Month: September 2017

Authored by Doug Kass via RealInvestmentAdvice.com,

I expect comparisons between the FANG stocks and Dr. Evil of the Austin Powers film series to be an ongoing investment storyline over the next year given these digital gatekeepers’ increased dominance over the U.S. economy. This idea might receive a lot more play in U.S. political and antitrust circles — and produce more legal challenges — than most investors currently presume.

For those unfamiliar with Austin Powers, Mike Myers’ character Dr. Evil is a parody of the James Bond villains. He hatches schemes to take over the world with his sidekick Mini-Me and his cat Mr. Bigglesworth. He’s also assisted by Number 2 (played by Robert Wagner), who fronts for his evil corporation, Virtucon Industries. A natural businessman, Number 2 is often more concerned about the financial aspects of world domination than in world domination itself. That sounds a lot like the FANG stocks — Facebook, Amazon , Netflix and Alphabet/Google.

Now, the FANG shares have been slipping recently despite Wednesday’s strength. However, investor sentiment remains almost universally optimistic as it relates to the intermediate term for these names.

Here are just two examples of that enthusiasm:

• Based on expectations of the FANGs’ glorious future and continued popularity, the Intercontinental Exchange this week announced an early November launch of a “FANG+” ETF. This will combine the FANGs with other hot stocks like Alibaba, Nvidia and Tesla.

• Some, like my pal Tom Lee of Fundstrat Global, remain ecstatic about the FANGs’ future prospects. In an early June CNBC appearance, Tom explained why, despite having an overall bearish market view, he thinks the FANGs can add nearly 50% over 2017’s second half — and then continue to soar in 2018 and beyond.

Most investors and traders are generally unconcerned about the FANGs’ recent weakness, seeing near-term declines as just another brief speed bump towards an investment pot of gold.

Why The FANGs Might Lose Their Bite

“So, is this it? The end of FANG and company?

 

I can tell you the news clip files are filled with FANG obituaries and each one seems as cogent as the previous epitaphs.

 

That’s why I like to have one foot in the rocket ship and another in the terrestrial.

 

Call me old-fashioned, but when the stock of Facebook gets crushed as it did today, I am more attracted to it than when it’s soaring. I feel the same way about the stock of Alibaba or Nvidia or Electronic Arts (EA). Sure, they might be cheaper tomorrow. That’s the risk you take. But these stocks didn’t get where they were a week ago by alchemy.

 

They got there because the companies are doing phenomenally and I don’t see anything that tells me they won’t.

 

I just see profit-taking in the winners and a love of the losers. Own some of both, in a portfolio not just diversified by sector but by riskiness, and you’ll do just fine.” — Jim “El Capitan” Cramer, Rocket-Ship Stocks Look Better When They Return to Earth, Sept. 25, 2017

While I’ve recently shorted both FB and AMZN, I’ve never been a serial basher of FANGs. I’m not one of those who have (as Jim related above) issued frequent FANG epitaphs. As George Lindsay said on Wall Street Week with Louis Rukeyser decades ago, “I am not one of those 600 boys.” (You can listen to him here at the 2:15 mark.)

I realize that calling market tops (or bottoms) for individual stocks, specific sectors or the market as a whole is generally an audacious pursuit and a fool’s errand. It’s also mathematically dangerous, and next to impossible, as there will only be one “generational low” every few decades, and zero “generational tops.” Time is not on forecasters’ side when it comes to projecting a stock’s top.

Generally speaking, stocks also have a gravitational pull higher over time as population and output rise in a secular sense. And while stocks often get out of sync — particularly to the downside — they have a knack at recovering.

As the late great Louis Rukeyser once noted:

The robins will sing,
The crocuses will bloom,
Babies will gurgle,
And puppies will curl up into your lap and go to sleep.
Even when the stock market is temporarily insane.

— Louis Rukeyser, Wall Street Week

My pal Byron Wien of the Blackstone Group often expands on Rukeyer’s view by frequently reminding me that contrary to Lord Keynes (“in the long run, we are all dead”), “disasters have a way of not happening.”

And of course, investors these days are more conditioned than ever to buy any dip thanks to market’s massive liquidity injections and the increased role of passive and machine-based investing (i.e., ETFs and quants).

It’s also important to remember that the FANGs aren’t one stock, but four separate companies serving different customers and end markets. But these companies have grown so dominant and disruptive — to competitors, entire industries and real-estate and the labor markets — that their political and antitrust touch points represent an ever-growing threat to their growth plans and business models.

Concern Abounds

I’ve recently turned more negative on two FANG components — Amazon and Facebook, as well as the Nasdaq and technology in general. That’s why I’m shorting AMZN and FB and have gone long on both the ProShares UltraShort QQQ and the ProShares UltraPro Short QQQ, which are 2x and 3x inverse plays on the Nasdaq 100.

Here are my current views and game plans for each of the FANG components:

• Facebook. I see more government intervention and regulation ahead. Recommendation: Short on a trading basis.

• Amazon. AMZN’s growth plans might be stifled going forward by government regulation. Political and antitrust forces represent an existential threat to the company’s horizontal- and vertical-expansion plans. Click here and here to see more of my views. Recommendation: Short on an investment and trading basis.

• Netflix. I would avoid NFLX, but high short interest precludes selling it short. Remember, Adam Sandler will eat before Netflix shareholders do. Recommendation: Avoid. Here and Here. 

• Alphabet/Google. Alphabet’s dominance in the search-engine space (coupled with consumer reliance on Google) leaves the company vulnerable to government interference. I’m negative on the stock, but not short. Recommendation: Avoid.     

Still, as Jim “El Capitan” Cramer wrote in a thoughtful piece on Monday, it’s possible that the FANGs are simply falling back to Earth (as they have in the past) and might be poised to rebound. Others opine that different sectors or stocks might pick up the slack for the market if the FANGs don’t.

In fact, there’s a growing view that even if I’m correct on the FANG being vulnerable, that won’t impact the overall market. This reminds me of something Helene “The Divine Ms. M” Meisler recently wrote:

“TV folks say the market is healthy without the FANG names. Of course, they said it was healthy when it was just the FANGs.”

However, I suppose that’s a subject for another day. Suffice to say, the consensus sentiment on the market and the FANG remains very upbeat.

But remembering that consensus market views need not be wrong (as the crowd usually outsmarts the remnants), let me outline my deeper concerns for the FANGs.

Existential Threats Abound

Amazon is the titan of 21st century commerce. In addition to being a retailer, it is now a marketing platform, a delivery-and-logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer and a leading host of cloud-server space.

Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm’s structure and conduct pose anticompetitive concerns — yet it has escaped antitrust scrutiny.

— Lina M. Khan, Amazon’s Antitrust Paradox, Yale Law Journal

I used to make presentations to CFA societies in various cities, and the one chart I always presented was called “Characteristics of a Good Stock.” These included growth, free cash flow, barriers to entry and the hope that the government would leave the firm alone. This is pretty much “Buffett 101,” with the caveat that you had to buy a good stock on the cheap.

Now, while Amazon and Netflix have had free-cash-flow and valuation issues, they and the other FANGs have had consistently dynamic top-line growth — and steadily produced deepening competitive “moats” that have expanded the barriers to entry in their markets. And until recently, government interference wasn’t a major concern.

But that might be about to change. The FANGs’ profound innovation and pervasive influence over the economy have rendered a lot of antitrust laws antiquated. Stated simply, these companies are ahead of the regulators — but that, too, might be about to change.

Moreover, the FANGs have no friend in the White House, as seen most recently by this tweet Wednesday from President Trump:

Facebook was always anti-Trump.The Networks were always anti-Trump hence,Fake News, @nytimes(apologized) & @WaPo were anti-Trump. Collusion?

— Donald J. Trump (@realDonaldTrump) September 27, 2017

Now, after meeting with several politicians and bureaucrats more than three decades ago, I wrote in a research note that Washington “is too pessimistic a place for one person to follow.” That probably still applies.

When Uncle Sam gets involved, it’s impossible to predict an outcome or its magnitude. But one thing is certain — with rare exceptions, government involvement with an industry won’t be positive for the companies that are impacted.

Backlash From Washington

Now, a well-received recent book by Franklin Foer called World Without Mind details some nasty effects of the FANGs’ relentless growth. One that I’ve previously discussed in my diary is that every competitor who collects ad dollars is playing a less-than-zero-sum game with the FANGs.

As Foer writes in his book:

“Back in the seventies, Herbert Simon, the Nobel-winning economist, took these inchoate sentiments and explained them rigorously: ‘What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention.'” — Franklin Foer, World Without Mind: The Existential Threat of Big Tech

I suggest reading this book if you own any FANG stocks, as the companies’ conflicts with competitors and regulators are now arising.

For example, Facebook under intense scrutiny for perhaps helping Russia manipulate the 2016 U.S. presidential election.

Similarly, the push by Amazon into food retailing, prescription-drug distribution and auto-parts sales is also attracting interest. These businesses are all very employment intensive, and competitors’ employees all have senators, House members and votes. Perhaps that’s why AMZN has quietly hit a correction mode and has pulled back some 11% from its high.

Now, it’s important to remember when analyzing government policies that there are typically three lags involved:

• The Recognition Lag
• The Action Lag
• The Impact Lag

We are now at the Recognition Lag, but we could be moving into the Action Lag — and might see the Impact Lag in the fullness of time. If the FANGs are destined to face regulatory problems, we might only be in the early innings of such an issue.

It seems like politicians are slowly recognizing that there’s a problem with the FANGs. If so, new interpretations of antitrust laws (possibly coupled with new antitrust laws as well) seem like they’re on tap. London officials’ recent decision to ban Uber could well be the FANGs “canary in the coal mine,” as was Bear Stearns’ failure in March 2008.

I certainly don’t have all of the answers here, but I hope I’ve presented some good ways to frame and consider these issues.

Getting the answers right could be the investment issue of the next few years.

The Bottom Line

To summarize:

• FANG valuations are elevated and incorporate the general perception that there’s little threat to the companies’ business models. However, the FANGs and other leading tech companies are likely to get caught in the government’s crosshairs in the years ahead.

• The FANGs now face existential political and antitrust threats that could inhibit, slow down and/or make growth more expensive and less profitable.

Personally, I would avoid the FANGs until the issue of government intervention (which is likely only in the early innings) gets sorted out.

To paraphrase Dr. Evil,

“The billions that the consensus expects to make on FANGs may turn into millions.”

So, I’d use this week’s market strength to consider reducing exposure to Facebook, Amazon, Netflix and Alphabet/Google.

Position: Long QID, SQQQ (large); Short AMZN, FB, QQQ

via http://ift.tt/2fEphl7 Tyler Durden

• Republican Tax Plan Hits First Hurdle (WSJ)
• A $6.4 Billion Windfall Awaits Big U.S. Banks in Trump’s Tax Cut (BBG)
• How Does the Trump Tax Plan Affect You? WSJ Answers Your Questions (WSJ)
• Twitter suspends Russia-linked accounts, but U.S. senator says response inadequate (Reuters)
• Flight ban on Iraqi Kurds imposed after independence vote (Reuters)
• Elon Musk’s New Vision: Anywhere on Earth in Under One Hour (BBG)
• Kurdistan region refuses to hand over border crossings to Iraqi government: Rudaw (Reuters)
• Independence Vote Tests Catalonia’s Police Force (WSJ)
• Uber CEO Khosrowshahi to Visit U.K. to Rescue London License (BBG)
• Chinese Money Is Still Leaking Into the World’s Housing Markets (BBG)
• Russia accuses CNN International of violating Russian media law (Reuters)
• Dems on Trump’s Voter Fraud Panel Push Back (BBG)
• Schumer says senators close to bipartisan deal on health exchanges (Reuters)
• VW’s dieselgate bill hits $30 billion after another charge (Reuters)
• VW Takes New $2.9 Billion Hit From Diesel Scandal (WSJ)
• Iron Ore Becomes Punch Bag as China Concerns Drive 20% Collapse (BBG)
• U.S. visas to six Muslim nations drop after Supreme Court backs travel ban (Reuters)
• P&G CEO Blasts Nelson Peltz as Tensions Mount Over Board Vote (BBG)
• Lyft IPO puts investors in self-driving cars as well as ride services (Reuters)
• World’s Biggest Oil Company Promised Expats Idyllic Lifestyle—Then Fire Erupted (WSJ)
• Chaos and hackers stalk bitcoin investors (Reuters)

Overnight Media Digest

WSJ

– A day after announcing their tax plan, Senate Republicans debated scaling back one of their largest and most controversial proposals to pay for lower tax rates – repeal of the individual deduction for state and local taxes. on.wsj.com/2yJB9qV

– Twitter Inc on Thursday offered its first public information on Russian use of its platform during the U.S. presidential election, but its limited disclosure only fueled criticism from lawmakers who are pushing for greater transparency from internet companies over how their platforms are manipulated. on.wsj.com/2ycE5iG

– China will force auto makers to accelerate production of electric vehicles by 2019, a move that will ripple around the globe as the industry bends to the will of the world’s largest car market. on.wsj.com/2x0wE9d

– Eight months after Toshiba Corp said it wanted to sell part of its memory-chip unit, it finally signed a $18 billion deal on Thursday with a buyer group which is led by Bain Capital LLC and will get financing from Apple Inc, South Korean chip maker SK Hynix Inc and other technology companies. on.wsj.com/2xHcRxo

– Chevron Corp on Thursday named Michael Wirth as its next chief executive who will be succeeding John Watson on Feb. 1. on.wsj.com/2xFAfeZ

– The U.S. Supreme Court said Thursday it would consider whether public employees can be required to pay union dues, revisiting an issue that deadlocked the court after Justice Antonin Scalia’s death last year. on.wsj.com/2yKMvL3

 

FT

Prime Minister Theresa May is being urged to deliver on her promise to cut energy bills for 17 million households in a cross-party letter signed by nearly 200 MPs, including 76 Conservatives.

Brompton issued a voluntary recall of 144,000 of its folding bicycles saying all of its bikes manufactured between April 2014 and May 2017 contained axles that had shown a higher than expected failure rate.

The UK Financial Conduct Authority said on Thursday there was no justification for any changes to the rules governing asset managers, firing a salvo against an attempt by European regulators to shake up the rules after Brexit.

Lawyers representing two Uber drivers argued in front of an employment tribunal on Thursday that the ride-hailing firm is an employer and not just an agent connecting drivers to passengers as the company sets the fees, determines the routes for the driver and adjudicates when passengers complained about the journeys

 

NYT

– Chevron Corp on Thursday said Michael Wirth, a career Chevron employee with long experience in pipelines and refineries, will succeed John Watson as chairman and chief executive in February. nyti.ms/2xKgWCW

– Flights were delayed and travelers struggled to check in at airports around the world on Thursday after a software program Altea, used by several major airlines went down. nyti.ms/2fvNSF8

– Rovio Entertainment Ltd, the company behind the Angry Birds empire, was valued at about $1 billion as it prepared to go public on Friday. nyti.ms/2xOiuw4

– Toshiba Corp said it had signed a deal to sell 60 percent of the microchip unit to a group of international investors that includes Bain Capital and Apple Inc. The deal will net Toshiba about $14 billion. nyti.ms/2fBloNW

– New legislation backed by Australia’s governing Liberal party would eliminate restrictions separating broadcast media from print media and would allow media companies to own more outlets in a city. nyti.ms/2ycvtZd

 

Canada

THE GLOBE AND MAIL

** U.S. President Donald Trump’s negotiators tabled stringent Buy American demands at the NAFTA talks in Ottawa that would drastically curtail bidding by Canadian companies on U.S. government-funded infrastructure projects. tgam.ca/2hA4VdC

** Unifor officials and senior General Motors Co executives held what a union leader called a productive two-hour meeting Thursday in Detroit in an attempt to end an 11-day-old strike at the auto maker’s Cami Automotive assembly plant in Ingersoll, Ontario. tgam.ca/2hAU3MC

** The reborn Stelco Inc plans to return to profitability by muscling back into the market for automotive steel, but its attempt to grab back auto business comes as vehicle sales and production begin sliding from their current peak. tgam.ca/2hC0ZZC

NATIONAL POST

** Polls by Forum Research suggest Ontario Premier Kathleen Wynne’s ongoing war on economists is paying dividends. bit.ly/2hASw9e

** The number of public proxy contests undertaken in Canada may be on the decline, but that doesn’t mean activism is having less of an impact on Canadian companies according to a report by Kingsdale Advisors. bit.ly/2hBMbuh

** Internet experts are questioning Canada’s new funding framework for the cultural sector. Experts are skeptical of the announcement which was made by Canada’s Heritage minister Melanie Joly as it lacked any funding for news organizations. bit.ly/2hCdbtj

 

Britain

The Times

Palmer & Harvey is close to striking a takeover deal with Carlyle, the U.S. buyout firm, after securing emergency funding from two of its main suppliers. bit.ly/2fvLo9O

BT Group Plc could be forced to stump up an extra 2 billion pounds ($2.69 billion) over the next two years to reduce its growing pension deficit, posing a cashflow problem for the telecom group, a leading credit rating agency has warned. bit.ly/2xFnj8G

The Guardian

The British manufacturer Brompton has embarked on an unprecedented recall of nearly 150,000 of its folding bikes over concerns about faulty axles. bit.ly/2ywyEHh

Lloyd’s of London, the world’s biggest insurance market, has started paying out the first of $4.5 billion of claims related to tropical storm Harvey and Hurricane Irma, which wreaked havoc in the southern U.S. and Caribbean. bit.ly/2yvVUVT

The Telegraph

The future of Ford Motor Co’s Bridgend plant has been thrown into further doubt after luxury car maker Jaguar Land Rover revealed it was bringing forward the end of a contract to produce engines at the Welsh site. bit.ly/2xB1xp6

Theresa May said Transport for London’s decision to stop Uber Technologies Inc operating in the capital has “damaged lives” and called the ban “disproportionate”. bit.ly/2k4PL0w

Sky News

Pension trustees at Carillion Plc the crisis-hit construction group, have called in the world’s largest audit firm to advise them amid a massive financial restructuring. bit.ly/2ydlYZO

The head of UK’s aviation regulator has told Sky News that he takes a promise by Ryanair Holding Plc to meet its obligations over mass flight cancellations “with a pinch of salt”. bit.ly/2k4QiQ4

The Independent

Royal Mail Plc is seeking to employ 20,000 temporary workers to help sort the Christmas post and manage an increasing amount of online Christmas shopping, the company has said. ind.pn/2yKZ6Oy

Nearly a third of all UK electricity came from renewable sources in the second quarter of this year, setting a new record for clean energy generation, the government said. ind.pn/2fBcqAb

 

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Ethereum and bitcoin tumbled overnight, after South Korea banned local initial coin offerings and margin trading in cryptocurrencies. According to Joongang and Bloomberg, the Financial Services Commission in Seoul said all forms of ICOs are prohibited in the country, including “projects that share profits, rights, dividends, and other “coin-style” offerings, according to a statement.”

The commission also banned margin trading, i.e., the practice of loaning funds to trade currencies including bitcoin and ethereum, according to an official who clarified the statement. The government plans to investigate any violations and deal with them strictly even before its measures are legislated, it said in the statement.

The announcement triggered a sell-off in crypto markets with Ethereum, which has become a platform for most ICOs, dropping 5.7% while bitcoin fell as much as 3.5%.

“They saw that the best practice was just to ban it before allowing any major crisis to occur, which would have impacted a lot of retail investors there,” Thomas Glucksmann, head of marketing at Hong Kong-based bitcoin exchange Gatecoin told Bloomberg. “Similar to China, they probably didn’t want to ban it, but they didn’t want to take any risk about it getting out of hand.”

“The majority of ICO tokens are being issued through the ethereum platform,” said Glucksmann. “At any sign of vulnerability, the first reaction would be a mass selloff in ether. That’s why the price of ether is susceptible.”

While not nearly as draconian as the Chinese crackdown launched last month which banned all cryptocoin exchange trading, the announcement was the second major blow to cyrptos this month, following Beijing’s ban of ICOs and subsequently, all cryptocurrency trading. Public interest in cryptocurrencies has surged this year – especially in Japan and South Korea which have emerged as the dominant trading centers – prompting officials to issue warnings about an overheated market and fraudulent activity.

While ICOs have been used to raise more than $2 billion this year, the lack of oversight has attracted criminals, with some estimates showing about 10 percent of all ICO funds being stolen by thieves.

According to Bloomberg, South Korea have prosecutors recently caught four cryptocurrency traders who illegally raised 25 billion won ($22 million) from 1,000 investors in a pyramid scheme growing in scale, the South Korea commission said. This month authorities also indicted four people on charges of illegally trading cannabis using bitcoin, the commission said.

South Korea also sees bitcoin as potentially vulnerable to North Korean hacking. Its national police agency said this week it confirmed North Korean hackers tried unsuccessfully to hack four bitcoin exchanges using emails containing malicious codes between July and August.

While the move has predictable has an adverse initial impact on cryptos, many have contended that a crackdown on ICOs, many of which are glarindly illegal and outright ponzi schemes, will extend the long-term viability of bitcoin and ethereum.  Countries including the U.S., Canada, Singapore and Hong Kong have also issued warnings about ICOs this year, although none has gone so far as to ban the practice. “It would shock me if you don’t see pump-and-dump schemes in the initial coin offering space,” U.S. Securities and Exchange Commission Chairman Jay Clayton said Thursday in Washington.

Separately, in the Ethereum investment section on Reddit, user “theoneandonlyeric” provided some additional color on the South Korean crackdown: 

I’ll give more clarification. Yes, the Korean government is currently only banning credit-granting activities, AKA margin trading within the exchanges. There is no proof or evidence saying that it will ban it entirely, yet.

 

According to Joongang (one Korea’s largest news outlets) they state that, “there is no regulation on individual investors’ investment behavior within the ICO ban.” It is possible for domestic investors to participate in ICOs conducted by FOREIGN companies.”

 

Participation is a different story. Banning it entirely, which is China’s case would be devastating. This is not confirmed, but in the long run, Korea might come down to heavy regulation only. The complete ban of ICOs will hinder technological development within Korea. There would be no way it would be completely banned.

Despite the ongoing ICO crackdowns and relentless rhetoric against cryptos, Bitcoin has regined the $4,000 level having dropped as low as $3000 two weeks ago following harsh commentary from Jamie Dimon who called cryptos a “fraud” and comparing it to the 17th century tulip craze. The statement prompted a spirited defense from Macquarie’s Viktor Shvets who noted that the modern financial system is just as much of a “fraud” as bitcoin.

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The nine-page dax document unveiled by the Trump administration this week included may of the proposals we expected to hear: streamlining the tax code for individuals into three (or possibly four) brackets, eliminating state and local deductions, repealing of the estate tax, major reductions on corporate rates and incentives for American companies to repatriate billions of dollars in overseas profits.

And while the details of the bill have yet to be worked out (Treasury Secretary Steven Mnuchin has said they will be negotiated in committee), after a handful of holdout senators killed the Republican effort to repeal and replace Obamacare (resulting in an embarrassing defeat on repealing an unpopular law that President Donald Trump has said "should've been a slam dunk"), the administration is likely already trying to figure out where senators stand. And, more importantly, where various senators stand in terms of their reservations.

To help give readers a sense of where the legislation stands, Bloomberg has identified six senators who may (and in many cases will) cause problems for the Trump administration by opposing the bill. The list includes moderates, hard-core conservatives, and several senators who already have – or may soon announce – that they will not be seeking reelection, presumably allowing them more freedom to consider the legislation on its actual merits.

The full list is presented below:

“The Deficit Hawk” (Bob Corker)

Earlier this week, the Tennessee senator announced that he will not seek a third term in the senate – effectively freeing him from political considerations (presumably unless they would jeopardize his chances of winning a seven-figure lobbying payday after leaving office) and free to vote based on his convictions.

Unfortunately for the Trump administration, those considerations could lead him into conflict. Corker, a well-known “deficit hawk”, has said the bill “cannot produce a deficit”. The official administration line is that any initial deficits will be closed by future revenues produced as a byproduct as economic growth.

Corker recently struck a deal with Toomey paving the way for budget legislation that would allow for huge tax cuts in theory, but Corker has said he wouldn’t allow them to balloon the deficit. “With realistic growth projections, it cannot produce a deficit,” Corker said Wednesday. “There is no way in hell I’m voting for it.” He estimated that some $4 trillion in revenue-raisers must be achieved in order to ease his concerns.
Corker also said he wants to “get down to lower corporate rates and get rid of all these crazy issues that exist in our tax code,” describing his opposition to raising the deficit as a "hard stand" in order to "make sure we stay fiscally sane."

“The Hard No” (John McCain)

John McCain has twice now led Republicans to believe he would provide a crucial vote in support of their Obamacare repeal-and-replace bills, only to dash everybody’s hopes at the last minute (the first time around, he cast a surprise “no” vote on the Senate floor that elicited audible gasps from his colleagues). McCain, whose distaste for President Donald Trump dates back at least to when then-candidate Trump mocked him for being taken prisoner during the Vietnam War, is already sending subtle hints that he will likely oppose the administration’s agenda, no matter what form the legislation ultimately takes.  

His comment that he would like to see the tax bill receive “bipartisan support” echoed his reasoning for opposing Graham-Cassidy. As Bloomberg admits, winning Democratic support “may be difficult.” This suggests that McCain will probably start off in the “no” column.   

The irony, of course, is that if a handful of Democrats do break ranks, McCain’s vote would be of little consequence.  

“That may be difficult to reconcile with Senate Republican leaders’ plans to use the fast-track procedure on taxes that they tried to use on health care. Will the so-called maverick be satisfied? Initial reaction among Democrats to the tax framework indicates firm opposition, but McCain was more positive, praising the multiple tax hearings that the Finance Committee has held and saying he looks forward to reviewing the proposal.
McCain, 81 and battling brain cancer, has a history of bucking his party on the issue of taxes. He was among the few Senate Republicans to vote against President George W. Bush’s two separate tax cuts in 2001 and 2003, although he later came to support making them permanent.”

“The Ideologue” (Rand Paul)

After Paul opposed the Republicans’ Obamacare repeal-and-replace agenda at every turn, each time claiming that the bill under consideration wouldn’t repeal enough of the law, his early remarks suggest that he and the Trump administration might find more common ground when it comes to cutting taxes.

True to his libertarian ethos, Paul is seeking massive cuts of “at least 15%” for every tax payer. He has also rejected the notion that cuts should be “revenue neutral” – presumably a priority for deficit hawks like Corker. The Trump administration has repeatedly tried to justify expanding the deficit, saying the cuts will bolster growth, which will in turn compensate for some of the shortfall. Paul appears to be on board with this.

The Kentucky libertarian is never an easy vote to win over – he proved it during the health-care debate by staunchly opposing the Senate’s last opportunity to undo Obamacare before the Sept. 30 deadline, complaining that it didn’t go far enough. And now he’s staking out a far-reaching position on taxes, too, calling for a “large cut of at least 15 percent for every taxpayer” in an Aug. 30 op-ed.

 

Paul is also opposed to paying for a tax cut, describing the push for revenue neutrality as "a terrible idea" that simply shifts around the tax burden and fails to achieve “real tax cuts.” He called on his party to reject the principle of revenue neutrality, warning it will “result in those with the best lobbyists, lawyers and accountants being the winners, while most everyone else either gets nothing or largely loses out.” Senator Ted Cruz of Texas has also said a tax plan should include big cuts, pushing back on the idea of revenue neutral changes.

 

“The Kentucky libertarian is never an easy vote to win over – he proved it during the health-care debate by staunchly opposing the Senate’s last opportunity to undo Obamacare before the Sept. 30 deadline, complaining that it didn’t go far enough. And now he’s staking out a far-reaching position on taxes, too, calling for a “large cut of at least 15 percent for every taxpayer” in an Aug. 30 op-ed.”

“The Tax Wonk” (Pat Toomey)

Toomey is widely recognized as one of the Republican “thought leaders” on tax policy. Toomey has been “an outspoken cheerleader” for cuts, and, like Paul, believes revenue-neutrality would be counterproductive. However, he has staked out two goals that could bring him in conflict with either the administration, or possibly more moderate Republicans. One is capital expensing (allowing businesses to write off the cost of capital projects). The other is the repatriation of corporate profits.

The second-term Pennsylvania senator is an outspoken cheerleader for tax cuts and has argued against the need to pay for such a plan, saying the overarching focus must be on economic growth and that a revenue-neutral plan would be "anemic." He successfully pushed for an agreement on a budget vehicle that allows the tax cuts to add to the deficit. He’s also argued for changing the rules to extend the budget window for a temporary tax cut from 10 years to as many as 30 years. "I’d like to stretch that out as much as possible," he said.

 

Toomey, along with fellow tax wonk Senator Rob Portman of Ohio, are seen as the Senate Finance Committee’s thought leaders on tax policy. One of Toomey’s big priorities: "Expensing capital might be the most pro-growth element of this exercise," he told reporters Wednesday. "That’s really really important to me." Another is to create an incentive to bring home the estimated $2.6 trillion in corporate profits sitting overseas and set up a territorial system where U.S. companies aren’t subject to "an extra layer of tax from overseas income."

“The Chairman” (Orrin Hatch)

Hatch is one of the few remaining senators who was around during the Reagan-era tax-code overhaul. So far, he’s been tight-lipped about the administration’s initial nine-page proposal.

However, Hatch’s support is vital to moving the bill out of committee (a committee that he controls). Hatch, who, as the oldest senator, has said he may not run again, may also be free from political considerations.

“Hatch, who was a second-term senator during the last big tax-code rewrite in 1986, is keenly aware of the issue’s complexity. He declined to say if he believes the Senate will secure a majority to eliminate the state and local tax deduction, a major revenue-raiser targeted in the Trump-GOP framework. "I’m not going to talk about specifics," he said. "It’s a very complex bill to begin with. And we’re going to have to make some very tough decisions about what we keep and what we don’t."

 

Hatch’s panel has a 14-12 split between Republicans and Democrats, which means he can afford to lose no more than one Republican if Democrats decline to play ball. He said he hopes to win Democratic support, but conceded that it "would be unique" in this political environment. "If they want to play politics with it, it’s another matter."

“The Moderate” (Susan Collins)

Finally, we get to Susan Collins. Collins, who opposed repeal-and-replace, is known for her “heterodox” voting record. She has already voted against measures for repealing the estate tax (one of the objectives outlined in the Trump administration’s nine-page document), and she’s also voted for measures raising the top tax rate for people earning more than $1 million (suggesting that she might insist on a fourth, higher tax bracket, a possibility that Trump and his representatives have said they would be open to.

The Maine senator has voted for numerous tax cuts in the past, including the Bush tax cuts of 2001 and 2003. But she has also taken some heterodox positions that could be a factor: In 2015, she was the only GOP senator of 55 who broke ranks and voted against a budget measure calling for repeal of the estate tax, which the Trump-GOP framework seeks to do. In 2008, she voted for a measure to raise the top tax rate for people earning more than $1 million.

 

For now, Collins isn’t revealing any of her thoughts on the framework.

 

"I’m going to take the weekend to study it," she said.

Of course, the final bill hasn’t taken shape yet. But the broad strokes suggest that the administration will be fighting to balance two sets of competing interests: On one side will be Republicans who want to see responsible deficits and more progressive taxes on the wealthy, and the other will be more conservative senators who are less concerned about deficits, and are more focused on across-the-board cuts.

The administration’s tiny margin of error (Republicans can’t afford to lose more than two votes, assuming every Democrat opposes the bill) gives holdouts considerable leverage; it could also be an opportunity for Trump to show off his much hyped "deal-making" prowess (not to mention the political attack machine that is Breitbart) to coax reluctant senators into voting for the final package. One thing is clear: wither neither Obamacare repeal, nor tax reform heading into the midterms, 2018 would be a difficult year for the republicans.

via http://ift.tt/2hBpO8j Tyler Durden

Submitted by South Front

On September 27th, a top commander of the US-backed Syrian Democratic Forces (SDF), Rojda Felat, claimed in a video statement that 100 ISIS terrorists, dressed as SDF members, attacked the SDF. The incident took place on September 26th and the SDF leader alleges that ISIS members came from some government-held area near Deir Ezzor.  Felat added that this is a “sign” that the Syrian government supported the attack. Twenty-eight SDF members were allegedly killed in the clashes with ISIS. The statement came a few days after the Russian Defense Ministry released pictures of US Speical Operations Forces positions deep inside the ISIS-held area near Deir Ezzor city as well as provided information that no clashes had been observed there between ISIS and the SDF.

Meanwhile, the SDF continued clashing with ISIS near al-Suwar with an aim to establish a foothold for further operations on the eastern bank of the Euphrates. In Raqqah city, the SDF captured the al-Nawawi mosque in al-Nahdah district from ISIS and continued developing momentum in the area. The SDF repelled the ISIS raids in al-Sinaa and al-Mashleb neighborhoods.  However, some 45 SDF members were reportedly killed in the clashes.

US-backed Forces and the Syrian Government are trading accusations of supporting ISIS as both make gains in Deir Ezzor.

Syrian Foreign Minister Walid Muallem said in an interview with the Lebanese news TV channel, Al-Mayadeen, that the US is evacuating ISIS fighters from Deir Ezzor province to deploy them in other places. The Syrian Arab Army (SAA) and its allies are deploying reinforcements to the Deir Ezzor area, preparing for an expected push towards the border with Iraq. Reports appeared that the military is working on establishing a second bridge crossing the Euphrates. The first one was set up by the Russians earlier this week.

Meanwhile, more information has emerged of the highest ranking Russian officer to be killed in Syria thus far in the war. Russian Lieutenant General Valery Asapov died as a result of ISIS shelling near Deir Ezzor on Septermber 23rd. He was 51 years old. Asapov was at a Syrian checkpoint when it was bombarded by ISIS forces. Russia's Ministry of Defense reports that Lieutenant General Asapov was helping the Syrian forces command the Deir Ezzor liberation campaign when he was lethally wounded in a sudden ISIS attack.

During the 1990s, Asapov took part in restoring order in Chechnya. In 1995 he was an executive officer of a battalion at Grozny, where he was wounded in the leg. Later in Abkhazia he served as part of a peacekeeping force, and after that in Russia commanded a motorized rifle brigade in Eastern Military District. Ukraine's Ministry of Defense argues that in March 2016 he allegedly commanded the 1st Army Corps of the Donetsk People’s Republic (DPR) in eastern Ukraine, however, no proof has been provided so far.

General Valery Asapov was the highest ranking Russian officer to die in Syria. Source: TASS

In Syria, he worked with the 5th Assault Corps of the Syrian Army. The 5th Assault Corps is one of the main strike units of pro-government forces in Deir Ezzor city, and participated in clearing the road to the city, and then crossed the Euphrates River to its eastern bank where the majority of oil and gas infrastructure is situated. 

“High prestige combined with care were outstanding features of his work,” Russia’s chief of general staff Valery Gerasimov said at General Asapov's funeral on Wednesday. “He worked as the chief of staff of the group of our forces and then was in command of the Fifth Corps of volunteers … A treacherous shell cut short his life.” The Russian pro-opposition media outlet RBC allegedly reached a “close friend” of Asapov. According to him, the Lieutenant General was known for his efforts in minimizing the amount of troop casualties during his service in Syria. The report also blamed Syrian Intelligence for low quality ground intel that potentially created preconditions for Asapov’s death.

RBC also reached the Arm Export magazine editor-in-chief Andrei Frolov . Frolov believes that the casualties are growing because of a high speed of the operation in Deir Ezzor.

“The volume and intensity of firefights increase”, Frolov told to RBC. “Apart from Russian Aerospace Forces in the air, Russian military personnel help and consult the Syrian troops on the ground. Hence more general officers in the region, and consequently the chance of them dying increases,” he added.

According to the Russian Ministry of Defense, Lieutenant General Asapov is the 38th Russian soldier to die in Syria. They estimate that Deir Ezzor city will be liberated soon. Now the city is 85% under Syrian control.

via http://ift.tt/2yx7ikC Tyler Durden

The dollar rally paused on Friday and looked poised to finish its best weekly gain of the year with a whimper, when in a repeat of the Thursday session the, Bloomberg dollar index first rose more than 0.1% during Asia hours before slumping around the European open as month and quarter-end flows came into play again.

U.S. stock-index futures were little changed as investors awaited data on personal spending, which however is likely to be distorted by Hurricanes Harvey and Irma, while both European and Asian shares were in the green. European equities drifted higher, headed for the best month this year, while stocks in Asia also followed the S&P 500 higher earlier. Treasuries were steady after a selloff that saw yields jump 18 basis points this week, the most since Donald Trump’s U.S. election victory in November. Emerging-market assets rallied, with stocks rising and most currencies strengthening against the greenback.

After an initial bout of euphoria over Trump’s tax plan – which still needs approval from Congress although it currently lacks detail, leaving investors guessing which parts of the package will be prioritized by the administration – the renewed “Trump trade” paused as profits were taken on some of the recent reflation trades. Though with the chances of higher U.S. interest rates by the end of the year now at about 65%, they have driven equities higher and taken money out of gold, which was on track for its worst month this year, suggesting that the Fed has once again failed to send a tightening message to markets.

“Trump’s fiscal package continues to drive markets,” said Societe Generale analyst Guy Stear. “U.S. bond yields have climbed both as a direct response to tax cut fears and as the market’s wider risk appetite returned.” He said the sharp rise in 10-year Treasury yields, which hit a two-month high of 2.36% on Thursday, was driving the dollar higher.

The euro swung between gains and losses around a pivotal level as supportive month- and quarter-end flows were countered by choppy trading. European data underscored the region’s economic recovery with German unemployment fallling to a record low in September, bolstering the ECB case to tighten and reduce asset purchases in coming months. The EUR traded within 0.2 percent of the psychologically significant $1.1800 level in London trading. Though the euro is headed for its first monthly drop since February, it is still up for a third quarter, a performance not seen in more than three years. As such, the EUR/USD reversed its drop and rose 0.1% to 1.1801. European exporters were helped in the early session by the dip in the Euro, and nudged the pan-European STOXX 600 index up to a two-month high, while Europe’s miners were green across the board in reflex to Chinese action.

This morning in Asia, markets are trading broadly higher. Note the Chinese markets  will be closed for a week from next Monday given their Golden week holidays. Asian shares regained some poise after several days of declines, with the MSCI index of Asia-Pacific shares ex Japan bounding 0.4%, but still down 1.7% for the week so far. For the quarter, it looked set to gain 4.7%. Chinese H shares capped their biggest monthly loss this year, despite edging higher Friday ahead of national holidays. The Hang Seng China Enterprises Index closes up 0.3% for monthly loss of 3.4%, the worst since December. The Hang Seng Index rose 0.5%; posts first monthly decline this year, down 1.5%; for 3Q, the gauge climbs 7% and it remains Asia’s best performing major index this year. The MSCI China Index rallied 0.5% oon Friday, posting its ninth monthly gain and +0.3% in September. The ASX 200 (+0.2%) and Nikkei 225 (-0.03%) were both initially subdued as energy weighed on Australia after crude prices fell over 1%, while Japanese sentiment was dampened from the prior day’s currency strength and as participants digested a deluge of mixed data releases. However, markets recovered alongside a jubilant China where Hang Seng (+0.5%) and Shanghai Comp. (+0.3%) were underpinned on retailer optimism ahead  of the National Day holiday and as financials benefitted after the banking regulator confirmed it is studying plans to further open up the industry

As a result, Euro zone stocks hit their highest in three months, on track for a quarterly gain after falling back in the second quarter. That helped push world stocks up 0.14% , with MSCI’s all-country world index, which tracks shares in 46 countries, gaining for 11 consecutive months – its longest winning run since 2004.

Meanwhile, GBP saw some added volatility amid the aforementioned month-end flow, alongside comments from BoE’s Carney with the Governor noting that the committee has seen a downtick in productivity due to Brexit uncertainty. GBP/USD slumped as low as -0.5% to 1.3353 first after BOE’s Carney said he is thinking about “taking foot off the accelerator”, it then jumped back above 1.3400 as he reiterated that rates may rise in coming months, in a limited and gradual pace, only to drop once again following weak eco data showing the current account deficit ballooning to GBP 23bln, while GDP for the second quarter was revised down to 1.5 percent from a previous estimate of 1.7 percent as service sector output fell -0.2%. Swedish krona slid as Stefan Ingves appointed to a third term as Riksbank governor.

Over the weekend, investors will be keeping a close eye on the Spanish region of Catalonia, where separatist groups urged supporters to defy efforts to block an independence referendum on Sunday.

“At the moment, there is no significant market impact from the tensions, but if the Catalan police and the Spanish police are standing there in front of the polling stations and discussing whether to block the station or not, this will be an issue,” said DZ Bank strategist Sebastian Fellechner.

In euro zone bond markets, lower-than-expected German inflation data released on Thursday led many to speculate that the corresponding figure for the bloc as a whole, due on Friday, would also disappoint. Germany’s 10-year yield declined two basis points to 0.46 percent. Britain’s 10-year yield declined two basis points to 1.33 percent, the largest drop in almost three weeks. The yield on 10-year Treasuries climbed less than one basis point to 2.31 percent.

In commodities, it’s been a quiet morning in commodities with WTI and Brent crude showing a slight pullback from some of the losses seen late yesterday. WTI looking to make a retest back to USD 52, after rejecting the break above the 1 week high. Precious metals have been led by risk flow, as month end unwinds are evident, with a bid seen through the European morning following the bearish September. Gold consolidates back in summer levels, back within pre- August 25th highs.  Gold, under pressure due to the stronger dollar, was set for its biggest monthly fall of the year. The metal was last all but flat at $1,287 an ounce.

Market Snapshot

• Dow, E-Mini S&P 500 and E- Mini Nasdaq 100 futures little changed
• S&P 500 +0.1% to a fresh record-high at 2,510.06 on Thursday
• VIX Index increases 0.7%, ending 3-day decline… for now
• Gold spot up 0.1% to $1,288.70
• U.S. Dollar Index up 0.02% to 93.11
• WTI crude down 0.1% to $51.53, Brent unchanged at $57.41
• STOXX Europe 600 up 0.02% to 386.42
• MSCI Asia up 0.4% to 161.21
• MSCI Asia ex Japan up 0.6% to 529.56
• Nikkei down 0.03% to 20,356.28
• Topix down 0.08% to 1,674.75
• Hang Seng Index up 0.5% to 27,554.30
• Shanghai Composite up 0.3% to 3,348.94
• Sensex up 0.7% to 31,508.30
• Australia S&P/ASX 200 up 0.2% to 5,681.61
• Kospi up 0.9% to 2,394.47
• German 10Y yield fell 2.5 bps to 0.454%
• Euro up 0.1% to $1.1799
• Brent Futures up 0.4% to $57.61/bbl
• Italian 10Y yield fell 2.9 bps to 1.829%
• Spanish 10Y yield fell 1.6 bps to 1.61%

Bulletin Headline Summary from RanSquawk

• GBP sees some pressure as UK GDP misses
• European Equities marginally higher on the final trading session of the quarter
• Looking ahead, highlights include US PCE, Personal Spending, Chicago PMI and a slew of Central Bank Speakers

Top Overnight News

• White House Is Said to Review Trump Aides’ Use of Private Email
• U.S. Is Said to Plan Freeing AIG From Systemic-Risk Designation
• U.K. 2Q GDP rises 0.3% q/q in line with previous estimate
• Euro-zone September inflation comes in at 1.5%, below consensus of 1.6%. Core CPI also below consensus at 1.1%
• Uber CEO Will Meet With London Regulators Over License Ban
• U.S. equity funds see outflows of $7.6b in week to Sept. 27, largest in
  14 weeks, BofAML strategists write in note, citing EPFR Global data
• MDA, DigitalGlobe Deal Cleared by U.S. Foreign Investment Body
• SJW Names Eric Thornburg as CEO, Succeeding Richard Roth
• CoStar Prices Offering of 2.88m Shrs at Price of $260.00/Shr
• KB Home: Flood Will Only Cause Short-Term Disruption in Sales
• “If the economy continues on this track it’s been on — and all indications are that it is — then in the relatively near term, you could expect interest rates to increase,” BOE Governor Mark Carney says in an interview on BBC Radio 4
• Chinese Premier Li Keqiang is set to keep his seat on the Politburo Standing Committee at an upcoming meeting of the party congress next month, South China Morning Post reports
• German unemployment slid to record low in September in a sign that Europe’s largest economy will continue to expand on the back of domestic spending while August unadjusted retail sales expanded 2.8% y/y vs est. +3.2%

Asia equity markets were positive on what was a range-bound day heading into quarter-end and after a similar close on Wall St, where the S&P 500 eked another fresh record. ASX 200 (+0.2%) and Nikkei 225 (-0.03%) were both initially subdued as energy weighed on Australia after crude prices fell over 1%, while Japanese sentiment was dampened from the prior day’s currency strength and as participants digested a deluge of mixed data releases. However, markets then recovered alongside a jubilant China where Hang Seng (+0.5%) and Shanghai Comp. (+0.3%) were underpinned on retailer optimism ahead  of the National Day holiday and as financials benefitted after the banking regulator confirmed it is studying plans to further open up the industry. 10yr JGBs were modestly higher on mild short covering and with the BoJ present in the market for JPY 710bln of JGBs ranging from the belly to the super-long end. BoJ Summary of Opinions for September 20th-21st meeting stated Japan’s economy is expanding moderately and the best way to achieve the price goal is to patiently maintain current easy policy. There was also an opinion that the BoJ needs to ease policy further to support demand due to expected impact from scheduled sales tax hike.

• Japanese National CPI (Aug) Y/Y 0.7% vs. Exp. 0.6% (Prev. 0.4%); Core CPI Y/Y 0.7% vs. Exp. 0.7% (Prev. 0.5%).
• Japanese Industrial Production (Aug P) M/M 2.1% vs. Exp. 1.8% (Prev. -0.8%); Y/Y 5.4% vs. Exp. 5.2% (Prev. 4.7%)
• Japanese Retail Sales (Aug) M/M -1.7% vs. Exp. -0.5% (Prev. 1.1%); Y/Y 1.7% vs. Exp. 2.5% (Prev. 1.8%)

PBoC refrained from open markets operations today. PBoC set CNY mid-point at 6.6369 (Prev. 6.6285) Chinese Premier Li is said to remain in position for another term, according to Hong Kong press reports.

Top Asia News

• China Uber-Rich Prompt Haitong to Build Hong Kong Private Bank
• BOJ Keeps October Bond Purchase Ranges Unchanged From September
• S&P Estimates China’s Debt Will Expand 77% by 2021
• Cryptocurrency Exchanges Get Nod to Operate in First for Japan
• After Panda Bond, Philippines to Explore Dim Sum in Funding Push

European equities are looking for a strong finish this week with EU bourses modestly higher following the outperformance in material names. In terms of stock specific movers, Volkswagen shares fell amid reports that the company will suffer negative special items of around EUR 2.5bln. Alongside equities, EGBs have been bid this morning which is most likely down to technical factors such as month and quarter end adjustments, as well as some short covering ahead of the weekend. Germany curve showing a flattening bias this morning with outperformance in the long-end.

Top European News

• Euro-Area Inflation Fails to Improve as ECB Prepares for QE Talk
• Deutsche Bank Rating Cut by Fitch as Cryan Turnaround Stalls
• London House Prices Decline for First Time in Eight Years
• U.K. Consumers Display Resilience as Saving Ratio Climbs
• May Pledges Britain Will Defend EU From Russian Aggression
• Germany Sept. SA Unemployment Change -23K M/m; Est. -5K M/m

In currencies, the EUR is slightly firmer this morning, above 1.18 (1.2bln worth of expires at 1.18-1.1815) with cross related buying in EUR/GBP supporting the currency. This comes amid usual month-end demand, consequently taking EUR/GBP back to 0.8800. However, the undertone for EUR remains weak, following Merkel’s wobble in the German Elections, while yesterday’s inflation readings from Germany had also been relatively subdued. The USDJPY nursed some of the prior day’s declines, which was slightly aided by the release of the BoJ’s Summary of Opinions from the September meeting which suggested to patiently maintain current easy policy and that further policy easing may be needed to support demand on the impact from the scheduled sales tax hike. However, price action was contained as participants also digested a slew of mixed Japanese data in which Core CPI printed its firmest YTD of 0.7% but was in-line with estimates and still a distance from the 2% target, while Industrial Production surged and Retail Sales disappointed. Cable saw some volatility amid the aforementioned month-end flow, alongside comments from BoE’s Carney with the Governor noting that the committee has seen a downtick in productivity due to Brexit uncertainty. Carney also reiterated that the majority of members may see a need to raise rates if the economy stays on track. A slew of data this morning further pressured GBP with the current account deficit ballooning to GBP 23bln, while service sector output fell -0.2%

In commodities, a quiet morning in commodities with WTI and Brent crude showing a slight pullback from some of the losses seen late yesterday. WTI looking to make a retest back to USD 52, after rejecting the break above the 1 week high. Precious metals have been led by risk flow, as month end unwinds are evident, with a bid seen through the European morning following the bearish September. Gold consolidates back in summer levels, back within pre- August 25th highs.

Looking at the day ahead, there is PCE core for August, personal income and spending, the Chicago PMI as well as the University of Michigan consumer sentiment index. Onto other events, there is the BOJ’s summary of opinions for its September meeting. In the UK, IMF’s Lagarde and BOE’s Broadbent will speak at the BOE conference (Mr Draghi has cancelled his talk due to a relative’s sickness). Over in the US, the Fed’s Harker will speak at a Fintech event.

US Event Calendar

• 8:30am: Personal Income, est. 0.2%, prior 0.4%; Personal Spending, est. 0.1%, prior 0.3%
  • 8:30am: Real Personal Spending, est. -0.1%, prior 0.2%
  • 8:30am: PCE Deflator MoM, est. 0.3%, prior 0.1%; PCE Deflator YoY, est. 1.5%, prior 1.4%
  • 8:30am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.4%, prior 1.4%
• 9:45am: Chicago Purchasing Manager, est. 58.7, prior 58.9
• 10am: U. of Mich. Sentiment, est. 95.3, prior 95.3; Current Conditions, prior 113.9; Expectations, prior 83.4; 1 Yr Inflation, prior 2.7%; 5-10 Yr Inflation, prior 2.6%
• 11am: Fed’s Harker Speaks at Fintech Event on Consumers and Banking

DB’s Jim Reid concludes the overnight wrap

Welcome to the last day of September and the quarter. There’s always a slight randomness to month and quarter end trading as investors adjust portfolios! The penultimate day of the month initially saw the sudden global bond rout continue after the more optimistic take on tax reform continued before a slight miss on German inflation seems to reverse the decline. 10 year Bund and Treasuries yields saw an intra-day peak of 0.516% and 2.357% respectively, before closing +1.1bp and -0.2bp at 0.475% and 2.309% (+0.7bp this morning in Asia). The yield lows this month were 0.302% and 2.04%.

Yesterday, both the German and Spanish CPI readings missed slightly. In Germany, the September CPI was a touch below market expectations at 0% mom (vs. 0.1%), leaving annual growth at 1.8% yoy (vs. 1.9%). Similarly, Spain’s CPI also missed at 0.6% mom (vs. 0.8% expected) and 1.9% yoy (vs. 2.0%). Looking ahead, we have CPI for the Eurozone, France, Italy and Poland today, along with the US August PCE Core, all of which could help dictate how bonds will end for the month. This morning, the August core Japanese national CPI (ex-fresh food) was in line at 0.7% yoy while IP beat expectations at 2.1% mom (vs. 1.8%). The DB house view on 10 years bonds is for YE yields of 2.75% (USTs) and 0.65% (Bunds) but as DB’s Francis Yared suggested yesterday the scale of the move over the last 36 hours has been a surprise as he believes the tax plan is just an opening bid and likely to be pared down. So a long way to go although at least we’ve moved away from pricing no probability of a tax plan passing.

One event that has slipped a bit under the radar is the independence referendum in Catalonia on Sunday. It’s been deemed illegal and therefore it’s all a bit confusing as to what will happen on Sunday, whether it will indeed go ahead and what happens next. Remember 3 years ago a non-binding ballot saw 80% support independence albeit on a 30% turnout.

Continuing on the theme of breaking away, the EU’s Brexit negotiator Barnier noted yesterday that “we are not yet there in terms of achieving sufficient progress” and signalled that it could take weeks or months before the talks can move onto a trade deal, as one of the sticking points remains that UK has not outlined what it thinks the country owes to the EU. Conversely, he did show some optimism, noting the UK PM’s Florence speech “has created a new dynamic in our negotiations, and we have felt this”. The next round of talks will begin from October 9th, two weeks before the EU Summit.

This morning in Asia, markets are trading broadly higher.The Kospi (+0.56%), Hang Seng (+0.21%) and Chinese bourses are up c0.5% as we type, while the Nikkei is down -0.29%. Note the Chinese markets  will be closed for a week from next Monday given their Golden week holidays.

Back onto Mr Trump’s tax plans which still lacks many details especially on where it’s funding will come from. Treasury Secretary Mnuchin said the plans will actually “cut” the US deficit by US$1trn, as the plans “will not only pay for itself, but it will pay down debt” by generating additional revenue. Conversely, the Committee for a Responsible Federal Budget said the plans could add US $2trn to the deficit over the next 10 years. Notably, a Bloomberg survey suggests 21 out of 26 economists expect the tax plans to increase the budget deficit. Elsewhere, White House’s economic advisor Gary Cohn said the tax plans was aimed at helping the middle class, but he could not guarantee that everyone in that tax bracket would get a cut.

Staying in the US, the Fed’s Esther George reiterated the US economy is in a “reasonably good shape” and that recent storms will hit 3Q growth, but is likely to be offset as rebuilding efforts gets underway. On rates, she said a gradual monetary tightening “will benefit the long run sustainable growth and financial stability in the US”.

Quickly recapping yesterday’s market performance now. US equities strengthened further, with the S&P up 0.12% to a fresh all-time high, while the Dow rose 0.18% and Nasdaq was flat following larger gains the day before. Within the S&P, most sectors advanced slightly, with only the industrials (-0.09%) and consumer discretionary sector marginally down. Elsewhere, the small caps index (Russell 2000) rose a further 0.27%, likely building on the optimism from Trump’s tax plans. Over in Europe, the Stoxx 600 gained (+0.19%) for the six consecutive day, while the DAX (+0.37%) and FTSE (+0.13%) also increased slightly. Turning to currencies, the US dollar index dipped 0.30%, but Sterling gained 0.41%, partly helped by BoE Chief Economist Andy Haldane’s comment that policy tightening should be considered good news for UK. In commodities, WTI oil fell 1.11% as investors consider whether rising output from US shale assets will offset OPEC’s efforts for production cuts. Elsewhere, precious metals were slightly higher yesterday (Gold +0.35%; Silver +0.67%), while other base metals are also trading (Copper +1.90%; Zinc +1.07%) higher this morning.

Away from the markets and onto Japan. A former ally of PM Abe has just formed a new party on Wednesday with reasonable traction as per the polls. Tokyo’s first female governor Yuriko Koike has formally launched her Party of Hope, seeking a “tolerant, conservative reform party”. According to a survey by Mainichi newspaper, it found 18% of respondents would vote for Hope vs. 29% for Abe’s party. We will watch and see whether PM Abe’s opportunistic choice for a snap election on the 22 October will eventually pay off.

Finally, our European equity strategist Sebastian Raedler has published “European equity strategy – Market overview” and in it expects European equities to end the year close to current levels, with his models pointing to temporary upside to around 400 for the Stoxx 600 (around 4% above current levels). Yet, with Euro area PMIs at 56.3, consistent with 3%+ Euro area GDP growth, significantly above our economists’ growth forecast of 2.0% for 2018, he sees scope for PMI momentum (the six-month change in PMIs and a key driver of equity market momentum) to turn meaningfully negative in Q1 next year, leading to renewed downside for the market.

Before we take a look at today’s calendar, we wrap up the other data releases from yesterday. In the US, the final reading of 2Q GDP was slightly higher at 3.1% qoq (vs. 3.0% expected), mainly due to a positive revision in inventories. The 2Q core PCE (0.9% qoq) and personal consumption (3.3%) were both unchanged. More up to date economic readings showed the August wholesale inventories was ahead of expectations at 1% (vs. 0.4% expected) and the advance goods trade balance deficit was not as wide as anticipated (-$62.9bn vs. -$65.1bn). Elsewhere, the Kansas City Fed manufacturing activity index was above expectations at 17 (vs. 15 expected) – the second highest reading over the past six years. Finally, the continuing claims (1,934k vs. 1,993k expected) and initial jobless claims (272k vs. 270k expected) were broadly in line.

For the Eurozone, numerous September confidence indicators beat expectations. The economic sentiment index rose 1pt to a fresh 10-year high (113 vs. 112 expected), while both the business climate (1.34 vs. 1.12 expected) and industrial confidence (6.6 vs. 5.2 expected) also beat. The consumer confidence was in line at -1.2. Elsewhere, Germany’s GfK consumer confidence was slightly lower than expected at 10.8 (vs. 11) while Spain’s retail sales rose 1.6% yoy in August (vs. 1.2% yoy previous).

Looking at the day ahead, we have the Eurozone CPI (1.2% yoy expected for core) along with CPI & PPI for France and Italy. In Germany, there is unemployment change for September. In the UK, there is the final reading of 2Q GDP along with mortgage approvals and money supply M4 stats. Over in the US, there is PCE core for August, personal income and spending, the Chicago PMI as well as the University of Michigan consumer sentiment index. Onto other events, there is the BOJ’s summary of opinions for its September meeting. In the UK, IMF’s Lagarde and BOE’s Broadbent will speak at the BOE conference (Mr Draghi has cancelled his talk due to a relative’s sickness). Over in the US, the Fed’s Harker will speak at a Fintech event.

via http://ift.tt/2x28URX Tyler Durden

Whether due to Yellen’s renewed hawkish push and sudden optimism Trump’s tax reform will pass, or – as SocGen suggested yesterday – Chinese FX policy driving both the USD and 10Y yields….

… the dollar has seen a dramatic rebound since the first week of September after hitting a 2017 low at the start of the month. But how much longer can this recent spike persist?

That’s what Bloomberg’s FX strategist David Finnerty seeks to answer in his latest Macro View note, in which he says that the dollar’s “amazing fourth-quarter comeback — the sort that would leave sports fans and Hollywood producers weak at the knees — could well founder.”

Here’s why:

Hedging Against the Return of the Dollar Comeback

 

The dollar’s suddenly back in vogue, but its amazing fourth-quarter comeback — the sort that would leave sports fans and Hollywood producers weak at the knees — could well founder. 

 

After rebounding from a 2017 low earlier in September, the Bloomberg Dollar Spot Index is rallying from increased optimism about tax reform. The index has bullishly breached its 50-day moving average and has been flirting with resistance at the 1,168.32, August 15th high.

 

It’s not surprising that the dollar would try and stage a recovery. The question though is: how much further can it rally?

 

During its slump, investors shrugged off hawkish rhetoric from the Federal Reserve and rising geopolitical tensions, highlighted by North Korea. It appears, therefore, that a sustained rally will depend on the outcome for President Donald Trump’s proposed tax package.

 

There’s a lot of blanks to be filled in for the proposal, particularly with regards to how it’s going to be paid for.

 

It’s unlikely to be a smooth process. One need only look to the Obamacare repeal effort to see that.

 

Some market participants already appear to be preparing for short-term disappointment: dollar-yen risk- reversal have seen a rise in demand for downside puts this week despite spot rallying.

 

Whether this is to hedge an underlying long dollar position or to speculate on spot falling again is uncertain. Either way it does indicate that investors are thinking dollar-yen’s rally maybe  stretched.

 

If investors see favorable progress being made toward a bill being passed, a test of 1,200 level by Bloomberg’s dollar index by year-end isn’t impossible. Signs of protracted delays may see a revisit of September’s lows.

 

The dollar’s delicately poised going into 2017’s final period. It remains to be seen if there’s a Hollywood ending here.

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Via TheAntiMedia.org,

Saudi Arabia’s Minister of Education has been given the boot for allowing the image of a pop culture icon to be published in his country’s high school curriculum. 

From the Associated Press on Monday:

“A senior Education Ministry official in Saudi Arabia has been fired after high school students opened their textbooks to find an image of Yoda from the ‘Star Wars’ films seated next to a Saudi king.

 

“The image produced by Saudi artist Abdullah Al Shehri, known as Shaweesh, shows the late King Faisal, who was foreign minister at the time, signing the United Nations Charter in 1945 with the diminutive green Jedi master seated to his right.”

Shaweesh, who spoke to the New York Times after posts about the gaffe began popping up on social media last week, says he meant no disrespect to King Faisal and that, in fact, he selected the legendary Jedi to join the late king in the piece because of the positive attributes of both figures.

“He was wise and was always strong in his speeches,” Shaweesh said of Faisal.

 

 “So I found that Yoda was the closest character to the king.”

The piece, the artist says, is part of a series he completed back in 2013 that features American pop culture icons, including Darth Vader and Captain America, superimposed onto historical images.

As to how or why his work was printed in Saudi textbooks, Shaweesh says he’s as baffled as everyone else.

“I am the one who designed it,” he told the Times, “but I am not the one who put it in the book.”

When the BBC followed up on the story, Shaweesh added, “Someone should have checked the image before printing.”

It seems the Saudi Arabian government agrees, as a subsequent apology from the minister on Twitter and an assurance to correct the problem weren’t enough to save his job.

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While the Catalan people prepare to decide whether to break with Spain, the bond market appears to have already made its mind up as Catalonia bonds decouple from Spanish sovereign yields.

Catalonia Bonds expiring next year have seen yields spike over 2% – the highest in over a year – and more than 230bps higher than the equivalent Spanish sovereign bond yields…

As The FT reports, in a special report released earlier this week, Rabobank’s Maartje Wijffelaars warned that “the relationship between Madrid and Barcelona has exponentially worsened in the past months, and it’s unclear how to put the genie back in the bottle”.

And judging by the Catalan police concerns, this will get a lot worse before it gets any better…

As France24 reports, Catalan police warned Wednesday that public disorder may erupt as Spain orders the authorities to seal polling stations and stop the region holding a referendum on independence.

Late on Tuesday, Catalonia's chief prosecutor ordered the force to seal off buildings that will house polling stations before Sunday's referendum which Madrid has declared illegal.

 

But such a step "could lead to undesirable consequences," the Mossos d'Esquadra warned in a posting on Twitter on Wednesday.

 

"These consequences refer to public security and to the more than foreseeable risk of a disruption of public order that this may generate."

 

The prosecutor also ordered police to deploy officers on the day of the ballot to prevent people from voting.

 

The order puts intense pressure on the regional police who are caught between their loyalty to local Catalan leaders who are pushing ahead with the referendum and their pledge to uphold the law.

Ignacio Gonzalez, a spokesman for Judges for Democracy, said it was "feasible" for police to seal polling stations.

"The problem is the unrest that this could cause," he told AFP.

Deputy Prime Minister Soraya Saenz de Santamaria accused Catalan separatists of seeking to end "the years of democratic stability for which our parents fought".

"We are perhaps living in an unprecedented historical moment because of the determination of certain separatists to deny centuries of shared history between Spaniards," she told parliament.

Madrid's opposition to the Catalan independence referendum drew a sharp rebuke from the Basque separatist group ETA, which released a statement accusing the state of being "a prison for the people".

As The FT concludes, few observers are expecting Catalonia to actually become independent even if, as expected, the “yes” side wins on Sunday, with a more likely outcome seen to be an increase in autonomy for the region.

Still, Ms Wijffelaars suggested “the negotiation period is set to take a long time and with the ultimate risk of unilaterally declared independence, uncertainty will linger in markets”.

Analysts at Citi agreed that uncertainty is unlikely to go away, noting that “the risk of even larger confrontations between the two sides post-referendum is rising”:

In the long-run …solving the Catalan challenge may require more fiscal autonomy for the region and possibly allowing a formal self-determination referendum. With both overwhelmingly opposed by the rest of the country, we fear a solution remains years away.

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