Month: July 2016

Several years ago, we were the first to point out the true “elephant in the room”, namely Deutsche Bank’s $75 trillion in derivatives which as we said at the time was about 20 times bigger than Germany’s GDP, and 5 times bigger than the entire economic output of the Eurozone.”

This was largely ignored by the “experts” because why bring attention to something which is fundamentally a devastating break in the narrative that “Europe is fine” and the financial crisis is now contained.

Fast forward to today when Europe is once again not fine, only this time one can’t blame Europe’s problems on Greece (instead the same “experts” are trying to blame everything in Brexit), when in a surprising admission of reality, none other than Italy’s prime minister Matteo Renzi, “went there” and slammed Deutsche Bank as the true “derivative problem” facing Europe.

To be sure, Renzi has his own problems, chief among which is how to pass a banking bailout of his insolvent banks without implementing the Bail In mechanism unveiled in 2016 as the only permitted resolution mechanism. Alas, in his push to bail out rather than bail in Italian banks, Renzi has faced stiff resistance from the Germans, namely Angela Merkel and Wolfgang Schauble who have both strongly opined against this kind of backtracking.

So perhaps it is not surprising that when faced with stiff resistance from the Germans, Renzi decided to call a spade a spade when, as Reuters reports, he said that the difficulties facing Italian banks over their bad loans are miniscule by comparison with the problems some European banks face over their derivatives.

One look at the chart above and it should be clear just who he was referring to.

As Reuters adds, speaking at a joint news conference with Swedish Prime Minister Stefan Lofven, Renzi said other European banks had much bigger problems than their Italian counterparts.

“If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred,” Renzi said

So just like that the Mutually Assured Destruction doctrine is activated, because now that Deutsche Bank’s dirty laundry has been exposed for all to see, Renzi’s gambit is clear: if Merkel does not relent on bailing out Italian banks, the collapse of Italian banks will assure the failure of Deutsche Bank in kind. And since in a fallout scenario of that magnitude DB’s derivative would not net out, there will be no chance to save the German banking giant, bail out, in, or sideways.

And now the ball is in Germany’s court: to be sure, traders everywhere will be curious to see just how this diplomatic escalation in which the fingerpointing at insolvent banks is only just beginning concludes, and most of all, they will follow every word out of Merkel’s mouth to see if the Chancellor will relent and give in to what is the first tacit case of financial – and factual – blackmail.

Ironically, even the best possible outcome, namely another bailout of every insolvent European bank, will merely accelerate the same populist anger that catalyzed the Brexit-driven schism in the first place, and lead to even more anger at what will, inevitably, be yet another banker bailout until ultimately the war of words between the classes becomes all too literal.

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Submitted by Zainab Calcuttawala via OilPrice.com,

Russia is on track to set a new record in crude oil exports this year, and Iran is boosting exports to Europe, intensifying competition on the continent, which is a key market for both countries.

As Oilprice.com noted at the beginning of June, Russia has surprised analysts time over time by keeping oil production at near-record levels throughout the rock bottom of the oil bust.

Not only has Russia managed to keep output at high levels, it has actively increased its exports to China and has managed to maintain its market share in other key markets.

Russian Energy Ministry figures reveal a 4.9 percent increase in exports to 5.55 million barrels a day during the first half of 2016 when compared to the same period last year.

In June, the country’s output rose 1.14 percent from a year earlier, with total crude export figures on the rise during every month since summer 2014.

“If production remains steady, then it will likely be a record year for exports,” said Christopher Haines, head of oil and gas at BMI Research told Bloomberg. “This should mean competition is strong, especially with Iran sending more oil into southern Europe.”

Russia – also known as the world’s most prolific energy producer – said earlier this year that it would fund a spike in crude production after members of the Organization of Petroleum Exporting Countries (OPEC) failed to agree on a plan to reduce the existing glut in oil and gas markets.

Iran has also been increasing production as it aims to regain market share after international sanctions against it were lifted earlier this year.

The year 2012 saw Europe banning Iranian oil as a political reaction to the country’s secretive nuclear program. In the years that followed, Russian Urals crude, a blend similar to Iran’s formula, became a popular alternative.

Last year, the European Council on Foreign Relations released a report outlining new energy sources for Europe. The document called Russia an “unreliable partner” and suggested several Central European and Middle Eastern countries – including Iran and Iraq – as possible suppliers in the near future, albeit with logistical caveats.

“There are also infrastructural constraints, such as the geographical distribution of resources in Iran relative to its consumption, as well as the lack of production and export infrastructure,” it said. “Iran’s gas resources (for example, the South Pars field) are in the south. Therefore, substantial investment would be needed to bring gas to the northwest to tap into Europe’s Southern Gas Corridor.”

The European Union might be skeptical about increasing its crude supply from Russia, but China seems to be keen on receiving more Russian Crude. Russian oil exports to this part of the world have doubled year over year last April at the expense of Saudi Arabia and Iran.

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We in the alternative media reported over and over and over and over and over and over that all of the insiders knew that Iraq didn’t have weapons of mass destruction (WMDs).

Today’s Chilcot Report doesn’t add anything new.

Craig Murray – former British ambassador to Uzbekistan and Rector (i.e. president) of the University of Dundee – explains why:

Do not expect a full truth and a full accounting from the Chilcot panel of establishment trusties today. Remember who they are.

 

Sir John Chilcot

 

Member of the Butler Inquiry which whitewashed the fabrication of evidence of Iraqi WMD. The fact is that, beyond doubt, the FCO and SIS knew there were no Iraqi WMD. In the early 1990’s I had headed the FCO Section of the Embargo Surveillance Centre, tasked with monitoring and preventing Iraqi attempts at weapons procurement. In 2002 I was on a course for newly appointed Ambassadors alongside Bill Patey, who was Head of the FCO Department dealing with Iraq. Bill is a fellow Dundee University graduate and is one of the witnesses before the Iraq Inquiry this morning. I suggested to him that the stories we were spreading about Iraqi WMD could not be true. He laughed and said “Of course not Craig, it’s bollocks”. I had too many other conversations to mention over the next few months, with FCO colleagues who knew the WMD scare to be false.

 

Yet Chilcot was party to a Butler Inquiry conclusion that the Iraqi WMD scare was an “Honest mistake”. That a man involved on a notorious whitewash is assuring us that this will not be one, is bullshit.

 

Sir Roderick Lyne

 

A good friend and former jogging partner of Alastair Campbell.

 

Last time I actually spoke to him we were both Ambassadors and on a British frigate moored on the Neva in St Petersburg. Colleagues may have many words to describe Rod Lyne, some of them complimentary, but “open-minded” is not one of them.

 

If the Committee were to feel that the Iraq War was a war crime, then Rod Lyne would be accusing himself. As Ambassador to Moscow he was active in trying to mitigate Russian opposition to the War. He personally outlined to the Russian foreign minister the lies on Iraqi WMD. There was never the slightest private indication that Lyne had any misgivings about the war.

 

From Uzbekistan we always copied Moscow in on our reporting telegrams, for obvious reasons. Lyne responded to my telegrams protesting at the CIA’s use of intelligence from the Uzbek torture chambers, by requesting not to be sent such telegrams.

 

Sir Lawrence Freedman

 

Lawrence Freedman is the most appalling choice of all. The patron saint of “Justified” wars of aggression, and exponent of “Wars of Choice” and “Humanitarian Intervention”. He is 100% parti pris.

 

Here is part of his evidence to the House of Lords Select Committee on the Constitution on 18 January 2006:

The basic idea here is that our armed forces prepared for what we might call wars of necessity, that the country was under an existential threat so if you did not respond to that threat then in some very basic way our vital interests, our way of life, would be threatened, and when you are looking at certain such situations, these are great national occasions. The difficulty we are now facing with wars of choice is that these are discretionary and the government is weighing a number of factors against each other. I mentioned Sierra Leone but Rwanda passed us by, which many people would think was an occasion when it would have been worth getting involved. There was Sudan and a lot of things have been said about Darfur but not much has happened…

 

…Iraq was a very unusual situation where it was not an ongoing conflict. If we had waited things would not have been that much different in two or three months’ time and so, instead of responding either to aggression by somebody else, as with the Falklands, or to developing humanitarian distress, as in the Balkans, we decided that security considerations for the future demanded immediate action.”

Sir Martin Gilbert (died in course of Inquiry)

 

Very right wing historian whose biography of Churchill focussed on Gilbert’s relish for war and was otherwise dull. (Roy Jenkins’ Churchill biography is infinitely better). Gilbert was not only rabidly pro-Iraq War, he actually saw Blair as Churchill.

Although it can easily be argued that George W Bush and Tony Blair face a far lesser challenge than Roosevelt and Churchill did – that the war on terror is not a third world war – they may well, with the passage of time and the opening of the archives, join the ranks of Roosevelt and Churchill. Their societies are too divided today to deliver a calm judgment, and many of their achievements may be in the future: when Iraq has a stable democracy, with al-Qaeda neutralised, and when Israel and the Palestinian Authority are independent democracies, living side by side in constructive economic cooperation.

Baroness Prashar

 

A governor of the FCO institution the Ditchley Foundation – of which the Director is Sir Jeremy Greenstock, the UK Ambassador to the UN who presented the lies about Iraqi WMD and was intimately involved in the lead in to war. So very much another cosy foreign policy insider.

 

So, in short, the committee – all hand-picked by Gordon Brown – could not have been better picked to ensure a whitewash.

 

Over 50% of the British population were against the Iraq War, including for example many scores of distinguished ex-Ambassadors, many military men and many academics. Yet Brown chose nobody on the Inquiry who had been against the Iraq War, while three out of five were active and open supporters of the war.

 

Do not expect to see this truth reflected in any of the mainstream media coverage.

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Over the past five month, we have been dumbounded by the relentless selling by “smart money” clients of Bank of America, who until a week ago, had sold stocks for an unprecedented 21 out of 22 consecutive weeks. As BofA reported last week, “BofAML clients sold US stocks for the third consecutive week (and in 21 of the past 22 weeks), led by institutional clients’ sales.”

In BofA’s latest report on client activity, we find that in the best week for stocks in years, even the smart money joined the buying scramble:

“last week, during which the S&P 500 rallied 3.2% (its best weekly return year-to-date), BofAML clients were net buyers of US stocks in the amount of $824mn, following three weeks of net sales.… clients were buyers of the post-Brexit dip after selling stocks the majority of weeks since January. Net buying was led by hedge funds, who have now bought stocks for four consecutive weeks, while private clients were net buyers for the first week since February. Institutional clients were net sellers, as they have been for the majority of the selling streak this year. Small, mid and large caps all saw inflows. 

Putting the recent move in perspective, however, shows just how vast the recent derisking has been:

However, what caught our attention was snot activity by client, but rather by corporations: as BofA reports, “buybacks by corporate clients accelerated for the second week to their highest level since mid-March, though buybacks for the full 2Q were their weakest in six quarters (and the weakest of any 2Q since 2011).”

Still, putting it in context, this is who bought, and who sold, stocks in the second quarter. The buying “outlier” sticks out like a sore, debt-funded, thumb.

Confused? It’s simple: the slow motion LBO of the market by the market continues, as more debt is issued fund stock buybacks and push stocks briefly, and artificially, higher, even as corporations lever themselves up to all time highs now that the even the merest risk of rising rates has been buried for years to come.

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Yesterday we got the first sure sign that Italy’s banking system is near collapse when in a flashback to the Greek financial crisis days of 2010-2011, Italy’s bank regulator banned short selling in Monte Paschi shares for the day. Today, we can conclude that the Italian bank crisis is set to get far worse, because moments ago, Italy’s banking regulator just announced that what was supposed to be just a temporary measure has been extended for the next three months and shorting in BMPS shares is now prohibited until October 5.

Consob bans for three months net short positions on Banca MPS shares – The prohibition shall apply from tomorrow 7 July 2016 until 5 October 2016 – It affects derivatives and market makers as well

 

Consob, with Resolution 19655 of 6 July 2016, decided to temporary prohibit net short positions on Banca Monte dei Paschi di Sienashares – BMPS (ISIN code IT0005092165).

 

The ban will be enforce for the next three months, from tomorrow 7 July 2016 (start of day) until 5 October 2016 (end of day).

 

The prohibition on net short positions strengthens and extends the ban to short selling adopted yesterday, as the new prohibition bans both short selling on BMPS shares and short positions taken though single stock derivatives on BMPS shares.

 

The ban applies to all transactions, irrespective of where they have been carried out (on an Italian or foreign trading venue or over-the-counter) and it affects market makers as well.

 

The ban does not apply to transactions in index-related instruments (e.g. FTSEMIB), taking into account the marginal weight of BMPS shares in financial indices.

 

The prohibition has been adopted pursuant to Article 20 of the EU Regulation on short selling, considering the negative price change recorded by the share in the last days and taking into account the positive opinion issued by ESMA on 6 July 2016.

Good luck with that:

While at it, Italy should probably also ban buying of CDS… just a thought.

And if that wasn’t enough, Italy’s prime minister, Matteo Renzi, took a page right out of the central banker playbook and in a desperate attempt to boost confidence, has gone the “opposite” route, by saying that Italian savers have no problems regarding banks:

• ITALY’S RENZI: ITALIAN SAVERS HAVE NO PROBLEMS REGARDING BANKS

The implication being that contrary to bank insolvency rumors, no bank run is coming any time soon.

He could have stopped there, but instead decided to make it far worse by comparing Italy with other just as insolvent European nations:

• ITALY PM RENZI SAYS PROBLEMS AT OTHER EUROPEAN BANKS MUCH MORE SERIOUS THAN ITALY’S NPLS 

With that statement he will hardly win any empathy points from his fellow Europeans and certainly not from Angela Merkel, whose very own Deutsche Bank remains in dire straits.

The good news is that at least for the time being, the headline chasing algos have assumed this means either a bailout is coming or that things are perhaps getting better, and sent USDJPY to the day’s highs, which as everyone knows by now, means the S&P 500 promptly follows.

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Now that not just 3 (as of last night) but 5 UK property funds, with Henderson and Columbia Threadneedle became the latest two entrants to this exclusive club of clueless asset managers who have no idea how to factor in liquidity mismatch during market stress, have “frozen” their assets and gated investors from accessing assets, concerned traders are wondering how far the downstream effects of this domino chain will go. Luckily, overnight analysts at Morgan Stanley, JPM and SocGen did the math and found what they believe is (are) the most impacted bank(s) from UK’s commercial real estate troubles.

Here is the verdict, first from SocGen:

• RBS exposure to CRE is GBP26b, most of U.K.’s major banks, and equivalent to 63% of tangible equity
• Lloyds 2nd most exposed at 46% of tangible equity, Santander 3rd at 24%, Barclays 4th at 23% and HSBC 5th at 17%
• U.K. banks debt financing of CRE is down 34% since 2008 to GBP168b, according to De Montfort University
• Says watch out for other banks, challenger banks have relatively high proportion of more highly leveraged CREs on books
• Lloyds is most preferred, will be able to absorb Brexit bumps; RBS is least preferred

Next, from JPM:

• RBS, Lloyds and Bank of Ireland are more exposed to risks from U.K. commercial property prices than Barclays, HSBC and Standard Chartered
• RBS, Lloyds TNAV sensitivity in stress scenario may be up to 5.5% with CT1 sensitivity at 90bps-100bps
• Major U.K. banks’ exposure is GBP69b
• Is “cautious” on U.K. domestic-exposed banks
• U.K. lenders exposure is GBP86b down from GBP150b in 2011
• Flags BOE remarks that U.K. challenger banks have high proportion of more highly leveraged commercial real estate loans
• Says BOE research shows 10% drop in U.K. CRE prices leads to 1% drop in economy-wide investment

Finally, Morgan Stanley is outright negative on everything:

• Morgan Stanley analysts see potential for further stress with GBP25b-40b of AUM in property funds, or 2-5% of total U.K. mutual fund assets, according to note.
• Outflows are always high when REIT discounts are wide, whilst Henderson, Aberdeen and Schroders have some exposure among asset managers
• Number of redemption requests normally correlated with discount to NAV for listed property stocks, currently close to historical wides
• Fund suspensions designed as circuit-breakers, but sentiment generated can still drive negative feedback loop similar to that seen during last financial crisis
• Liquidity mismatch the main concern:
• Liquidity of investment funds is a significant concern for global regulators, particularly where illiquid underlying investments are being sold in daily dealing fund structures to retail investors

* * *

The conclusion: Italy has Monte Paschi, Germany has Deutsche Bank, and the UK is now saddled with RBS.

At this rate, all three will soon require taxpayer bailouts. Just remember: it’s all Brexit’s fault that 7 years after the financial crisis, not a single of Europe’s most systemically important banks were actually “fixed.”

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By EconMatters

Focus on Bond Prices, and forget about Bond Yields, nobody is trading or investing in the Bond Market since Helicopter Money by Central Banks hit financial markets in 2008 because they are searching for Yield. It is all about Price Appreciation at the Zero Bound of Monetary Policy.

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