Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The promises made when there were 7 workers for every retiree cannot be kept when there are only 2 workers for every retiree.

In an auto-mechanic analogy, the Powers That be are assuring us those grinding noises under the hood and the black smoke chugging out of the tailpipe are no big deal and can be fixed with a minor tuneup. They're wrong; we need a total overhaul to avoid a total system breakdown.

The grinding noises and black smoke are telling us the engine of our economy is on its last legs. The Powers That Be (Federal Reserve, government at all levels, mainstream corporate media, etc.) have been masking the need for an overhaul with trickery for the past seven years, the financial equivalent of using heavy oil and spray-painting the battery to make it look new.

With the tranny and top end about to blow, the Status Quo keeps claiming everything's running great and the new set of sparkplugs and minor valve adjustment (i.e. zero-interest rate policy and more banking regulations) have restored the economy to top performance.

It's all lies, fantasy and propaganda. Nothing has been fixed. Automation has just started devouring human labor/jobs, corporate profits have peaked, the trick of pushing the stock market higher by borrowing money to buy back shares is finally falling apart, the trends of wealth and income inequality are roaring ahead full steam, and our entire system of taxation, entitlements and debt is about to blow up.

As I explain in my new books A Radically Beneficial World and Why Our Status Quo Failed and Is Beyond Reform, the big structural trends will destroy the status quo: automation/loss of jobs leads to lower profits and wages which means lower tax revenues while costs of an outsized generation retiring will soar for the next 30 years.

The promises made when there were 7 workers for every retiree cannot be kept when there are only 2 workers for every retiree. As automation commoditizes labor, goods and services, the ratio of full-time workers to retirees will continue to slip: it's already under two-to-one, as there are 123 million full-time jobs and 65.48 million Social Security beneficiaries.

Please glance at the following charts. The point here isn't to play doom-and-gloom; it's to accept the reality that the current set of promises and power arrangements is going to blow up and we'll need a complete overhaul of our system.

Chart 1: Medicare costs will continue skyrocketing for decades:

Chart 2: all three major entitlement programs–Medicare, Medicaid and Social Security–are expanding rapidly while tax revenues are stagnating (and could plummet in a systemic recession). (For context, the entire defense budget is around $700 billion.)

Chart 3: the inevitable consequence is soaring entitlement deficits for decades:

Chart 4: we are at the base of a steep mountain of government spending:

Chart 5: funding this mountain will require a doubling of federal taxes:

Toss in the crushing burden of skyrocketing debts and the rise of inflation (already running 20% hotter than official statistics) and the meltdown of the status quo is only a matter of time. Anyone who thinks taxes can double and the consumer-based economy will be just fine is delusional.

We need a complete system overhaul, and the sooner we face up to this sobering reality, the sooner we can start working on real solutions.

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Over two years ago, and just days after Michael Lewis released Flash Boys focusing attention on the ongoing criminal practice of orderflow frontrunning by such Fed intermediaries as Citadel (and many other now entrenched and recently IPOing names), none other than Citadel’s head of “Execution Services” which we supposed is the internal name of the firm’s client-facing HFT group, Jamil Nazarali, proclaimed that small investors have never been so fortunate and said, with regard to Michael Lewis’ now infamous book Flash Boys, “The most important thing that the market can do is stop… pointing fingers at everyone else.”

As we said back then “Citadel, who allegedly provides the NY Fed’s VIX trading capabilities, are among the very largest high-frequency traders in the market (and the most levered), so one would surely expect that Citadel would like us all to stop pointing fingers at them. As Bloomberg reports, Nazarali said yesterday during a panel discussion at the Milken Institute Global Conference in Beverly Hills, California, “things are much better today than they were 10 to 15 years ago.“

Maybe for Citadel; for investors – who are tired if not disgusted of having their orders constantly frontrun by internalizers and wholesale market-maker venues such as Ken Griffin’s Citadel – not so much.

Which is why we were not surprised, though certainly delighted, to see that after years of railing against Citadel’s dominant position at the intersection of HFT trading and retail orderflow – recently Citadel was found to be the largest private US trading venue – this morning Reuters reports that Federal authorities are investigating the market-making arms of Citadel LLC and KCG Holdings looking into the possibility that the two giants of electronic trading are giving small investors a poor deal when executing stock transactions on their behalf.

According to Reuters, the DOJ has subpoenaed information from Citadel and KCG related to the firms’ execution of stock trades on behalf of clients. Not just Citadel, the DOJ is also looking at a number of high-speed trading firms that pay retail brokerages to sell them their flow of customer orders for stock trades. This segment of the industry is known as wholesale market making.

In the case of Citadel, authorities are examining internal data concerning the firms’ routing of customer stock orders through exchanges and other trading systems, to see whether they are giving customers unfavorable prices on trades in order to capture more profit on the transactions.

In other words, the DOJ is looking into whether Citadel is frontrunning its clients, something we have claimed for years.

As a reminder, Citadel is so big and its own private stock-trading platform is so large that, if it were an official exchange recognized by the Securities and Exchange Commission, it would one of the largest registered exchanges in the United States – bigger than Nasdaq Inc, according to data published last month by the Financial Industry Regulatory Authority. Citadel Execution Services, the firm’s wholesale market-making unit, executes 35 percent of all trades by retail investors in U.S.-listed stocks, according to the firm.

KCG was formed in December 2012 from the merger of New Jersey-based Knight Capital Group and Chicago-based high-frequency-trading firm Getco LLC. Knight was forced into the merger after an August 2012 computer trading glitch led to millions of accidental stock orders flooding the market in less than an hour, leaving the firm with a $468 million loss

The documents subpoenaed from KCG related to the firm’s market making activities from 2009 to 2011, Reuters adds. In 2012, the head of KCG’s electronic trading group, which included its wholesale market making arm, Jamil Nazarali, left the firm to join Citadel. Since then, Citadel’s own wholesale market maker has grown substantially under Nazarali. Nazarali is also the same person two after Flash Boys came out said that “small investors have never been so fortunate.” Let us guess: “because bid-ask spreads have fallen”, right? Well, first that’s wrong. And second, how fortunate has Citadel been to be able to frontrun billions of retail orders and generate billions in risk free profits.

And while we doubt anyone will go to prison, there is a small chance Citadel’s egregious frontrunning will at least be minimized for the time being: the inquiry is being driven by Justice Department authorities who previously investigated banks for alleged wrongdoing in the market for residential mortgage-backed securities. Making those cases, which yielded billions of dollars in penalties, required investigators to master some of finance’s most complex markets. The current undertaking presents similar technical challenges.

That said Reuters adds that it isn’t clear what sort of evidence the federal investigators may have compiled in their inquiries. And it is possible that no cases will result from the investigations. A spokesman for KCG declined to comment, as did a Justice Department spokesman. In an August 2015 filing with the SEC, KCG disclosed the existence of a Justice Department probe but provided no details. A spokeswoman for Citadel said she could neither confirm nor deny the firm’s involvement in the investigations, but said Citadel cooperates fully with any requests from enforcement agencies.

“As one of the largest market-makers and providers of liquidity in the U.S., we regularly receive inquiries from and work closely with a number of regulators and others regarding our business and market practices,” said Katie Spring, a spokeswoman for Citadel. “We cooperate fully with such requests, but as a matter of practice, we simply don’t confirm any particular inquiry.”

What happens if the DOJ does find what has been obvious to market participants for years?

If authorities do move ahead, they would be marching forcefully into the debate over high-speed trading. Critics have alleged that firms with the fastest trading technology are using speed to manipulate stock prices, giving investors a raw deal. The industry counters that its technology delivers cheaper and more transparent trades to investors.

It also delivers guaranteed profits to itself, because while on one hand Citadel is a massive market-maker, responsible for the biggest portion of retail flow traffic, on the other it happens to be the most leveraged hedge fund in the world in terms of regulatory to net assets

This means that the fund has massive prop capital at its disposal to take advantage of its knowledge of flow traffic. It also explains why Citadel’s “tactical trading” unit has been one of the best performing hedge funds for years even as the rest of the hedge fund industry has fallen behind.

Finally, it’s not just the DOJ: Citadel and KCG are among several firms being examined in a separate probe by the New York State Attorney General, Reuters reports. New York authorities are examining firms that buy and sell the flow of trading orders placed by investors, according to a person familiar with that investigation. The authorities are also looking at other practices in the world of high-speed stock trading that may disadvantage retail investors. Citadel and KCG declined to comment on that inquiry.

As noted above, we doubt that anyone will end up in prison, however we are curious if there is any connection between the existence of the probe which has  clearly put the firm’s frontrunning operations under the microscope, and Citadel’s recent underperformance. We are also curious if Citadel will have no choice but to minimize if not abolish outright its retail orderflow frontrunning as a behind the scenes settlement with the DOJ. If so, the market just may regain some semblance of normalcy. Now if only there was some way to eliminate central bank manipualtion and intervention as well…

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• World stock markets rise while yen falls back (Reuters)
• Yen Falls a Second Day as Japan Reiterates Ability to Intervene (BBG)
• Say goodbye to OPEC, Russia’s Sechin says (Reuters)
• European Stocks Buoyed by Banks (WSJ)
• Fed’s Dudley: More Reserve Currencies Would Make for Stronger Financial System (WSJ)
• Dead-of-Night Reversal Puts Brazil Impeachment Back on Track (BBG)
• The Recession’s Economic Trauma Has Left Enduring Scars (WSJ)
• China angered by U.S. navy patrol in South China Sea (Reuters)
• FDA Seeks to Redefine ‘Healthy’ (WSJ)
• Pro-Clinton Super-PAC to Start Anti-Trump Ad Barrage Before June 8 (BBG)
• Saudi Aramco to press ahead with oil expansion (FT)
• The World’s Most Extreme Speculative Mania Unravels in China (BBG)
• Credit Suisse Posts Loss as CEO Signals Cost-Cuts Progress (BBG)
• Record-Breaking Container Ship Ends Brief U.S. Service (WSJ)
• China Railway Materials says company will try to pay debts in time  (Reuters)
• Berlin opens way to Greek debt relief talks (FT)

 

Overnight Media Digest

WSJ

– North Carolina and the Obama administration filed dueling lawsuits against each other Monday over the state’s bathroom law, in a legal showdown that some experts said could settle for good the question of whether the 1964 Civil Rights Act protects transgender people. (http://on.wsj.com/1T2thmF)

– Donald Trump sought Monday to clarify his views on fiscal and monetary policy, saying he was open to compromise on tax cuts but wouldn’t try to alter the terms of the nation’s $19 trillion in debt, which he called “absolutely sacred.” (http://on.wsj.com/1T2tnL6)

– Alonzo Knowles, who was accused of hacking email accounts of celebrities to steal unreleased scripts, personal information such as social security numbers and explicit photos and videos pleaded guilty in a New York federal court Monday to criminal copyright infringement and identity theft. (http://on.wsj.com/1T2tpTi)

– California Gov. Jerry Brown on Monday issued an executive order making permanent some temporary water restrictions imposed to help the state through a severe drought, despite a wet winter that eased some dry conditions. (http://on.wsj.com/1T2tzKk)

 

NYT

– Foreign investment is sprouting along Ukraine’s western borders, but the country’s recent history of strife has made some companies hesitant to move in. (http://nyti.ms/1T7fTD8)

– As Washington remains deadlocked over a solution to Puerto Rico’s rapidly worsening debt crisis, Treasury Secretary Jacob J. Lew traveled to the island on Monday to put human faces on the dry numbers underlying its woes, seeking to pressure Republicans in Congress to move quickly on a rescue package. (http://nyti.ms/1Wm6ad5)

– Takata, the Japanese airbag manufacturer at the center of the largest auto safety recall in history, revised its estimates of a profit in the latest fiscal year to a loss of $120 million as the costs of the crisis mounted. (http://nyti.ms/1T2sLVG)

– Facebook scrambled on Monday to respond to a new and startling line of attack by the website Gizmodo that accused the social network of suppressing stories from conservative news sources. (http://nyti.ms/1Ol84SX)

 

Canada

THE GLOBE AND MAIL

** Amid predictions the fire that drove the evacuation of Fort McMurray could burn for weeks or months, transportation companies that serve northern Alberta are adding flights and waiving some fees to help people get where they need to go. (http://bit.ly/1rPc3SJ)

** Canada Finance Minister Mike de Jong has issued a rare order under British Columbia’s Freedom of Information law to ensure that travel receipts and daily calendars for cabinet ministers and their senior officials are automatically made public. (http://bit.ly/1rPcGvs)

** Former radio host Jian Ghomeshi is expected to sign a peace bond on Wednesday that could preclude him going to trial a second time for sexual assault, the Globe and Mail has learned. (http://bit.ly/1rPdYXB)

** The Canada Revenue Agency has launched investigations into 45 Canadian taxpayers named in the Panama Papers, and the number is set to grow as federal auditors pore over the newly acquired data. (http://bit.ly/1rPdXCV)

NATIONAL POST

** Two major Canadian banks have signed on to Apple Pay, marking a significant expansion of the tech giant’s mobile wallet service in Canada. Starting Tuesday, debit and major credit cards issued by Royal Bank of Canada and Canadian Imperial Bank of Commerce will support Apple Inc’s payments technology. (http://bit.ly/1rPf0Tp)

** Despite having the highest degree of digital literacy in the world, Canadians are far less likely than others around the globe to badmouth companies online when they have had a negative customer experience, according to a new survey from Accenture. (http://bit.ly/1rPfBEE)

** As oilsands companies scramble to determine when they can start producing oil again in fire-ravaged northern Alberta, the industry is estimated to be losing C$70 million ($54 million) every day that production is off line. (http://bit.ly/1rPfJE3)

 

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One man was killed, and three were stabbed A German national stabbed three passengers at a train station near Munich early on Tuesday, after a 27 year old knife-wielding assailant reportedly shouting “Allahu Akbar” attacked people at Grafing train station 32 km southeast of Munich at about 5 a.m. local time.

Tödliche #Messerattacke am Bahnhof #Grafing: Erste Videobilder vom #Tatort. #Ebersberghttps://t.co/RfZchSJHqm

— BR24 (@BR24) May 10, 2016

The attack might have an Islamist motive, officials said. “The perpetrator made remarks during the attack which point to there being a political motive,” Bavarian police said in a statement, adding he had been arrested and there were no further suspects.  Apart from “Allahu Akbar” the man was heard shouting “unbelievers,” Das Bild newspaper reported, citing local witnesses.

The prosecutor has confirmed the death of a 50-year-old man. He added that “two people are badly wounded, one is in critical condition.” The three injured are aged 58, 43 and 55. The “assailant made remarks at the scene of the crime that indicate a political motive – apparently an Islamist one,” Ken Heidenreich, spokesman for the prosecutor’s office, told AFP. “We are still determining what the exact remarks were.”

The 27-year-old German citizen stabbed a newspaper delivery man in the back, a firefighter told the Merkur paper. The attacker is reportedly from the city of Hesse in central Germany. He doesn’t have a migrant background, the ARD broadcaster said. According to German law enforcers, the alleged perpetrator was arrested on the spot. He has no criminal record. 

“The idea that people enter the station or deliver newspapers there and then become victims of a maniac is terrible. Hopefully they will recover completely,” the town’s mayor Angelika Obermayr told the Sueddeutsche Zeitung. “I am most grateful to the police, doctors, paramedics and our firefighters who reacted quickly on the scene.”

According to RT, the interior minister of the state of Bavaria, Joachim Herrmann, confirmed that the perpetrator was a German national, without providing details on the incident. “When it comes to revealing more about their background, or whether mental illness or drug addiction played a role, these are things that require further clarification. I think we will make further announcements on this later in the day.”

Bayerischer Rundfunk identified the attacker as Paul H., a young man with mental health problems. ARD cited sources claiming he was also a drug addict.

The station has been closed following the attack. “The station is a crime scene,” and specialists will be working there, a police spokesman told the Sueddeutsche Zeitung.

This is not the first knife attack in Germany that has an apparent Islamist motive. In February, a 15-year-old girl, Safia S., stabbed a police officer at the main train station in Hannover. According to prosecutors, the girl had “embraced radical jihadist ideology of the foreign terrorist group Islamic State of Iraq and Syria.” In September 2015, a 41-year-old, Rafik Y. of Iraqi origin, seriously injured a female officer in Berlin. The attacker was later revealed as a known Islamic extremist.

Der Messerstecher von #Grafing war nach BR-Informationen “ein nicht polizeibekannter Deutscher”. Das LKA ermittelt. http://pic.twitter.com/8UY3IlDT81

— BR24 (@BR24) May 10, 2016

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In what has been an approximate repeat of the Monday overnight session, global stocks and US futures rose around the world as oil prices climbed toward $44 a barrel, with risk-sentiment pushed higher by another plunge in the Yen which has now soared 300 pips since the Friday post-payroll kneejerk reaction, and was trading above 109.20 this morning. At the same time base metals regained some of Monday’s steep losses following Chinese CPI data that came in line while PPI declined for 50 consecutive months however showed a modest rebound from the prior month on the back of China’s recent, and now burst, speculative commodity bubble.

The weaker yen was the main driver of overnight action: “The weakening yen is acting as a boost to stocks,” Yoshihiro Okumura, general manager at Chiba-Gin Asset Management told Bloomberg. “We’re seeing some risk-on moves overall. The key going forward is whether we’ll get a sense that all the negative earnings are over with now.” The yen weakened for a second day after Japan’s Finance Minister said the government can intervene to stabilize foreign-exchange markets if necessary. Japan’s currency fell against all its Group-of-10 peers after Taro Aso, speaking in parliament in Tokyo Tuesday, reiterated that the U.S. doesn’t object to the Asian nation’s policy. His comments came a day after he said “it’s natural that Japan has means to intervene” in the foreign-exchange markets.

“The increase in Japan’s talk about intervention is drawing market attention,” said Sean Callow, a senior foreign-exchange strategist at Westpac Banking Corp. in Sydney. “Japanese officials run the risk being ‘the boy who cried wolf’ if they keep talking without acting.” Considering they have been crying wolf all of 2016 after the disastrous NIRP experiment, one would assume the market has had enough, and yet here we are with a 300 pip squeeze in two days.

The MSCI All Country World Index’s 0.4 percent gain was its biggest in three weeks as Credit Suisse Group AG boosted European banks and Japanese shares rose. Nickel led a rebound in a Bloomberg measure of raw-materials prices as Japan’s largest supplier forecast a widening shortage. Philippine’s peso jumped the most in six weeks after Rodrigo Duterte called for “healing” after claiming victory in a presidential election and trading Europe signaled Brazilian markets would rebound as the move to oust President Dilma Rousseff appeared back on track. Optimism was dented by the latest industrial output print in Germany which declined more than expected in March while France’s unexpectedly fell highlighted the uneven nature of the recovery.

Cited by Bloomberg, Michael Hewson, a London-based market analyst at CMC Markets said that”people are slightly less risk averse now than they were end of April. Credit Suisse earnings weren’t great, but they were better than the worst of expectations. Still, the optimism is a little premature. Economic data hasn’t been very convincing.” So not great, but better than the worst expectations, and the result is a 1.5% jump in Europe and a 0.6% bounce in US futures. As a reminder, on Monday morning Goldman cuts its Stoxx 600 and Eurostoxx 50 forecast. Now we know why.

Some more details: the Stoxx Europe 600 Index advanced 1.3 percent as of 10:31 a.m. London time, with all of its industry groups rising. Lenders led the gains. Greece’s ASE Index rose 2.7 percent for the biggest rally among western-European markets. S&P 500 futures added 0.6 percent after the gauge closed little changed on Monday. Credit Suisse rallied 4.8 percent after posting a smaller loss than analysts estimated. Pandora A/S jumped 9.8 percent after the maker of charm bracelets reported better-than-projected results and raised its full-year forecast.

Market Wrap

• S&P 500 futures up 0.6% to 2066.5
• Stoxx 600 up 1.3% to 337.5
• Eurostoxx 50 +1.5%
• FTSE 100 +0.8%
• CAC 40 +1%
• DAX +1.1%
• IBEX +1.9%
• FTSEMIB +2%
• MSCI Asia Pacific up 0.7% to 127.4
• Nikkei 225 up 2.2%
• Hang Seng up 0.4%
• Kospi up 0.7%
• Shanghai Composite up 0%
• ASX up 0.4%
• Sensex up 0.3%
• Euro up 0.01% to $1.1384
• Italian 10Yr yield down 4bps to 1.42%
• Spanish 10Yr yield down 3bps to 1.56%
• US 10Yr yield up 2bps to 1.77%
• German 10Yr yield up 0bps to 0.13%
• Gold spot up 0.2% to $1265.9/oz

Global Top News

• Republican Senators Nowhere Near Uniting Over Trump as Nominee: some hope to meet with party nominee and urge new approach
• Duterte Claims Big Philippine Win Amid Doubts on Economic Smarts: vice presidential vote count remains too close to call
• Credit Suisse Posts Loss as Thiam Signals Cost-Cutting Progress: says ‘subdued’ market conditions may persist for a while
• Brexit Backers Close Gap on ‘Remain’ in BCC Poll of Businesses: support for Leaving EU up to 37% from 30%
• Osborne Says Pent-Up Investment to Boom If U.K. Stays in EU: says delayed decisions will go ahead if Brexit rejected
• Several People Injured in Knife Attack in Grafing Near Munich: 4 to 5 people were injured, one of them seriously
• EnCap Said to Seek $1.5 Billion for ‘Stack’ Oil Explorer PayRock: according to people with knowledge of the matter
• Emirates Profit Rises 50% on Fuel Windfall, Long-Haul Routes: hedging policy reaps full benefit of declining oil price
• Pop. Emilia Weighs Bid for All 4 of Italy’s Rescued Banks: MF: MF report doesn’t cite anyone
• LendingClub Founder Goes From Wall Street Darling to Unemployed: Renaud Laplanche resigns after allegations tied to loan sales

Looking at regional markets, Asian stocks traded mostly higher after encouraging Chinese inflation figures supported a turnaround in sentiment. Nikkei 225 (+2.2%) outperformed as JPY weakness bolstered exporter sentiment, while ASX 200 (+0.4%) rebounded off its worst levels as strength in financials offset commodity weakness in which WTI crude futures declined below USD 44/bbl and iron ore dropped around 6%. Shanghai Comp (flat) recovered from opening losses after the latest China data release inspired an improvement in sentiment. Finally, 10yr JGBs were mildly lower as firm gains in Japanese stocks dampened demand for safe-haven assets while today’s 10yr auction also saw a decline in the b/c from prior.

Top Asian News

• China Said to Consider Curbs on Backdoor Listing Valuations: CSRC weighs deal quota for overseas-listed Chinese cos.
• Hedge Funds Bullish on the Philippines as Duterte Wins Election: Civetta, F&H say they are encouraged by nation’s fundamentals
• China April Retail Auto Sales Rise 6.4% on Year, PCA Says: China’s retail auto sales in April rose to 1.72m units
• Mitsubishi Motors Pain Spreads With $3 Billion Exposure Risk: Trading co. Mitsubishi discloses potential impact of fraud
• SoftBank Profit Misses Estimates on Continued Losses at Sprint: Reports net income of 474.2b yen for fiscal year ended March 2016 vs 576.5b yen est.
• Japan’s Top Trading Houses Post First Net Losses as Prices Slump: Mitsubishi, Mitsui post combined losses of 232.8b yen
• 1MDB Default Deters Funds as Malaysia Can’t Put Scandal to Bed: Political situation still one of “biggest hurdles,” PineBridge says

European equities trade higher this morning, benefiting from the upside seen in Asia, combined with some notable positive earnings pre-market. The most notable earnings release pre-market came from Credit Suisse, with the Swiss Bank leading the way this morning, trading higher by over 5% after announcing a smaller than expected loss. The strength in equities has contributed to some of the downside in fixed income markets, with Bunds trading lower today and slipping back below the 164.00 level. Bunds have also been impacted this morning by the auction calendar, with a number of countries coming to market today including the Netherlands, Austria, UK and Germany. Elsewhere, as mentioned yesterday EUR denominated corporate bond sales have picked up this week as companies look to take advantage of low interest rates after publishing their quarterly earnings.

Top European News

• Thyssenkrupp Cuts FY Forecast on Steel Price; Beats 2Q Estimates: now sees FY adj. Ebit of at least EU1.4b, compared w/ previous guidance of EU1.6b-EU1.9b
• Abertis Reaches Accord to Buy 51.4% of A4 Holding for EU594M: A4 Holding main assets are A4 Brescia-Padova, A31 highways in Italy
• ING Profit Falls on Regulatory Costs, Loss at Markets Unit: regulatory losses jumped on levies, deposit insurance
• Adecco CEO Says U.K. Finance Hiring Sputters on Brexit Vote: Dehaze tells Bloomberg TV France is slowly recovering
• Munich Re Revises Annual Profit Target on Ergo, Investments: sets new profit target of EU2.3b vs previous target of EU2.3b-EU2.8b
• Nokia Revenue Misses Estimates Amid Waning Carrier Spending: CEO Suri seeking growth after Alcatel-Lucent acquisition
• Nordea CEO Says Headcount Must Fall to Meet Cost-Cut Goals: CEO says “low 40s” should be cost-to-income goal for Nordea
• EasyJet Posts Loss as Terror Clips Demand, Weighs on Fares: over-capacity hurting European carriers on short-haul routes
• Ditecsa Prepares Offer for Abengoa Unit, Expansion Reports: unit has 1,500 staff, revenue of ~EU400m

In FX, The yen slid 0.9 percent to 109.25 per dollar, adding to Monday’s loss of 1.1 percent. It declined versus all of its 16 major counterparts, except the South African rand. Bloomberg Dollar Spot Index fell 0.1 percent, after a five-day winning streak that marked its strongest run of gains in almost a year. The Philippine peso strengthened 0.8 percent as Duterte, the tough-talking mayor of Davao City, sought to calm markets and win over Filipinos and investors watching closely how he will manage the economy.  there has been plenty of data releases overnight but none which majorly influenced FX, or indeed any of the key markets. Malaysia’s ringgit slumped to a seven-week low and Russia’s ruble weakened as trading resumed following a slide in oil on Monday. South Korea’s won fell to the lowest in almost eight weeks.

German trade data showing an improvement in the surplus, while the equivalent UK stats revealed a tighter, but still wide deficit. French industrial and manufacturing production was notably weak, but for the EUR, it was another tight trading session against the USD. However, we did see the greenback giving back some of its recent gains vs the CAD, more modestly so against GBP, but vs the JPY, the positive sentiment in equities saw the lead spot rate tipping 109.00 , with the prospect for a move on towards 110.00 now very much on the cards. Some moderation also seen in AUD/USD, with dealers reporting strong bidding interest at .7300. The recovery has been slow, but in line with the risk on tide. Little on the US data slate, so focus on Wall Street on the JPY pairings, with CAD/JPY in focus given the underlying spot moves seen this morning — up over 1.5 JPY from yesterday’s lows.

In commodities, WTI and Brent have been pushing higher this morning with WTI heading toward the USD 44.00/bbl level. Gold has seen a slight reprieve from yesterday’s sell off up marginally 0.15% as the dollar index slows down. Silver is also trading in positive territory up 0.44%.Meanwhile in base metals copper and iron ore were mixed with the red metal edging a mild recovery while Singapore iron ore futures declined below USD 50/mt for the first time since March.

On today’s US calendar the main release of note is the March wholesale inventories and trade sales report. As well as that, we’ll get the NFIB small business optimism survey reading and March JOLTS job openings data. Fedspeak wise it is the turn of Dudley who is due to speak this morning in Zurich (at 8.15pm BST) on the international monetary system.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade higher across the board as a pick-up in risk sentiment continues to guide price action
• This sentiment has filtered through to FX markets with USD/JPY reclaiming 109.00 to the upside
• Looking ahead, highlights include US JOLTS and API Crude Oil Inventories

US Economic Calendar

• 6am: NFIB Small Business Optimism Apr 93.6, est. 93.0 (prior 92.6)
• 8:55am: Redbook weekly sales
• 10am: Wholesale Inventories, m/m, Mar, est. 0.1% (prior -0.5%)
• 4:30pm: API weekly oil inventories

DB’s Jim Reid concludes the overnight wrap

In terms of markets yesterday, caution was the name of the game as a steep selloff across the commodity complex kept investors sidelined. The S&P 500 did manage to close out with a modest +0.08% gain with performance for European markets slightly better (Stoxx 600 +0.47%). Credit markets were a smidgen tighter on both sides of the pond meanwhile. It was the moves for commodity markets which caught the eye though. Oil gets most of the attention and yesterday we saw WTI close back down below $44/bbl after falling -2.73%. However it was moves for metal markets which caught our eye though. Aluminium (-2.32%), Copper (-2.58%), Zinc (-2.81%), Nickel (-5.07%) and Iron Ore (-5.66%) were hammered and even Gold tumbled nearly 2% during yesterday’s session. We’ll touch on the moves in more detail below, along with what were some interesting developments in Greece and Brazil.

Before we do though, it’s straight to China where we’ve got some important inflation numbers to digest. China has reported CPI of +2.3% yoy in April which is both in line with March and relative to expectations. Food prices are again driving the number and were up +7.4% yoy with non-food prices currently +1.1% yoy. Meanwhile, PPI increased by nine-tenths last month and more than expected to -3.4% yoy (vs. -3.7%). That is actually the highest reading since December 2014 and further evidence prices at the factory gate may have bottomed out.

Bourses in China have been fairly muted in their reaction with the Shanghai Comp and CSI 300 +0.35% and +0.19% respectively. Elsewhere it’s been a broadly better day for Asian markets however. The Nikkei is +2.07% and benefiting from further weakening in the Yen, while the ASX (+0.26%) and Kospi (+0.47%) are also up. The Hang Seng (-0.05%) is the notable underperformer.

Staying with China, shortly after we went to print yesterday, an article from China’s People’s Daily was released which provided some important signals that China’s macroeconomic policy stance may turn from aggressive easing to a more neutral position soon in the eyes of our China economists. They note that the article indicates that the government is generally satisfied with the economic performance so far this year. It recognizes that structural challenges facing the economy will take time to resolve, and economic growth in the coming years will likely take an L-shaped path, rather than a V- or U-shaped one. The article also goes onto to say that the policy maker points out that adding leverage will not be effective in stimulating the economy at the current stage, and higher leverage could heighten systematic risks. With some focus also on the danger of indecisiveness when facing policy dilemmas, the context of the statement is a clear signal to our colleagues that the focus of the government will likely shift from promoting and stabilizing growth to control and the reduction of systematic risks in coming months. This leads

them to believe that the aggressive policy easing seen in the past few months may come to an end soon.
This to some extent then helps explain that broadly poor day for commodity markets yesterday. The move for Oil was more reflective of some changing weather patterns in and around the Alberta region which is fuelling hopes that the wildfires may be starting to come under control. However the China story probably had a bigger impact for metals yesterday and it now means that Aluminium, Copper and Nickel are down anywhere from 7-9% in May already. Iron ore is amazingly down 17% this month and has plummeted over $15/tn from the April highs too. Steel rebar futures were also limit down yesterday and there’s still a lot of concern in the market about the speculative trading on Chinese commodity exchanges. A Bloomberg article caught our eye yesterday noting some of the eye-watering numbers concerning this. The daily average market turnover on bourses in Dalian, Zhengzhou and Shanghai is said to have increased from about $78bn in February to a peak of $261bn on April 22nd which in contrast compares to peak turnover on the Nasdaq in early 2000 of $150bn. The same article also suggests that over 40% of volume in rebar futures in April came in the night session and once people returned from their day jobs, while the average holding period for a contract is said to be less than 3 hours. Recent measures by bourses to curb speculative trading is helping to keep a lid on turnover in the last couple of weeks and has resulted in metals prices declining from recent highs, but what started with trading in Chinese equity markets some 12 months ago and has now spread to commodity markets is a strong illustration of how quickly bubbles can form when there’s large amounts of leverage and huge amounts of credit in an economy.

Another one of the BRIC economies namely Brazil was also the focus of some attention yesterday too. It was a confusing day for the country however as mid-way through yesterday afternoon the acting head of the Lower House of Congress announced that he was to call for a new vote on the impeachment of President Rousseff. This was supposedly on the back of the vote on April 17th containing procedural irregularities. However later on in the evening, Brazil’s Senate confirmed that the impeachment proceedings would still move ahead despite the call from the Lower House, and that voting by the Senate on whether to put Rousseff on trial could begin as soon as Wednesday. All the headlines sent Brazilian assets into a tailspin however. The Real had weakened by as much as nearly 4.6% at one stage (the most since September 2011) before paring the vast bulk of that move to close just 0.41% weaker on the day. Meanwhile the Ibovespa plummeted nearly -3.5% post the early headline, before also retracing much of that to finish the day with a -1.41% loss.

Closer to home, there were some positive developments in Greece to highlight. After talks had effectively been in a standstill over the last few months, yesterday the IMF, European finance ministers and the Greek government came to an agreement on a path forward which should be workable and so as a result allow Greece to receive the funding its needs for bond payments due in July. DB’s resident expert George Saravelos noted that it was a substantial back down from the IMF which allowed for the important step forward. The fund has accepted a softer version of the initial contingency package of fiscal measures, with the Greek side now agreeing to vote on a vague ‘spending break’ that only imposes temporary across the board spending cuts the year a fiscal target is missed. A similar softer package on debt measures has also been agreed upon including short, medium and long term debt measures. A number of underlying issues still remain unresolved but it’s a positive step forward nonetheless in resolving near term risks of another Greek crisis.

Moving on, there was a bit of Fedspeak for us to take note of yesterday. The Chicago Fed President Evans came across as slightly dovish in his tone, saying that he is in favour of the Fed being in a ‘wait and see mode’ for now and that while the fundamentals for US growth continue to be good, ‘uncertainty and risks remain’. Meanwhile, Minneapolis Fed President Kashkari sounded a similar tone in comments yesterday. The Fed official said that in his view that Fed’s current stance on monetary policy is ‘about right’ and that ‘to me, just looking at the raw data, it says we should be accommodative’. Elsewhere, the ECB’s Constancio reiterated that patience is needed to judge the effects of the recent ECB measures, while also reiterating that the Bank will continue to do what is necessary to achieve its inflation goal.

Just wrapping up yesterday, it was a particularly quiet day for data with the only release in the US being the April labour market conditions index reading which revealed a third consecutive monthly worsening in conditions. The index printed at -0.9pts for last month following a -2.1pts reading in March. Meanwhile in Europe there was good news to be had in the latest German factory orders data. Orders printed at +1.9% mom for March (vs. +0.6% expected) to be up +1.7% yoy now. Elsewhere the Sentix investor confidence reading printed at 6.2pts for May which is half a point higher relative to April.

Looking at today’s calendar, the main focus this morning in Europe will be the various industrial reports out of Germany, France and Italy for March. German trade data is also due to be released while later this morning we’ll receive the March trade data for the UK. Over in the US this afternoon the main release of note is the March wholesale inventories and trade sales report. As well as that, we’ll get the NFIB small business optimism survey reading and March JOLTS job openings data. Fedspeak wise it is the turn of Dudley who is due to speak this morning in Zurich (at 8.15pm BST) on the international monetary system.

via http://ift.tt/1qaWTWS Tyler Durden

 

 

Comex Gold Open Interest

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

 

 

 

 

In defending their long held short positions, the Comex Banks have now issued enough new contracts to drive total open interest back to levels not seen since 2011. Will they be successful in capping price or are they about to get a religious experience? We’re about to find out.

 

Let’s start with the basics so that we’re all on the same page….

 

The Bullion Banks act as de facto “market makers” on the Comex. In doing so, they have the ability to create new futures contracts for trading across the board. In a sense, there are three possible transactions:

 

• A Bank issues a new contract. A willing Spec buyer (long) takes one side and the Bank (short) takes the other. Net result = 1 new contract and total open interest increases by that one contract.
• A Bank issues a new contract. A willing Spec seller (short) takes one side and the Bank (long) takes the other. Net result = 1 new contract and total open interest increases by that one contract.
• A buyer and a seller meet ( the bid and ask/offer) and they exchange an existing contract at the current price. Net result = No change in total open interest as no new futures contract has been created.

 

On The Comex, where The Banks seek to manage and control the paper price, since time immemorial The Banks have been NET short and the Specs have been NET long the paper contracts. The degree to which The Banks are short and the Specs are long fluctuates daily and, once per week, the CFTC surveys all of the market participants to get their summary positions. This data is compiled and released every Friday as the “Commitment of Traders” report.

 

OK…so far so good?

 

Now here’s where the fraud begins. The Banks, acting in their capacity as “market makers”, have a virtually unlimited power to create from thin air as many Comex paper derivative contracts as they’d like. In doing so, The Banks take the risk of being short while the Specs, in taking the other side of the trade, take the risk of being long. The fraudulent game that The Banks play is in never being forced to deliver upon of their paper obligations. The Specs simply seek gold “exposure” so they buy the paper derivative contract and The Banks sell it to them. If prices go up, the Specs make fiat and The Banks lose fiat. If prices go down, The Banks make fiat and the Specs lose fiat.

 

Again, though, very little physical gold is ever delivered. Thus, the only price “discovered” is the price of the derivative itself, not the actual physical metal.

 

Having the unlimited ability to create new contract supply gives The Banks the nearly unlimited ability to control price, too. How? Think of it this way:

 

• You call up your broker at Merrill Lynch and tell him to buy you 200 shares of Coca-Cola. A market order is submitted and someone, somewhere sells their existing 200 shares of Coca-Cola to you. The supply of Coca-Cola shares is finite on any given day so price must find an equilibrium where buyers and sellers meet.

 

However, as we laid out at the beginning of this post, that’s NOT how it works on The Comex. Oh sure, most of the volume each day is an exchange of existing contracts. However, volume is also supplied by The Banks simply creating new contracts to sell to buyers. Go back to the bullet point above. How fair and legal would it be if your broker, instead of finding a seller of existing Coca-Cola shares, decided instead to simply create some new shares out of the blue and sell them to you? You’d have your long exposure to Coke and your broker would take the risk of being short Coke.

 

Not only would this be patently illegal and fraudulent, think of the impact this would have on the price of the Coca-Cola shares. Since willing sellers wouldn’t need to be found for new buyers, price wouldn’t need to rise in order to entice sellers to sell. Your broker would simply take the risk of being short Coca-Cola, all with the hope and the plan of seeing you eventually give up and sell your Coca-Cola shares back to them, likely at a lower price and at a profit for your broker.

 

And, again, this is EXACTLY how The Comex operates.

 

Without having to supply any additional physical gold or other collateral, The Banks simply create new gold derivative contracts whenever demand for contracts exceeds available supply. This has the obvious effect of dampening price moves as “price” isn’t forced to find a true equilibrium between buyers and sellers. And this has played out for all to see here in 2016.

 

We’ve written about this before, most recently two weeks ago: http://ift.tt/1SkM64d However, open interest has expanded so dramatically in the two weeks since, it seemed we had to write about this again today.

 

Again, what is happening here is an overt attempt to contain and control price. If the total volume of available open interest on the Comex was anchored or tethered to a fixed amount of collateral, then the supply of derivative contracts would be relatively stable like the daily supply of available Coca-Cola shares. Instead, The Banks simply create new supply nearly every day and, in doing so, restrict and manage the daily movements of “price”. It looks like this:

 

DATE	PRICE	TOTAL OPEN INTEREST	TOTAL “COMMERCIAL” GROSS SHORT POSITION
1/26/16	$1121	385,350	175,176 contracts or 545 metric tonnes of paper gold
2/16/16	$1209	428,912	259,784 contracts or 808 mts of paper gold
3/8/16	$1264	499,110	311,865 contracts or 971 mts of paper gold
4/12/16	$1261	504,523	353,968 contracts or 1,101 mts of paper gold
4/26/16	$1243	497,994	356,553 contracts or 1,109 mts of paper gold

 

And now here’s where it gets particularly egregious. Over the past week, the price of “gold” has risen by $49 to Tuesday’s close of $1292. While that’s still a significant move of nearly 4%, how much higher would the price of gold had risen if the total open interest, which has already been inflated by over 25% over the past 90 days, wasn’t allowed to rise farther still? And, as of yesterday (Tuesday) it looks like this:

 

5/3/16

$1292

565,774

410,000 contracts at a minimum or 1,275 mts of paper gold

 

I’m going to stop here to let that sink in for a while….

 

So, to control/manage price and to keep the rally contained at just $170 or 15% in the past 100 days, The Comex Banks have issued a whopping 180,424 new paper derivative contracts, growing the total Comex open interest by 47%! Not only that, but 180,424 new contracts is the paper equivalent of over 18,000,000 ounces of “gold”, created from whole cloth and sold to the Speculators, all without additional capital or physical collateral requirements.

 

As noted above, the GROSS short position of The Comex Banks has more than doubled from 545 metric tonnes to as much as 1,100 metric tonnes today. This means that if The Banks were ever forced to make good on these paper short obligations, they’d have to physically deliver more than the entire stated holdings of Switzerland! Additionally, the entire Comex vaulting system only purports to hold 7,300,000 ounces of gold. So when The Banks are short 41,000,000 ounces of gold, aren’t they fraudulently selling something that they don’t own? (And please don’t give me that line of garbage about producers hedging and selling forward. That scheme ended years ago.)

 

At the end of the day, you must understand the implications. The Banks are doing everything in their power to manage price…and why wouldn’t they?!? When you’re short 40,000,000 ounces of gold, every $10 move “costs” you $400,000,000. A $100 up move from here generates paper losses of $4,000,000,000 so they are fighting tooth-and-nail to keep that from happening by doubling down and putting “bad money after good” in the same way that a blackjack player thinks he will eventually win a hand and get all of his lost money back.

 

The Banks hope that eventually they can spark a Spec selloff. Once the Specs head for the exits, this Spec selling will be utilized by The Banks. They’ll take the other side of the trade and buy their shorts back. The Banks will then “retire” those contracts and total open interest will decline. The Banks will hope to engender enough Spec selling to allow them to cover (buy back) up to 100,000 of their ill-gotten shorts and drop total open interest back to the 450,000 level. The question is: Will they be successful? While this has been a foolproof business plan since 2013, it hasn’t worked thus far in 2016 as Spec fiat has continually flowed into the paper gold derivative market.

 

So watch price and open interest very closely in the days and weeks ahead. The increasingly-desperate Banks are apt to openly raid price in their efforts to spur some Spec selling. The upcoming jobs report of this Friday being an obvious starting point.

 

In the end, however, I’ll leave you with one, final thought. Now that the Chinese have pricing power in gold, they quite literally have the ability to completely screw and hammer the Comex and London Banks. They can raise the Shanghai Fix and enable the immediate arbitrage. They could use this tool to drain whatever gold is left and utterly crush every big, western Bank.

 

But the time is nigh. If The Banks successfully rig the price back down, squeeze out all the Spec longs and close back up 150,000 contracts of OI, The Chinese will miss their opportunity. So, will they take it? Maybe. Maybe not. Maybe they’re not yet ready. We’ll just have to wait and see.

 

Again, watch price and open interest very closely in the days ahead. It’s crunch time and things are going to get increasingly volatile. Prepare accordingly.

 

 

 

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

 

 

Comex Gold Open Interest

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

 

via http://ift.tt/24JxhmQ Sprott Money