Month: September 2016

Just hours after delivering subdued comments and striking a conciliatory tone alongside Mexico’s president, Donald Trump returned to form in his fiery immigration speech (full text here) in Phoenix last night, which laid out the presidential candidate’s immigration plan which definitively ruled out legal status for undocumented immigrants and once again promised to build a wall on the southern border of the U.S., saying he would force Mexico to cover the cost. “We will build a great wall,” Trump said to loud cheers “And Mexico will pay for the wall. One hundred percent. They don’t know it yet, but they’re going to pay for it.”

Trump lays out immigration plan. No. 1: “We will build a great wall along the southern border…and Mexico will pay” https://t.co/In8NY0SLwz

— ABC News (@ABC) September 1, 2016

The rally was at a convention center in downtown Phoenix. Trump’s warm-up speakers including Arizona Governor Doug Ducey; Joe Arpaio, the sheriff of an Arizona county who has become a symbol of the anti-illegal-immigration movement; former New York City Mayor Rudy Giuliani; and Trump’s running mate, Mike Pence. At various points in the speech, the crowd broke into chants of “build the wall!”

The speech, which presented crime prevention as the underlying rationale for his immigration policies, came just hours after Trump traveled to Mexico at the invitation of President Enrique Pena Nieto. The two men met privately and discussed a range of topics that included illegal immigration and the possibility of amending the North American Free Trade Agreement. They came away with markedly different interpretations on the question of Mexico’s willingness to pay for a wall.

“As with any law enforcement activity, we will set priorities. But unlike this administration, no one will be immune or exempt from enforcement,” Trump said during the more than hour-long speech. “Anyone who has entered the United States illegally is subject to deportation, that is what it means to have laws and to have a country. Otherwise we don’t have a country.”

But Trump made it clear that border security and removing illegal immigrants who are a threat to the country top his list of goals ahead of removing otherwise law-abiding people; he had previously called for the immediate deportation of the roughly 11 million people living in the country illegally.  “Under my administration, anyone who illegally crosses the border will be detained until they are returned,” Trump said, adding that, if he is elected president, the U.S. would “end catch-and-release” and beef up the number of police and immigration officers dedicated to handling undocumented workers.

Trump also promised to “immediately terminate” President Barack Obama’s executive actions on immigration, including a 2012 program that currently shields some 750,000 young people from deportation, Bloomberg noted.

“On day one, we will begin working on an impenetrable, physical, tall, powerful, beautiful southern border wall,” he said, including plans for above- and below-ground sensor technology and increased border patrol officers.

He said a “deportation task force” and triple the number of Immigration and Customs Enforcement (ICE) officers would focus on swiftly removing illegal immigrants who have committed violent crimes or who pose security threats. And Trump said those overstaying visas, recent arrivals and people dependent on welfare would also be on the top of the list for deportation.

To stem the flood of illegal immigration, Trump pledged to enact new “ideological certification to ensure those admitting to our country share our values and love our people.” Trump also promised to improve the nation’s monitoring system for those who overstay their visas, and to crack down on 23 countries that he said currently don’t take back citizens whom the U.S. deports.

If the U.S. elects him president in November and follows his prescription, Trump said, “crime will go down, border crossings will plummet, gangs will disappear, and welfare use will decrease.”

* * *

The 10-point plan emphasized conservative immigration staples like ending the “catch-and-release” of undocumented immigrants, blocking federal funds for sanctuary cities, strengthening E-Verify, and deporting immigrants back to their country of origin instead of just putting them over the border.  Recent rhetoric from Trump and his staff, especially surrounding mass deportations, prompted questions as to whether the campaign was planning a break from the hard-line stance he rode to victory in the primaries.  Wednesday’s speech shows that the Trump team is confident in the message he has been delivering since his campaign launched.

The speech emphasized a commitment to strict enforcement of immigration laws, bashing President Obama and Hillary Clinton as promoting lawless and “deadly non-enforcement policies that allow thousands of criminal aliens to freely roam our streets.”

“We will break the cycle of amnesty and illegal immigration. There will be no amnesty. Our message to the world will be this — you cannot obtain legal status or become a citizen of the United States by illegally entering our country. Can’t do it.” But he left the door open to reevaluating the approach to illegal immigrants already in America once his goals have been accomplished.  

“In several years, when we have accomplished all of our deportation goals and truly ended illegal immigration for good, including the construction of a great wall,” he said, “then, and only then, will we be in a position to consider the appropriate disposition of those individuals who remain.”

Wednesday’s speech shows that the Trump team is confident in the message he has been delivering since his campaign launched.   The speech emphasized a commitment to strict enforcement of immigration laws, bashing President Obama and Hillary Clinton as promoting lawless and “deadly non-enforcement policies that allow thousands of criminal aliens to freely roam our streets.”

“Clinton’s plan would trigger a constitutional crisis unlike almost anything we have ever seen before,” he said, accusing her of looking to legislate from the Oval Office.  “In effect, she would be abolishing the lawmaking powers of Congress in order to write her own laws from the Oval Office — and you see what bad judgment she has.”

He swore off any type of legal status for those already in America illegally.  “For those here illegally today seeking legal status, they will have one route and one route only — to return home and apply for reentry like everyone else under the rules of the new immigration system,” he said.

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Trump also reiterated his opposition to the admittance of Syrian refugees and his plan to halt immigration from countries where proper screening can’t be conducted. He said the “extreme vetting” of immigrants would include questioning people about where they stand on radical Islam, honor killings and respect for gay people, women and minorities. “It’s our right as a sovereign nation to choose immigrants that we think are the likeliest to thrive and flourish and love us,” he said, pointing to the challenges of assimilation.

Trump’s direction became clear even before the speech started, as the speakers ahead of the rally embraced the tough immigration approach that ran through the primary. Sheriff Joe Arpaio and mothers whose children were killed by undocumented immigrants warmed the crowd up for Trump, along with Sen. Jeff Sessions (R-Ala.), former New York City Mayor Rudy Giuliani and Trump’s running mate Mike Pence. Before beginning to lay out his plan, Trump detailed several gruesome murders of Americans by illegal immigrants.

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Ultimately, little of what Trump proposed was new, and the speech hewed to the immigration blueprint that he published on his website in August 2015. It came after a week in which he seemed to shift his position on using a “deportation force” to remove approximately 11 million undocumented immigrants from the country. On one point, however, Trump added more clarity, pledging to deport “all illegal immigrants who are arrested for any crime whatsoever,” saying they would “be placed into immediate removal proceedings.”

The fiery speech dashed the hopes of moderate Republican operatives who wanted Trump to adopt gentler and more measured rhetoric. “There was never any pivot,” said Doug Heye, a former Republican National Committee spokesman who has been critical of Trump. “The media has been using that term for a year and it never happened. Even the Trump campaign stopped using it months ago.”

Hillary Clinton’s campaign called it Trump’s “darkest speech yet.”

Meanwhile, Trump oriented his speech around his motto of “America first,” charging that Clinton and others are putting the needs of illegal immigrants before the needs of citizens.

“The media and my opponent discuss one thing, and only this one thing: the needs of people living here illegally. The truth is, the central issue is not the needs of the 11 million illegal immigrants – or however many there may be. That has never been the central issue. It will never be the central issue,” Trump said. “To all the politicians, donors and special interests, hear these words from me today: there is only one core issue in the immigration debate and it is this: the well-being of the American people. Nothing even comes a close second.”

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After a muted end to August, September started off on the strong foot overnight following a surprising beat in China’s official manufacturing PMI print, which rose above 50 to the highest level in almost two years. That, together with a record rebound in the UK PMI, bolstered investor confidence, fueling gains in stocks and industrial metals. The dollar advanced against most of its peers while bonds retreated before Friday’s payrolls report.

In Asia, Chinese shares in Hong Kong climbed to a two-week high after China’s official factory gauge unexpectedly rose to the highest since 2014 even as China’s head state planner Xu Shaoshi said that China is facing “great difficulties remain in meeting goals for investment and trade,” with the economy expected to be under continued pressure in the second half of the year. Also troubling was the latest Uwin real estate news according to which the Tier 1 city bubble shows no signs of abating after Shanghai’s new home sales rose to 30.1% to 1.71m square meters in August, with the average new home price rising 12.6% in August from the previous month to 42,204 yuan per square meter, suggesting China will have to crack down further on what even it admits is a housing bubble.  For now, however, markets focused on the positive as miners rebounded in Europe and S&P 500 futures signaled a two-day drop in U.S. stocks will end. Lead, tin and zinc reached the highest levels in more than a year.

“The PMI data were positive for China’s risky assets,” Tim Condon, head of Asian research at ING in Singapore, told Bloomberg. Even so, investors are “cautious about a September rate hike and tomorrow’s payrolls report could push the Fed to follow through.”

Even more impressive than China’s “economic rebound” was the surge in the UK, where instead of a post-Brexit collapse, U.K. factory activity soared by a record in August, and reached a 10-month high as the weaker pound helped manufacturing bounce back from a post-Brexit slump. IHS Markit said its Purchasing Managers Index, which dropped below the key 50 level in July, jumped by a record to 53.3. That was far better than economists had forecast; the median estimate in a Bloomberg survey was for a reading of 49.

New orders rose, with sterling’s recent drop “by far the main factor” for the improvement in exports, Markit said. “Companies reported that work that had been postponed during July had now been restarted, as manufacturers and their clients started to regain a sense of returning to business as usual,” said Rob Dobson, senior economist at Markit. As a result, the pound rallied more than 0.8% after the blistern PMI data, in Britain bounced
back from a post-Brexit slump, while the dollar strengthened for a
seventh day against the yen in the longest winning streak since March.

As Bloomberg summarizes the overnight data deluge, “signs that China’s economic slowdown is abating may bolster demand for riskier assets, while a rebound in U.K. factory activity helped ease concern that Britain’s vote to leave European Union will strangle growth. U.S. payrolls data due Friday may provide clues as to whether that policy tightening will come at this month’s Federal Reserve meeting after a private jobs report Wednesday showed steady growth in the labor market.

In Europe, the Stoxx Europe 600 Index added 0.6 percent in early trading, pushing European stocks to near 3-week high, with trading volumes 27 percent higher than the 30-day average. The final European August manufacturing PMI data of 51.7, which was fractionally weaker than the flash print of 51.8, was released overnight, broken down as follows:

• U.K. Aug. Manufacturing PMI 53.3 vs 48.3 in July; Est. 49
• Italy Aug. Manufacturing PMI 49.8 vs 51.2 in July; Est. 51.2
• Norway August Manufacturing PMI Falls to 50.8
• Denmark Aug. Manufacturing PMI Falls to 53.3 vs 62 in July
• Swedish Manufacturing PMI Falls to 50.7 in Aug. vs Est. 54.0
• Spain Aug. Manufacturing PMI 51 vs 51 in July; Est. 50.9
• Czech Rep. Aug. PMI 50.1 vs 49.3 in July; Est. 50.9
• Swiss Aug. Manufacturing PMI Rises to 51.0; Est. 50.6
• France Aug. Manufacturing PMI 48.3 vs Flash Reading 48.5
• Greece Aug. Manufacturing PMI 50.4 vs 48.7 in July

Among the notable movers, european bank stocks headed for their best 3-days gain in almost a month. Metals stocks were likewise bid with Glencore Plc and Rio Tinto Group rising at least 1.3 percent, while Banco Santander and BNP Paribas climbed more than 2 percent. Pernod Ricard SA advanced 2.3 percent after forecasting profit growth for the current fiscal year. Elekta AB gained 2.9 percent after the Swedish maker of medical devices posted better-than-expected quarterly earnings.

S&P 500 Index futures rose 0.2%, indicating equities will bounce back from Wednesday 0.2 percent decline. Salesforce.com Inc. slid 6.8 percent in early New York trading after forecasting fiscal third-quarter revenue that may fall short of some analysts’ estimates.

Crude oil erased earlier gains to trade little changed around $44.60 a barrel as a strengthening dollar provided hampered demand a day after West Texas Intermediate tumbled 3.6% on Wednesday when the DOE reported that U.S. inventories increased by 2.28 million barrels last week, keeping supplies at the highest seasonal level in almost three decades. An oversupply paired with soft demand battered European gas contracts, with gas for immediate delivery in the U.K. plunging as much as 18 percent to the lowest price in about seven years. With the OPEC informal talks later this month, which catalyzed another record squeeze in oil, it now appears a virtual certainty that nothing of note will take place, especially after Russia said overnight an oil output freeze is not needed with price around $50, adding it would consider resuming discussions if prices fall. The only near-term question that can affect oil pricing is what the impact of Hermine will be on the East Coast supply glut.

* * *

Market Snapshot

• S&P 500 futures up 0.2% to 2175
• Stoxx 600 up 0.9% to 347
• FTSE 100 up 0.2% to 6794
• DAX up 0.6% to 10658
• German 10Yr yield up 2bps to -0.05%
• Italian 10Yr yield up less than 1bp to 1.15%
• Spanish 10Yr yield up less than 1bp to 1.02%
• S&P GSCI Index up less than 0.1% to 348.4
• MSCI Asia Pacific up less than 0.1% to 138
• Nikkei 225 up 0.2% to 16927
• Hang Seng up 0.8% to 23162
• Shanghai Composite down 0.7% to 3063
• S&P/ASX 200 down 0.3% to 5416
• US 10-yr yield up 2bps to 1.6%
• Dollar Index down 0.02% to 96.0
• WTI Crude futures up 0.1% to $44.76
• Brent Futures down less than 0.1% to $46.88
• Gold spot down 0.2% to $1,306
• Silver spot up less than 0.1% to $18.66

Top Global News

• Salesforce Revenue Forecast Falls Short on Cloud Competition: 3Q sales may be held back by steeper competition in cloud-based software & services.
• Trump Affirms Nativist Immigration Vision in Speech: “We will build a great wall,” Trump said in Phoenix; “and Mexico will pay for the wall. One hundred percent. They don’t know it yet, but they’re going to pay for it.”
• Musk Talked Merger With SolarCity CEO Before Sale of Stock: Musk, SCTY’s CEO Rive discussed deal sometime before Tesla’s board was briefed on the idea on Feb. 29: filing.
• Gross Calls for Two Fed Hikes at Double the Pace Seen by Market: “I would say c’mon, let’s raise interest rates by 25 basis points in September, and c’mon, six to nine months from now let’s do it again,” Bill Gross told Bloomberg Television.
• Yellen Speech Contained Clue to Reading the Aug. Jobs Report: While focus was on Yellen’s statement that case for rate raising “has strengthened in recent months,” she followed with new language that Fed’s decisions depend on extent to which data “continues to confirm” outlook.
• AllianceBernstein Agrees to Buy RASL to Expand Alternatives: Co. agreed to buy money manager with $3 billion in assets.
• TPG Capital Said to Target More Than $4b in New Asia Fund: Firm plans to start raising money for the new fund later this year.
• Amazon Taps $1b Focus Group by Streaming Shows on Twitch: AMZN streamed 2 original TV-show pilots produced by its own studios on the gaming website.
• Investors Real Estate Trust to Sell 27 Properties for $236m Cash: Entered 6 separate sales agreements with several affiliates of Edgewood Senior Living.
• Lew Says Inappropriate for Europe to Re-Write Tax Law on Apple: Says AAPL consitutes U.S. tax base on U.S. income.
• Apple CEO Confident of Victory in Tax Fight as Irish Dither
• American Delays Target to Integrate US Airways Flight Attendants: American can’t reap all potential cost savings from merger until carriers’ flight systems integrated.
• Charter Communications to Replace EMC in S&P 500: Kraft Heinz will replace EMC in S&P 100.
• Another Uber Settlement Rejected, This Time Over Riders’ Fee: Judge proposed $28.5m payout wasn’t enough for customers vs Uber’s $459m in revenue from fee.

Looking at regional markets, Asian stocks began the month mixed following the energy-triggered losses in the US and as the region also digested a slew of Tier-1 data. ASX 200 (-0.3%) initially underperformed after WTI crude futures declined below USD 45/bbl post-DoE build, while Retail Sales and Q2 Capex data also missed expectations. Nikkei 225 (+0.2%) traded choppy amid a pull-back in USD/JPY, with the index edging out again as 103.00 held. China conformed to the indecisiveness after mixed PMI data with the Hang Seng (+0.8%) & Shanghai Comp (-0.7%) swinging between gains and losses after the Official Manufacturing PMI beat expectations, while Non-Manufacturing PMI was lower than prior and the Caixin Manufacturing figure missed estimates to print at the 50.0 benchmark level. 10yr JGBs tracked the losses in T-Notes amid the choppy trade in Japanese stocks, while today’s 10yr JGB auction provided some brief support with the b/c, lowest accepted price and tail in price all better than prior.

Top Asian News

• China’s Factory Gauge Unexpectedly Rises to Highest Since 2014: Large enterprises improve, small firms drop
• China Wealth-Management Products Rise to Record $3.9t: Banks sold 84t yuan of WMPs in six months to June
• WeChat Chats Fuel China Money Exodus Into Hong Kong Policies
• Rule tightening doesn’t dampen Chinese desire to get money out
• Bank of Japan Has an 8.7 Trillion Yen Gap in Balance Sheet: BOJ wrote down 874 billion yen in losses last fiscal year
• Duterte’s Stock Rally Withers as Foreign Funds Pull Cash Out: Country had worst performance in Southeast Asia during August
• Uniqlo Makes Biggest Southeast Asia Bet as CEO Looks Abroad: Yanai wants regional expansion to make up for stagnant Japan
• Singapore Has First Pregnant Woman Testing Positive for Zika: Sales of mosquito repellents and patches soar in city- state
• China’s Hard Line on Hong Kong Democracy Faces Election Test: Result to shape city’s response to growing political divide

In Europe, September has kicked off with a risk-on tone, with equities spending the European morning in the green (+0.4%) and financials leading the way higher. Italian banks have reaped the gains from the upside in financials and lead the way higher this morning, while Deutsche Bank (+2.7%) are also among the best performers, after falling into focus yesterday amid reports of their potential merger with Commerzbank. However, the FTSE 100 underperforms relative to its counterparts following the strong UK Mfg. PMI release (53.3 vs. Exp. 49) which subsequently saw GBP rally by a point to weigh on exporting names. While the figure would also suggest that there is less urgency for further measures by the Bank of England. This also filtered into Gilts which is firmly in the red, while European paper have also been under pressure amid supply from France, Spain and the UK DMO.

Top European News

• Deutsche Bank Climbs on Report Cryan Is Weighing Fresh Revamp: Rises on report that DB analyzed sale of all or part of its asset management business.
• Merkel Facing Defeat by Anti-Immigration Party in Home State: Alternative for Germany running neck-and-neck with Merkel’s Christian Democratic Union in Mecklenburg-Western Pomerania ahead of this Sunday’s vote.
• U.K. Factories Rebound From Brexit Shock as Pound Boosts Exports: IHS Markit PMI, which dropped below 50 in July, jumped by a record to 53.3.
• May Spells Out Immigration Limits as the First Brexit Red Line: U.K. PM wants to end free movement of people coming to U.K. from EU; suggests she’s willing to leave the bloc’s single market to do so.
• U.K. Banks Attacked for Elitism as May Targets Social Inequality
• Pernod Ricard to Cut Costs as Distiller’s Top 2 Brands Suffer: Co. reorganizing China business to add dedicated salesforce for premium brands; trying to speed decision- making in U.S. through new structure.

In FX, the pound surged to $1.3264. IHS Markit said its PMI, which dropped below the key 50 level in July, jumped by a record to 53.3. That was far better than economists had forecast; the median estimate in a Bloomberg survey was for a reading of 49. New orders rose, with sterling’s recent drop “by far the main factor” for the improvement in exports, Markit said. The dollar climbed against 11 of its major counterpart, gaining 0.2 percent to $1.1137 per euro and 0.1 percent to 103.56 yen. Fed Vice Chairman Stanley Fischer indicated last week that a U.S. interest-rate hike is possible in September and said Tuesday that the central bank would base its decision on economic data, putting added focus on the payrolls report. Malaysia’s ringgit sank 0.7 percent after Wednesday’s drop in crude prices dimmed prospects for Asia’s only major net oil exporter. The Aussie strengthened 0.4 percent following the manufacturing figures for China, Australia’s biggest export market.

In commodities, zinc rose as much as 1.2 percent to $2,338.50 a metric ton on the London Metal Exchange, its highest since May 2015. Lead and tin both gained as much as 1.1 percent to highs not seen since last June and February, respectively. Copper climbed 0.4 percent. “Today’s PMI data is a good surprise,” said Wei Lai, an analyst with Cofco Futures Ltd. in Shanghai. “It will initiate strong expectations for demand in the autumn and metals will be supported at least over the coming two months.” Crude oil erased earlier gains to trade little changed at $44.76 a barrel as a strengthening dollar provided a potential obstacle to demand in countries other than the U.S. West Texas Intermediate tumbled 3.6 percent on Wednesday. U.S. inventories increased by 2.28 million barrels last week, keeping supplies at the highest seasonal level in almost three decades, official data show. An oversupply paired with soft demand battered European gas contracts, with gas for immediate delivery in the U.K. plunging as much as 18 percent to the lowest price in about seven years.

On today’s US calendar we get the final confirmation for Q2 nonfarm productivity and unit labour costs data, along with the latest initial jobless claims data. The final manufacturing PMI revision follows this before we then get the important August ISM manufacturing and prices paid readings. The market consensus for the ISM number is 52.0. Away from that we’ll also get construction spending data for July and last month’s vehicle sales data. On the Fedspeak front the Fed’s Mester is due to speak.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• FTSE 100 underperforms, while GBP rallies as UK Mfg. PMI surprisingly moves back into expansionary territory.
• Oil prices remain pressured with the latest commentary from Russia that a production freeze is not needed with prices at current levels.
• Looking ahead, highlights include US ISM Mfg PMI and comments from Fed’s Mester & ECB’s Nowotny.
• Treasuries dropped during overnight trading with rest of developed market sovereign bonds amid supply in France and Spain, and U.K. factory activity reached a 10-month high in August.
  China’s official factory gauge unexpectedly rose last month to the highest level in almost two years, suggesting the economy’s stabilization remains intact and that a weakening in July was flood-related and temporary
• The yuan advanced against a trade-weighted currency basket for the fifth day in a row, the longest run of gains in more than a month, on speculation China’s central bank is propping up the exchange rate before a Group of 20 meeting
• An overlooked line in Federal Reserve Chair Janet Yellen’s speech last week could hold the key to whether Friday’s U.S. jobs report clinches an interest-rate increase this month
• Bill Gross is recommending the Fed raise interest rates twice by as early as March. The market doesn’t expect that degree of monetary tightening even by the end of 2017
• Ken Griffin has become impossible to ignore in the once- lucrative world of credit derivatives, where a group of Wall Street dealers long maintained a stranglehold
• The most committed backers of Europe’s proposed financial transaction tax may not be the finance ministers who’ve been trying to thrash out an agreement for more than three years
• After German Finance Minister Wolfgang Schaeuble won praise from the crowd of middle-aged and retired party faithful for his role in the country’s reunification, the goodwill quickly evaporated as he defended Chancellor Angela Merkel’s open-door refugee policy
• Anyone who got caught in the real estate bust last decade in the U.S. or U.K. probably knows this already, but now the economic data is in: home ownership can be bad for you

US Event Calendar

• 7:30am: Challenger Job Cuts, Aug. (prior -57.1%)
• 8:30am: Non-farm Productivity, 2Q F, est. -0.6% (prior -0.5%); Unit Labor Costs, 2Q F, est. 2.1% (prior 2%)
• 8:30am: Initial Jobless Claims, Aug. 27, est. 265k (prior 261k); Continuing Claims, Aug. 20 (prior 2.145m)
• 9:45am: Bloomberg Consumer Comfort, Aug. 28 (prior 45.3)
• 9:45am: Markit U.S. Manufacturing PMI, Aug. F, est. 52.1 (prior 52.1)
• 10:00am: Construction Spending, July, est. 0.5% (prior -0.6%)
• 10:00am: ISM Manufacturing, Aug., est. 52 (prior 52.6); ISM Prices Paid, Aug., est. 54.8 (prior 55); ISM New Orders, Aug. (prior 56.9)
• Wards Domestic Vehicle Sales, Aug., est. 13.5m (prior 13.77m)
• Wards Total Vehicle Sales, Aug., est. 17.2m (prior 17.77m)

DB’s Jim Reid concludes the overnight wrap

Over in markets the main story yesterday was the sharp leg lower for Oil following the latest US crude stockpile data. WTI tumbled -3.56% for its biggest daily decline since July 13th and in the process closed below $45/bbl for the first time in three weeks. The latest EIA report showed that crude stockpiles rose 2.3m barrels last week after analyst expectations were for a gain closer to 1.3m barrels. That sent energy stocks tumbling lower which more than offset another relatively decent day for financials. The end result was a -0.24% decline for the S&P 500 and the fifth time in the last six sessions that the index has closed in the red.

In Europe the Stoxx 600 (-0.35%) edged lower in late trading for the same reason while in credit markets both CDX IG (+1.5bps) and Main (+1bp) finished wider. Brazil’s Ibovespa closed -1.15% following the confirmation of the impeachment of President Dilma Rousseff in the Senate by a 61 to 20 majority. Vice-President Michel Temer has now replaced Rousseff and will continue in office until January 2019, ending the long and exhausting process that started in December 2015. As our EM economists noted yesterday, the success of the Temer administration will depend on its ability to overcome the economic crisis which will require unpopular measures on fiscal policy, in particularly addressing two critical reforms in the spending cap and social security reform.

In actual fact it ended up being a relatively busy day for newsflow yesterday, certainly compared to the rest of August. Ahead of tomorrow’s payrolls report there was plenty of focus on the August ADP employment change print which came in pretty much in line with the market at 177k (vs. 175k expected). That follows a 15k upwardly revised July reading of 194k. The rest of the US data was a mixed bag. On the positive side pending home sales rose +1.3% mom in July (vs. +0.7% expected) although the June reading was revised down sharply. Meanwhile the Chicago PMI for August printed at a slightly disappointing 51.5 (vs. 54.0 expected), meaning it was down 4.3pts relative to July and at a three month low.

There was some more Fedspeak for us to digest also yesterday. The usually dovish Rosengren and Evans both spoke early in the morning. The former said that he believes that the Fed’s dual mandate ‘is likely to be achieved relatively soon’ and that ‘by slowly normalizing rates, we would hope to continue to support growth’. However Rosengren also expressed some concern about financial stability risks in the commercial real estate market. On the other hand Evans said the he see’s less reason to fear financial instability and that ‘lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path’.

Treasury yields edged slightly higher with the 10y up +1.4bps to 1.581% although still very much anchored in the 1.50-1.60% range which it’s been in for some time. Market implied probabilities for the next Fed hike didn’t change too much. September edged up to 36% from 34% the day prior, while December edged up to 60% from 59%.

European bond markets were also weaker and especially so in Spain where the 10y yield there ended up +6.3bps higher at 1.007%, the weakest day since June 24th. Yesterday’s move came after Spanish PM Rajoy lost a vote of confidence in Parliament by 180 votes to 170 in the 350-strong assembly. While Rajoy was backed by the liberals of Ciudadanos and a small party from the Canary Islands, the Socialists and anti-establishment Podemos group both voted against as expected. A second confidence vote is now expected to take place tomorrow, where a simple majority is required.

Switching to the latest in Asia this morning where bourses are kicking off the month of September on a bit of a mixed note. The Nikkei (+0.13%) and Hang Seng (+0.28%) have rebounded from early losses, however the Shanghai Comp (-0.24%), Kospi (-0.42%) and ASX (-0.25%) are in the red. There’s been some data to get through this morning too. In China the official manufacturing PMI for August rose 0.5pts to 50.4 and so exceeding expectations of 49.8. In fact that’s the highest reading since October 2014. There was a bit of contrast between this and the private Caixin survey however which showed that the manufacturing PMI fell 0.6pts to 50.0. Meanwhile the official non-manufacturing PMI fell 0.4pts in August but to a still relatively healthy 53.5. In Japan the Nikkei manufacturing print for August was revised down 0.1pts at the final reading to 49.5.

In terms of the remainder of the data yesterday, in Europe the August CPI report for the Euro area was a little disappointing after coming in below market at the headline (+0.2% yoy vs. +0.3% expected) and unchanged from July. The core also declined one-tenth unexpectedly to +0.8% yoy. Over in Germany unemployment held steady at 6.1% in August while retail sales data for July well exceeded expectations after rising +1.7% mom (vs. +0.5% expected). Consumer spending data in France was more disappointing however (-0.2% mom vs. +0.3% expected) while France’s CPI report for August revealed headline inflation growth of +0.3% mom (vs. +0.4% expected).

Looking at today’s calendar there’s a fair bit of economic data to get through today. This morning in Europe we’ll get confirmation of the final August manufacturing PMI’s as well as a first look for the data in the periphery and of course the UK. Remember that last month the UK’s manufacturing PMI plummeted 4.2pts to 48.2 and the lowest since February 2013. Expectations today are for another sub-50 reading, albeit a slight improvement to 49.0. Across the pond we’ll first of all kick off with the final confirmation for Q2 nonfarm productivity and unit labour costs data, along with the latest initial jobless claims data. The final manufacturing PMI revision follows this before we then get the important August ISM manufacturing and prices paid readings. Our US economists expect the ISM manufacturing to stay relatively unchanged at 52.5 (vs. 52.6 in July), while the market consensus is 52.0. Away from that we’ll also get construction spending data for July and last month’s vehicle sales data. On the Fedspeak front the Fed’s Mester is due to speak at 5.25pm BST.

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The plight of the American farmer has been a frequent topic for us over the past couple of months.  A few weeks ago we pointed out how declining corn, wheat and soybean prices were leading to the first declines in farmland values in the Midwest since the 80s (see "Farmland Bubble Bursts As Ag Credit Conditions Crumble").  We also questioned whether California farmland was overvalued by $70 billion as almond prices have been cut in half over the past year and drought conditions threaten farming sustainability in many regions of the Central Valley (see "Is California Farmland Overvalued By $70 Billion?").

Most food grown in the U.S. has come under extreme pressure in 2016 due primarily to lower Chinese consumption resulting from the combined effect both a weak Chinese economy and a relatively strong U.S. dollar.  This slack in demand has resulted in massive supply gluts for several commodities as producers failed to adjust supply quickly enough to meet new levels of demand.

Unfortunately, per the USDA's latest farming income forecast for 2016 (released yesterday), conditions only look to be getting worse for farmers as demand still remains low but supply has been slow to adjust in the wake of improving yields.  Below are a couple of the key takeaways from the USDA's 2016 forecast.

Real farm incomes in 2016 are expected to sink below 2010 levels which represents a 34% decline from the recent peak and 14% decline YoY.

 

Meanwhile farm debt continues to rise at an astonishing rate…

 

While farmer leverage has spiked to the highest level since the early 80s.

 

And of course, lower incomes means less money to spend on shiny new John Deere tractors with equipment capex expected to decline 31% YoY.

 

And finally, farmer returns have crashed to the lowest levels ever.  We're not sure about you but a 2% ROIC seems a "little low" even in our current rigged interest rate environment.  So, there's only a couple of ways to fix that problem…either commodity prices have to recover quickly or farmland prices need to come down substantially.  Which do you think will happen first?

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"The Empire is befuddled," at Brexit, exclaims Nigel Farage, telling Alex Jones that globalist establishment is clueless on how to regain control. In a wonderfully frank interview, Farage explained that the establishment's "problem is that it’s fighting this argument on several fronts at once.”

"We’ve got the American elections going on, we’ve got a big referendum coming up in Hungary on migrant quotas from Germany, we’ve got a rerun of the Austrian presidency where the right-wing candidate was cheated by false votes,” Farage said. “So they’ve got a real problem, they’re fighting us now on a whole series of fronts.”

 

“What will they do to fight back? I don’t know the answer to that yet, and you know something? Nor do they.”

 

“Brexit is the first strike-back against this phenomenon of the big banks, the big businesses, effectively owning politics, willfully destroying nation-state democracy, getting rid of that thing our forbearers actually fought and shed their blood to create and to preserve our liberties and our freedoms,” he continued. “All of that being taken away and suddenly in a referendum that no one said we could win, and we’ve done it.”

 

“What we’ve done is given inspiration to freedom fighters right across the Western World.”

Farage then broke down how Hillary is aligned with the globalist agenda and how the US elections are crucial to the fight against globalism.

“Hillary represents everything that has gone wrong in our lives over the last couple of decades,” he said. “She is part of that phenomenon where all that seems to matter now is corporatism.”

 

“The big, global companies who want to set the rulebooks to effectively put out of business any small or medium-size competitors.”

And Hillary loves the supranational global-type bodies which are accountable to nobody, Farage continued.

“I think she sees the European Union as a prototype for an even bigger form of world government,” he stated. “If you want nothing to change at all, if you want to continue with the kind of cronyism that we see with the Clinton Foundation, if you want things to stay the same, vote for Hillary.”

Farage also commented on Hillary’s public criticism of his recent US visit to speak at a Trump rally in Mississippi.

“Can I please use this opportunity to thank Hillary Clinton from the bottom of my heart for doing what she’s done?” asked Farage with a chuckle. “She’s raised my profile massively in this presidential election. So Hillary, thank you.”

Full interview below…

Source: InfoWars.com

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Pension and insurance demand for "juicy" investment grade paper seems to be insatiable.  Per Bloomberg data, $962 billion of IG paper has been issued so far in 2016 putting issuance for the year on track to set an all-time record.  August issuance alone was $115 billion, the highest level recorded in 12 years, and the current pipeline for September includes $120 billion of new issues. 

 

Obviously it's not terribly surprising that funds would flow out of sovereign debt markets and into IG bonds with over $13 trillion of sovereign paper now carrying negative yields (see "With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict").  That said, as we've pointed out before (see "Pension Duration Dilemma – Why Pension Funds Are Driving The Biggest Bond Bubble In History"), pensions aren't just "reaching for yield" they're also "reaching for duration" in an attempt to match their asset/liability duration.  The problem is that by "reaching for yield" (or "reaching for duration" if you prefer) large pension funds enter into a negative feedback loop that only serves to exacerbate their problem.  As billions of dollars are plowed into longer-dated securities the yields of those securities are driven even lower.  Even worse, as yields fall, negative convexity causes the duration gap between assets and liabilities to expand.  With that, pensions have no choice but to go even further out the yield curve and the cycle continues.

 

The problem, of course, is that these rates have been artificially engineered by misinformed Central Banking policies and will, at some unknown point in the future, be unwound creating spectacular losses for the pensions and insurance funds holding the paper.  The Securities Industry and Financial Markets Association estimates there is about $8.5 trillion of corporate debt outstanding in the United States with an average maturity of about 15 years which means every 1% increase in yield will destroy just over $900 billion in value.  

But, we suppose it doesn't really matter if pensions destroy their asset base as long as their completely fictitious liability valuation also declines then all will be well in the world.  Right?

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By Chris at http://ift.tt/12YmHT5

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all it’s glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW we’re covering the relationship between Bonds and Commodities

As our monetary overlords swallow up more and more of the sovereign bond market, punching bonds higher, and kicking yields into negative territory, the inevitable consequences are showing themselves. Bonds are now being traded and priced in much the same way as commodities are.

To be clear: this isn’t “supposed” to happen. When traders buy a bushel of wheat they don’t do so expecting to receive a yield on it. They buy it to sell it at a higher price to the next guy.

Bonds, however, are completely different. Or at least they used to be.

Investors buy bonds (i.e. they lend money) and are then paid a set percentage fee for the lifetime of the loan, and they’re also paid the principal at the end of the loan term. The coupon or yield can be paid monthly, quarterly, annually, or capitalised and paid at maturity. That’s entirely different to a commodity. Also, we know that bonds are typically secured against assets standing ahead of other creditors in the event of liquidation and as such they’re more secure than equity.

Now, I’m not telling you anything you didn’t already know. My apologies for being really simplistic but I do it because when so little makes sense in markets, it’s probably time for us all to go back to basics, bring out the crayons, and ensure that 1 and 1 really does equal 2.

As I write to you today, bonds no longer trade on yield but on some future price. 

Let’s for a minute revisit the 2008 global financial crisis.

It’s worth revisiting – for the purposes of understanding – how and why we humans do such stupid stupid things and do them repeatedly.

It’s as if we have marshmallows between our ears. If it was the case for central bankers, we’d all be better off as instead of inflicting such damage to the world economy, they’d instead be found slumped on the sofa, eyes glazed over, and drool running down their chests. Alas there are not enough marshmallows to go around and so instead we get what we get.

As I discussed a couple of months ago, the GFC was birthed in the real estate market.

Now real estate is a yield bearing investment, or at least it should be. So unless you’re buying real estate for your personal use, it is essentially a bond. It has underlying collateral value, and it provides a quantifiable and consistent stream of cashflows.

In a bull market capital chases yield first. It doesn’t chase price appreciation. Price appreciation is simply the consequence of yield chasing since yields decline as more buyers dive in.

In today’s world of bond pricing 1 and 1 doesn’t equal 2 or even 15. It is so far removed from reality that today 1 and 1 equals a chicken.

Below is spot gold in red overlaid by the PIMCO 25-year zero coupon Treasury ETF in blue. They may as well be twins.

I find this correlation fascinating but not unsurprising.

Spot gold (red) and Pimco 25-year zero coupon Treasury ETF (blue)

When bonds are being bought for capital appreciation then of course they’re going to trade like a commodity.

Just as housing in the 2000’s was increasingly bought not of yield but capital appreciation so too today we find ourselves facing the same set of circumstances.

Ten years ago, heck even five years ago, if you’d told me that we’d have over US$13 trillion in negative yielding debt, underwritten by bankrupt governments, and at the tail end of a demographic boom in developed countries – with much of that debt in Europe which is also facing a collapsing banking sector, a fragmenting European Union, and the easiest short in recent history, I’d have suggested that you’ve been smoking crack. And yet here we are.

Contributing Factors

 

Central banks completely and totally have your back when investing in government bonds. Why?

Letting rates normalise by any meaningful amount would cause severe problems for governments to actually service debt payments. They would all suddenly look very Greek. And though the Greeks have a cool sounding accent, lovely beaches, and don’t pay their taxes nobody really wants to be Greek.

So even though core inflation seems to be rising in the US, it’s completely meaningless. Because even if inflation was raging, the resulting real adjustment in debt and the serviceability of it due to inflation would take some time to reach anything resembling manageable before the Fed could conceivably hike rates by a meaningful amount. They simply can’t afford to.

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So the central banks have your back on the long sovereign bond trade. That is obvious.

I can see why owning bonds makes sense based on having a central bank “put”. In fact, I’ve even suggested a few months ago that trading (not investing) by selling the Spanish ten year while going long the US ten year provided a great arbitrage as the inevitable discrepancy would get re-priced.

To be clear, that’s a short term opportunistic trade and I wouldn’t want to put something like that on and go on holiday for 6 months. I’m not getting paid enough to take duration risk on something like that.

What to Watch For

So when bonds, which are traditionally bought for safety and yield, provide neither and trade just like gold is it maybe, just maybe time to buy the asset which is traditionally bought purely for safety and offers no yield?

What I believe is a critical chart to watch is the chart I posted above. That of bonds and gold. When we see these diverging then the probability is higher that the belief in central banks is finally failing. Interestingly the only way for these two asset classes to move in tandem to the upside is if bonds continue to go into deeper negative yielding territory.

If you think about that for a minute it means that the cost of owning bonds becomes increasingly more expensive, surpassing the cost of owning gold. On a relative basis gold becomes cheaper to own even while its rising in value. Something for you to ponder.

And so… 

Something else? Share your thoughts in the comment box here.

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Investing and protecting our capital in a world which is enjoying the most severe distortions of any period in mans recorded history means that a different approach is required. And traditional portfolio management fails miserably to accomplish this.

And so our goal here is simple: protecting the majority of our wealth from the inevitable consequences of absurdity, while finding the most asymmetric investment opportunities for our capital. Ironically, such opportunities are a result of the actions which have landed the world in such trouble to begin with.

– Chris

“Ten years ago, the notion that zero-coupon perpetual securities should make a comeback seemed like a good April Fools’ joke. Now, it’s no laughing matter.” — Edward Chancellor

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“Overall, it was fun while it lasted – the trends had been up and now they aren’t,” warns National Asscociation of Credit Managers' economist Chris Kuehl.

This sentiment comes as NACM's Credit Manager Index plummetes to its lowest since 2009…

The score reflects the deterioration in the combined favorable categories reading (56.4). In July, it was as high as it was in March (60.0). The categories in the favorable sector were lower than they had been last month, and some by quite a lot. The index of combined unfavorable factors also dropped (49.2 to 49.1), but not as dramatically. “The best that can be said about the decline is that it was bad and hasn’t gotten much worse,” Kuehl added.

When looking at specifics in the favorable categories, there was not much to celebrate and some of these sectors are worrying. The sales category was riding a high at 60.0 last month and dropped to 53.7, marking the lowest point in seven years.

 

“The sales collapse is consistent with what has been appearing in the Purchasing Managers’ Index and other statistics, so it is unlikely to be an anomaly, not good timing as far as the retail community is concerned,” explained Kuehl.

And finally, favorable and unfavorable aggregate indices have plunged…

 

We leave to Kuehl to sum up: “the most vexing part of the change is that it is happening at the start of the season that many in the economy count on for growth.”

Source: NACM

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