched its first QE program in 2015. The Bank of Japan first launched QE back in 2001.

 

In short, the Bank of Japan has two decades of experience with QE. Indeed, Japan is responsible for the single largest QE program in history, its “Shock and Awe” program launched in April 2014 which equaled over 25% of Japan’s GDP.

 

Which is why when Kuroda admitted that Japan’s GDP growth “potential” is limited to 0.5% or lower, he was implicitly admitting that QE cannot generate growth.

 

Remember, Central Bankers speak in half measures. They NEVER admit failure directly. Their primary job is to maintain confidence in the financial system even if it entails lying.

 

In Central Banker speak, Haruhiko Kuroda has admitted that there is a limit to potential GDP growth regardless of how much QE and Central Bank employs. He has admitted that Central Bankers might not have the tools required to generate growth.

 

Even more that this, his actions SUPPORT this claim.

 

Last Friday, the Bank of Japan announced that it would be implementing Negative Interest Rate Policy or NIRP.

 

This change in policy was incredible. But what’s even more incredible is the fact that the Bank of Japan did NOT increase its QE program when it announced NIRP.

 

Put another way, the head of the Bank of Japan announced that QE cannot generate GDP growth, and then DIDN’T increase the Bank of Japan’s QE program when it came time to announce a new policy.

 

In short, Haruhiko Kuroda’s actions are supporting his words.

 

This is the single most important development in the monetary world. The head of a MAJOR Central Bank announced that QE cannot create economic growth and then refused to increase his bank's QE program.

 

As usual, the markets have yet to adjust. Eventually they will. When they do, the S&P 500 will be below its March 2009 lows.

 

 

 

Another Crisis is coming. Smart investors are preparing now.

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Chief Market Strategist

Phoenix Capital Research

 

 

 

 

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While January's final manufacturing PMI print disappointed (52.4 vs 52.6 expectations) and dropped from its initial print, its still managed a seasonally-adjusted bounce off December's  two year lows. As Markit warned, this is still one of the worst prints in the last 2 years as "the manufacturing sector continues to struggle against the headwinds of weak global demand, the strong dollar, slumping investment in the energy sector and rising financial market uncertainty." ISM Manufacturing also rose very modestly but disappointed as Decmber's data was revised lower still.

 

Commenting on the final manufacturing data, Chris Williamson, chief economist at Markit said:

“Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector.

 

“One bright light appeared, in that order book growth picked up, led by an upturn in domestic demand. However, hiring remained in the doldrums, suggesting that firms remain cautious in relation to the business outlook and reluctant to expand capacity.

And then ISM Manufacturing data hit…

Respondents were broadly pessimistics:

"The oil and gas sector continues to be challenged by low oil and gas prices. Risk of suppliers filing for bankruptcy and reducing their workforce is becoming an increasing risk. Our company workforce is also declining." (Petroleum & Coal Products)

As Markit concludes…

“The manufacturing sector continues to struggle against the headwinds of weak global demand, the strong dollar, slumping investment in the energy sector and rising financial market uncertainty, all of which mean the goods-producing sector looks set to act as a drag on the wider economy again in the first quarter of 2016.”

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Denials, Goldman’s dismissal, and now Persian Gulf oil producers unsupportive, and Thursday’s exuberance is done…

You didn’t really think it was that easy right?

 

As WSJ reports,

Persian Gulf Arab oil producers don’t support holding an emergency meeting of the Organization of the Petroleum Exporting Countries, officials said, dampening expectations that the group will act to prop up sagging crude prices.

 

Persian Gulf Arab OPEC delegates said they want to wait until the next scheduled OPEC meeting in June, when they will have a clearer picture of how new barrels of Iranian oil are affecting the market now that western sanctions have ended. Iran has pledged to increase production by a million barrels a day this year, potentially flooding a market that already has too much supply.

 

“We still don’t how much oil Iran can add to the market and this won’t be clear for weeks if not months so calling for an emergency meeting is pointless,” a Gulf OPEC delegate said.

 

The Persian Gulf Arab states include Saudi Arabia, Kuwait, Qatar and the United Arab Emirates, an influential bloc that is leading OPEC’s current policy of letting the market sort itself out.

 

The comments come as Venezuelan energy minister Eulogio Del Pino conducts a tour of oil-producing countries such as Russia and Saudi Arabia to drum up support for a coordinated output cut in hopes of lifting prices. OPEC’s inaction has helped oil prices fall to levels not seen in more than a decade, hitting $27 a barrel last month.

 

* * *

 

A third OPEC delegate said Gulf Arab delegates see little upside to an emergency meeting and a production cut. “If we meet in the next few weeks for an emergency meeting and we cut, we are potentially subsidizing shale production,” a third Gulf Arab OPEC delegate said, holding the often-stated view that American shale producers can ramp output up or down faster than conventional oil producers.

But what is most notable is the ever louder war of words between Iran and the Saudis:

The impasse has left some oil-industry producers seething at Saudi Arabia. Akbar Nematollahi, the chief of public relations for Iran’s oil ministry, called the Saudi policy “illogical,” “obstinate,” “stubborn” and potentially dangerous, in a little-noticed opinion article published in December in the ministry’s official magazine.

 

“The Saudis are now snared in a trap they set to other petrostates,” he wrote.

Clearly no love lost between the two nations.

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As most market structure watchers are well aware, the biggest debate currently roiling the field of equity markets revolves around the August 21, 2015 submission by the dark pool made famous by Michael Lewis’ Flash Boys, IEX, in which it is seeking become a public trading venue that will compete with the New York Stock Exchange and Nasdaq Stock Market. What makes IEX different from all other “lit” venues and markets is its embedded technology which implements a 350 microsecond order delay which makes HFT frontrunning, spoofing, and quote stuffing of orders impossible.

This “speed bump” which would apply to everyone has led to a vocal outcry among the established HFT players who allege that what IEX is doing would go against the principle of market fairness, when in reality virtually every exchange provides tiers of access speeds to paying clients, in order to be richly compensated by those who can afford to frontrun general orderflow.

The best example of this may be the recent advent of “laser” trading at the NYSE, duly chronicled here, which seeks to provide a several microsecond advantage to those who can afford it.

In any event, as discussed here previously, at the heart of virtually every complaint against granting IEX exchange status is that a ‘speed bump’, would “result in the investors receiving stale and misleading quote information” according to such prominent competitors as the NYSE.

Overnight, the IEX, faced with stiff resistance from the likes of not only the NYSE but also NY Fed “favorites” as Citadel, struck back and in an op-ed posted on the IEX website on Sunday night, IEX cofounder Don Bollerman said that the NYSE also has a speed bump, one which it has keep quiet about and which serves merely to further enrich its best-paying clients.

Here is the full IEX allegation of impropriety at the NYSE:

IEX is applying to become a registered stock exchange and we find ourselves at the center of a fierce debate over what is, and what is not, permissible in the operation of a U.S. stock exchange. The heart of the issue is the IEX “Speed Bump,” a coil of fiber optic cable that slows down access to our market by 350 microseconds, which is one one-thousandth of the time it takes to blink your eye.

 

Our speed bump has two primary purposes. First, it protects client orders on IEX from being scalped at stale prices by certain high-speed traders who have purchased faster access to information from other exchanges, and know the prices to be stale. Second, it protects clients who use IEX’s Router from being beaten to other exchanges by high-speed traders who are looking to react to the client’s orders by removing liquidity on those exchanges before the orders can be executed.

 

IEX’s detractors are trying to convince the Securities and Exchange Commission (“SEC”) that IEX’s speed bump will harm the entire U.S. stock market and that it gives IEX an unfair advantage. The irony is that over the past ten years, U.S. stock exchanges have invested huge sums of money creating two-tier markets – building and offering faster data and technology infrastructures at a price that only a small niche of traders can benefit from or afford, while at the same time continuing to offer slower products to everybody else.

 

Some of the existing exchanges might say such accusations are unfounded, with the justification that anyone who is willing to pay up can have access to the fast lane. However, the bigger questions remain: why offer both slow and fast access, and how transparent are the relative advantages/disadvantages of each?

 

The NYSE Speed Bump

 

Last year, IEX noticed that its ability to access displayed quotations (our “fill rate”) on the New York Stock Exchange (“NYSE”) had degraded to as low as 84% (meaning we were able to, on average, trade 84 shares out of every 100 shares that were quoted at the time we attempted to trade). On some days, 1 out of every 10 orders sent to NYSE missed ALL available liquidity. In contrast, IEX’s fill rate averages 96.9% across all other U.S. exchanges. We found this especially curious given that our fill rate on Arca, an exchange owned by NYSE and located in the same data center, was 96.8%.

 

While consulting with NYSE, they advised we consider upgrading from the NYSE FIX gateway to their Binary gateway instead. One of the few public documents we found stated that the Binary gateway is a “new, faster protocol [which] reduces bandwidth and latency.”

 

After making the change, we noticed our fill rate on NYSE immediately improved to 97%, on average. The practical explanation: using NYSE’s FIX offering is so much slower than Binary that market participants seeing IEX’s Router trade on other exchanges were able to race ahead of our routing client and cancel or trade with quotes on NYSE through the faster Binary gateway before IEX’s client order arrived through the slower FIX gateway.

Fill Rates by Exchange (%)

 

Source: IEX Router 1/20/2016 – 1/26/2016.

So why does this matter?

First, it offers more validation that “quote fading” or “latency arbitrage” at the microsecond level is real.

Second, by offering the faster binary access method, NYSE effectively imposed a “Speed Bump” on all of its participants who did not upgrade. They essentially slow down everyone else by offering a faster means of access that only a few have bothered to adopt given the amount of development work necessary to do so. We found very little documentation about this offering, and no public filings with the SEC.

Most interesting, the difference we found in the speed between NYSE FIX and Binary ranged from approximately 200 to 400 microseconds. And those microseconds translated into over a ten percentage point difference in fill rates! NYSE’s speed bump was intentionally imposed on existing participants with very little disclosure, and without any review or approval by the SEC. All the while, NYSE continues to be a registered stock exchange with a protected quotation.

 

Moreover, this isn’t just some temporary transitional system upgrade; NYSE has offered both means of access in parallel since 2011.

 

By comparison, IEX’s speed bump is 350 microseconds and is equally applied to all our participants – there is only one lane. IEX has been fully transparent in our dealings with members and our filings with the SEC, but this transparency is being used against us as existing exchanges, including NYSE, are citing the speed bump as a reason to prevent IEX from having a protected quotation, the status that NYSE enjoys under its current fast lane/slow lane model.

 

Does this mean only exchanges that offer an uneven playing field and varying speeds of access will be allowed to operate? And that an exchange that offers a level playing field, with uniform access for all will not be allowed to compete?

 

Some would have you think that the debate over our exchange application is about rules, or even market structure philosophy, but it’s not. What the debate is really about is commercial interests. IEX slows everyone down to make our market more fair. Other exchanges offer products with different access speeds: connection ports, co-location, and market data – charging a premium to the fast which enables them to make money trading against the slow. Manufacturing those kinds of trading “opportunities” creates market share and revenue for those exchanges.

IEX’ conclusion:

If participants are provided the opportunity to choose the IEX exchange model, IEX can grow. If it grows, other exchanges will either lose market share or need to adopt similar investor protections themselves. Either way, the premium on pure speed goes down, and that will cost a select few players, including the exchanges themselves, a lot of money. Clearly those players have a very strong incentive to prevent IEX from ever becoming an exchange.

 

And who are those players? The answer is easy – just read the IEX comment letters.

Normally, this would be an open and shut case, with the SEC granting the IEX its desired exchange status: after all nobody is forcing market participants to use IEX – they would only do it if they themselves agree that the US stock market is, for lack of better words, “broken” and “rigged”, thus benefiting the IEX business model which has set off to fix precisely that. If there was no demand for IEX’s “speed bump” it would disappear on its own without regulatory intervention: capitalism 101.

However, since granting IEX exchange status would lead to an immediate market structure disruption, one which would impair such embedded HFT players as Citadel which, as we have explained previously is the NY Fed’s preferred “arms length” intermediator in the market to ingite momentum at critical downward junctions, we are very skeptical that when all is said and done, the SEC will grant IEX what it wants: after all there are too many status quo revenue models at stake, not to mention a potential threat to the Fed’s preferred market “intervention” pipeline.

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One theme we’ve explored at length and on a number of occasions over the past 12 months is the global shift towards so-called “radical” political parties and candidates.

Whether it’s Syriza in Greece, Podemos in Spain, or Donald Trump in the US, voters are increasingly turning to candidates outside of the establishment.

Why is the electorate turning its back on the traditional bases of political power, you ask? Well, that is the question of the day and indeed it’s one quite a few people are trying to answer. BofA’s Michael Hartnett recently asked why, if the global “recovery” is real, are populist parties and politicians dominating the political landscape. For those who missed it, here’s a look at how these parties and politicians are polling:

As hinted above, one reason for the political sea change may well be voter disaffection with the economy.

While the general public is probably ignorant to the nuances, Main Street is in tune to a kind of inescapable suspicion that things aren’t what they once were and that the gap between the haves and the have nots is growing. That goes double in countries like Spain, where unemployment is still running above 20%.

As RBS’ Alberto Gallo put it a few months back, “persistent low growth, high youth unemployment and increasing inequality have hurt Europe’s young generation.”

The same can be said of America, although one could argue the problem is less acute.

Ahead of primary season in the US, RBS’ Gallo is out with a fresh look at the rise of “the all-American protest vote” which he says is being driven by “the deeply imbalanced nature of the recovery.” Here’s how RBS describes the state of the American economy:

The deeply imbalanced nature of the recovery could well be driving the protest vote. This US recovery is one of the most uneven on record, looking across both states and industries. In 2014 55% of states grew at a rate of 1.75% or less, whilst only a small number of states (12%) grew faster than 3.25%. This compares to 1988-2014 average of 24% growing less than or equal to a rate of 1.75% and 20% growing faster than 3.25%.

 

 

Looking across industries, structural shrinkage in the manufacturing and construction sectors, where employment has been declining since the crisis, is contributing to pockets of structurally higher unemployment. With many parts of the economy not feeling the full benefits from the US recovery almost 8 years after it began, the protest vote seems to have grown strong enough within the two main parties to begin to challenge for power.

 

And here’s a bit on where the “radicals” are enjoying support:

Who is supporting “protest” candidates? According to YouGov Sep 2015 data, Trump’s supporters are older, less educated and earn less than the Republican average. Over one-third of his supporters earn less than $50,000 per year vs 11% earning over $100,000 per year. One half of his voters have high school education or less vs 19% with a college or post-graduate degree. This pattern was also seen by Civis Analytics data in December, which continues to show stronger support for Trump from older and less educated voters. For Cruz, support is the strongest among women and people over the age of 50. While there is no clear correlation between support for Trump and economic growth statewise, it is notable that the majority of the states that are still in recession or have below 1% growth have strong poll ratings for Trump (e.g. West Virginia, New Hampshire, South Dakota, Mississippi).

 

 

Gallo’s conclusion: “The sustained growth in support for protest parties across Europe provides a lesson for the US – unless the root causes of popular discontent are addressed (uneven growth, pockets of high unemployment and weak wage growth), the protest vote is unlikely to go away. In fact, it may well grow.”

Yes, it “may well” just do that, and the consequences of a protest candidate taking the White House “may well” be decidedly unpredictable.

As we saw in Greece, attempts to rekindle “the dream” (so to speak) can end in new nightmares. That’s not to say America should resign itself to four more years of business as usual inside the Beltway. But we wonder if the old adage “be careful what you wish for” doesn’t apply to both Donald Trump and Bernie Sanders.

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As DB’s Jim Reid points out, it was definitely not the easiest start to the year with many global equity markets suffering from their worst January in a post-Lehman world.

The S&P 500 (-5.0%), the Dow (-5.4%), and the Nikkei (-8.0%) posted their worst January returns since 2009. Similarly for the Stoxx600 (-6.3%) and Hang Seng (-10.2%) it was also their worst since 2008. The ‘January effect’ was certainly missing in action this year although curiously it has been missing over the last 3 years. The last time we saw a positive January start to the year for the S&P 500 was in 2013 (for a further technical analysis what a poor January means see “As Goes January”… What Happens When Bullish Seasonals Fail).

In terms of the specifics, only 17 out of the 39 global asset benchmarks that DB tracks managed to avoid finishing the month in the red in January. Of the 17 that were up so far on a total return basis, 12 were fixed income indices (core rates or IG credit) although Gold (+5.3%) did deliver its best performance since January last year. Indeed Gilts (+3.8%), Bunds (+2.5%) and US Treasuries (+2.2%) were the main outperformers which have helped IG from a total returns perspective. IG excess returns were negative though on both sides of the Atlantic as spreads finished the month wider. Indeed HY benchmarks, which are less sensitive to rates, finished the month lower. January also marks the third and second consecutive monthly decline for US HY (-1.2%) and European HY (-1.4%), respectively.

The other end of the performance spectrum was mostly dominated by equities and oil. Chinese equities had bad start to the year with the A-share index nearly down 23%. This was followed by Stoxx600 Banks (-15%), FTSE MIB (-13%), Greek equities (-12%), and the Hang Seng (-10%). The worst performer could have been Oil if not for bounce last week. Brent for example would have been down 27% had it not recovered from its intra-month lows. It eventually settled at -6.6% for the month.

Here is the January performance in local currency terms:

 

And when rebased in dollar terms:

Source: DB

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