Month: September 2017

Authored by Patrick Watson via MauldinEconomics.com,

Here’s a loaded question for you: “What could go wrong?”  

In some contexts, it can express mistaken confidence, as in, “Sure I’ll put my hand between that crocodile’s jaws. What could go wrong?”

Investors should ask the same question before entering a position. “What risks am I taking with this trade? What could go wrong if it doesn’t go as planned?”

But here’s the problem: What if you never think to ask the question because you have no idea you’re in that trade?

And guess what—this is your problem if you are a taxpayer anywhere in the US.

Photo: DWS via Flickr

Pension Pain

Part of my job is helping John Mauldin with the research for his Thoughts from the Frontline letters. Regular readers know John isn’t a doom-and-gloom guru. He’s optimistic on most of our big challenges.

Except for a few things—like the brewing state and local pension crisis.

The more John and I dig into it, the worse it looks. We have both spent many hours trying to find any good news or a silver lining, without success.

All over the US, states, cities, school districts, and other governmental entities have promised their workers generous retirement benefits, but haven’t set aside enough cash to pay what they will owe. At some point, perhaps soon, either they will have to cut benefits to retirees or stick taxpayers with a huge bill, or both.

You can read John’s September 16 letter, Pension Storm Warning, to learn more. Then you’ll see why he says to Build Your Economic Storm Shelter Now.

What else could go wrong? Plenty.

Photo via Flickr

Healthcare Goes on the Books

Local governments often give retired police officers, firefighters, teachers, and other workers a pension plus healthcare benefits.

Healthcare is expensive even in the best circumstances. Imagine your health insurer had promised to cover your medical expenses but hadn’t set aside any cash to pay for it.

Remarkably, that’s exactly what has happened. Governments currently disclose their retiree healthcare liabilities only in footnotes to their financial statements. Many have saved little to no money to cover those future expenses.

That’s about to change.

Starting in 2018, the Governmental Accounting Standards Board—the source of generally accepted accounting principles (GAAP) for state and local governments—will force officials to record healthcare liabilities on their balance sheets. Pew Charitable Trusts estimates the national shortfall will add up to $645 billion.

That’s on top of the estimated $1.1 trillion in unfunded pension liabilities they already had. In other words, this giant problem that no one knows how to solve is about to get 59% worse!

Or, more accurately, it’s going to look 59% worse. The healthcare shortfall isn’t new. What’s new is that local governments have to stop obscuring it.

What else could go wrong? Plenty.

Photo: AP

Unbudgeted Crisis

Now, let’s add another crisis on top of the already-terrible one that just got 59% worse.

You’ve probably heard about the opioid drug abuse that is killing thousands of Americans. Putting numbers on it is tricky—often, multiple factors contribute to the same death. The Centers for Disease Control estimates opioids played a role in more than 33,000 deaths in 2015. No one thinks the numbers have improved since then.

The deaths aren’t evenly distributed. This Reuters graphic shows the heaviest concentrations in the Midwest, New England, and New Mexico.

It’s probably no coincidence that some of these states also suffered above-average economic pain in the last decade or two.

The deaths from overdose and the even larger number of near-deaths are putting a huge strain on local government finances in those regions.

A recent Reuters investigation found costs soaring for everything from ambulances to autopsies. Cities and counties are racking up huge bills for courts, prosecutors and public defenders, jails, and treatment programs.

The small towns and counties dealing with this opioid plague are often the same ones whose pension plans and healthcare expenses are already underfunded.

That’s bad news for current retirees, workers who hope to retire, and taxpayers who will ultimately foot the bill. In a word, everyone.

But that’s not all.

Costly Storms

Last weekend at the Texas Tribune Festival here in Austin, I heard Houston Police Chief Art Acevedo discuss his Hurricane Harvey experience. As more areas flooded, he kept the entire department on duty for six straight days, 24 hours a day.

Acevedo said he knew this wasn’t in the budget, but the alternatives were worse. Lives were at stake, and the city needed its protectors more than ever.

The hurricane is over, but the Harvey expenses are just starting. Houston may have to spend $250 million on the disposal of flood debris… and the city is only part of the affected area.

Houston’s pension plans were already on shaky ground, so this won’t help. Many local governments in Florida, Puerto Rico, and the US Virgin Islands may see the same, thanks to Irma and Maria.

So what does it mean to you?

For one, we should plan for substantially higher state and local taxes in the future.

And if you’re a public worker or retiree, you better think about how you will make ends meet if your benefits get slashed.

I’m going to do my part by working even harder to find income-generating investments for Yield Shark subscribers, so they can replace what the pension crisis may cost them.

This is, as John Mauldin says, a problem we can’t just muddle through. All we can do is prepare for it—and now is the time to start.

See you at the top,

via http://ift.tt/2wYDp0g Tyler Durden

Gold Standard Resulted In “Fewer Catastrophes” – FT

– “Going off gold did the opposite of what many people think” – FT Alphaville
– “Surprising” findings show benefits of Gold Standard
–  Study by former Obama advisor in 1999 and speech by Bank of England economist in 2017 make case for gold
– UK economy was ‘much less prone to extremes’ under than the gold standard – research shows
– ‘Gold standard seems to have produced fewer catastrophes for Britain’ – data shows 
– FT still wary of gold standard arguing ‘stability can be overrated and growth is worth having’
– Finding is not surprising and joins a wealth of evidence and research that shows gold’s importance as money, a store of value and safe haven asset

300 years ago last week on the 21st September, 1717 Sir Isaac Newton, Master of the Royal Mint of Great Britain, accidentally invented the gold standard.

Last month it was the 46th anniversary of President Nixon ending the gold standard. Since then the world has existed on a system of fiat paper and digital currency. It works so badly that it has lead to the global financial crisis, unending debt issues and a dramatic devaluation in sovereign currencies.

Despite this, much of the media and central banking system remain supporters of the current financial and monetary status quo.

They are so convinced that the time before fiat money was a disaster that anyone who suggests otherwise is labelled a gold-bug and told to move along.

Last week, there was a glimmer of light when the Financial Times’ Matthew C. Klein uncovered some 18-year old research into the gold standard and a recent speech by a Bank of England economist.

Mr Klein although a young man has quite an impressive journalistic c.v. He writes for FT Alphaville and Bloomberg View about the economy and financial markets.

He previously wrote for the Economist magazine and before that, Klein was a research associate at the Council on Foreign Relations (CFR), where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics.

Going off gold did the opposite of what many people think

Klein writing in FT Alphaville draws on research from former economics advisor to President Obama, Christina Romer:

Imagine you can choose between living in two kinds of societies:

1. Dynamic world prone to wild swings and big crashes, but ultimately more growth in the long run
2. Safe and stable world with greater consistency, less volatility, and much lower risk of catastrophe

You might think that Americans and Europeans effectively decided to move from option 1 to option 2 between the late 19th and mid-20th centuries. Depending on your politics, you might attribute this to the stultification of modernity, or the triumph of the enlightened welfare state.

Regardless, you would be wrong.

The growth of government as a service provider and guarantor of financial security — backed by fiat money — has actually coincided with faster trend growth and greatervariance around that trend line. Moreover, the likelihood of particularly bad events has increased since the escape from the “golden fetters”.

Klein refers to this and subsequent information from Romer as ‘surprising findings’. They are not likely suprising to Klein but would be too many FT readers given its generally negative stance towards gold in recent years.

The gold standard: Reduced volatility 

Klein reports that in 1999, Romer made some interesting findings regarding the stability and volatility of various business cycles in the 20h century.

The findings initially suggest results that would make modern bankers rest on their laurels in terms of how they manage things today, but dig deeper and things don’t look so straight forward.

He reports that Romer concluded:

that business cycles had roughly the same amplitude both before WWI and after WWII. Volatility was slightly lower in the modern period:

Credit: FT, Romer

But this was entirely attributable to the unusual calm of 1985-1997:

Credit: FT, Romer

Given what’s happened since then, the pre-WWI period might look more stable than the era of the “countercylical” Federal Reserve. Romer measured the severity of a downturn by looking at how far industrial production fell from its peak and how long it took to return to its old level. Using her method, the financial crisis was about as painful as the depression of 1920 and the contraction of 1937 — and about 2.5 times as bad as any post-WWII downturn.

Bank of England’s economist makes case for gold

Gertjan Vlieghe, an economist and former economic assistant to Lord Mervyn King at the Bank of England, gave a speech last week entitled ‘Real Interest Rates and Risk’.

The speech presented research on and linked the history of interest rates, economic volatility, and stock market returns.

As Klein points out in the FT the most important part of the speech is most likely to the be most underreported.

Vlieghe’s research finds that whilst the UK economy off the gold standard was better at allocating resources, the dangers it brought to the financial system made it “more fragile” and “lead to a financial crisis”.

Vlieghe at the Bank of England says:

I suspect the increase in the importance of private sector debt and financial intermediation plays an important role, which in turn was facilitated by moving off the gold standard. An economy where debt and financial intermediation play a more important role can allocate resources more efficiently and achieve a higher growth rate, but also becomes more fragile. Small set-backs can have amplified downside effects and even lead to a financial crisis

Very little desire for serious revision

Throughout history, the majority of fiat currencies have met a miserable end, succumbing to hyperinflation after just a few decades.

So far the current global fiat monetary system has survived just over 45 years. Few can seriously look at it and argue that it is healthy. It is increasingly unstable and is in terminal decline.

It is not unfathomable to expect it to fail in the coming financial crisis. Unfortunately bankers and governments have not woken up to this thought yet.

Ignorance is apparently bliss when it comes to believing a decade of money printing can be unwound without serious consequence.

Whilst it is refreshing to see the Financial Times take a positive look at the gold standard, it is unfortunate that they have failed to recognise this simple fact from looking at monetary history and at the wealth of research out there which makes very similar arguments.

One of the world’s most famous bankers, Alan Greenspan, recognised the destructive nature of the fiat system:

The result of the FT’s approach is their readers (you, I, central bankers, finance ministers) are easily swayed into believing that a system of debt, volatility, high returns and high risk is preferable to the gold standard. We come to believe it is ‘the norm’.

But a system which repeatedly fails cannot be ‘the norm.’ Surely the one that we ultimately return to after each failure should be ‘the norm’?

Did we learn anything about money?

Following the financial crisis, a 2009 UN report concluded that the disaster was not a result of failures, instead the result of bad political choices:

Luckily gold’s role as a store of value and important monetary asset is being increasingly appreciated. This is happening both on the part of governments and individuals alike.

Major holders and buyers of gold include the world’s largest central banks, the largest global banks, the largest insurance companies in the world, the largest hedge funds in the world, the largest pension funds in the world and of course many wealthy and prudent investors.

The idea of returning gold to the monetary system is clearly not a crazy one – it is already slowly happening and the Chinese look set to take the lead in this regard.

The mainstream media should not be surprised by this. After all, the evidence shows gold’s ability to protect wealth, reduce volatility and protect us from the policies of central banks and increasingly populist governments.

Klein’s article can be read in full here Going off gold did the opposite of what many people think – FT Alphaville

News and Commentary

Gold rises from 1-mth lows; palladium at discount to platinum (Reuters.com)

Ex-UBS metals trader indicted over alleged metals price rigging (Reuters.com)

Bonds Slide as Dollar Climbs on Tax Plan, Economy (Bloomberg.com)

Trump proposal slashes taxes on businesses, the rich amid deficit worries (Reuters.com)

Billionaire Paulson Targets CEOs Of Poorly Performing Gold Miners (Bloomberg.com)

 Source: City AM

London house prices to fall this year and next on Brexit – Experts (CityAM.com)

This Is Not A Time To Buy Anything – Zell Warns Retail Real Estate Market Is A “Falling Knife” (ZeroHedge.com)

A Real Republic of Opportunity would Tax Land and Property to the Hilt (DavidMCWilliams.ie)

You’re Likely A Lot Less Prepared For Crisis Than You Realize (PeakProsperity.com)

Jim Rogers on why you should get “less passive” today (StansBerryChurcHouse.com)

Gold Prices (LBMA AM)

28 Sep: USD 1,284.30, GBP 961.04 & EUR 1,091.40 per ounce
27 Sep: USD 1,291.30, GBP 963.83 & EUR 1,099.54 per ounce
26 Sep: USD 1,306.90, GBP 969.59 & EUR 1,105.38 per ounce
25 Sep: USD 1,295.50, GBP 957.89 & EUR 1,089.26 per ounce
22 Sep: USD 1,297.00, GBP 956.15 & EUR 1,082.09 per ounce
21 Sep: USD 1,297.35, GBP 960.56 & EUR 1,089.00 per ounce
20 Sep: USD 1,314.90, GBP 970.53 & EUR 1,094.79 per ounce

Silver Prices (LBMA)

28 Sep: USD 16.82, GBP 12.53 & EUR 14.28 per ounce
27 Sep: USD 16.89, GBP 12.58 & EUR 14.38 per ounce
26 Sep: USD 17.01, GBP 12.67 & EUR 14.43 per ounce
25 Sep: USD 16.95, GBP 12.57 & EUR 14.27 per ounce
22 Sep: USD 16.97, GBP 12.52 & EUR 14.18 per ounce
21 Sep: USD 16.95, GBP 12.58 & EUR 14.24 per ounce
20 Sep: USD 17.38, GBP 12.84 & EUR 14.48 per ounce

Recent Market Updates

– Financial Advice From Man Who Made $1+ Billion in 1929 – Importance Of Being Patient and “Sitting”
– “Gold prices to reach $1,400 before the end of the year” – GoldCore
– Commodities King Gartman Says Gold Soon Reach $1,400 As Drums of War Grow Louder
– Bitcoin “Is A Bubble” but Gold Is Money Says World’s Biggest Hedge Fund Manager
– Pensions and Debt Time Bomb In UK: £1 Trillion Crisis Looms
– Gold Investment “Compelling” As Fed May “Kill The Business Cycle”
– “This Is Where The Next Financial Crisis Will Come From” – Deutsche Bank
– Global Debt Bubble Understated By $13 Trillion Warn BIS
– Bitcoin Price Falls 40% In 3 Days Underlining Gold’s Safe Haven Credentials
– Gold Up, Markets Fatigued As War Talk Boils Over
– Oil Rich Venezuela Stops Accepting Dollars
– Massive Equifax Hack Shows Cyber Risk to Deposits and Investments Today
– British People Suddenly Stopped Buying Cars

Important Guides

For your perusal, below are our most popular guides in 2017:

Essential Guide To Storing Gold In Switzerland

Essential Guide To Storing Gold In Singapore

Essential Guide to Tax Free Gold Sovereigns (UK)

Please share our research with family, friends and colleagues who you think would benefit from being informed by it.

via http://ift.tt/2wYMCk6 GoldCore

• GOP Tax Proposal Expected to Benefit Wall Street Firms (WSJ)
• Trump’s Tax Cuts May Produce Short Job-Growth ‘Sugar High’ (BBG)
• Playboy founder Hugh Hefner dies at age 91 (Reuters)
• Mountains of Aid Languish on Docks in Stricken San Juan (BBG)
• Janet Yellen Can’t Help Retirees (BBG)
• Macron’s EU vision faces reality check at Estonia dinner (Reuters)
• EU’s Barnier Says It May Take Months for Brexit Talks to Move On (BBG)
• Aramco listing reshapes Saudi Arabia’s OPEC oil policy (Reuters)
• Health Insurers Stay in ACA Despite Fears of Last-Minute Exits (WSJ)
• Trump Prepares to Pick His Own Auditor at the IRS (BBG)
• Lyft close to selecting IPO adviser (Reuters)
• History Shows Even Sovereign Bond Default Won’t Unseat Maduro (BBG)
• ‘Amazon Effect’ Leads Investors to Sour on Retail Around the World (WSJ)
• Michael R. Bloomberg: Jeff Sessions Has a Point About Free Speech (BBG)
• Toshiba $18 billion sale of chip unit signed, but discord emerges immediately (Reuters)
• Here’s Where the Most Millionaires Are Being Minted (BBG)
• Video streamer Roku raises $219 million in IPO, prices at top of range (Reuters)
• Fighting the Toxic Nightmare Next Door (BBG)
• Apple Interested in Advanced LCDs for Some iPhones in 2018 (WSJ)

 

Overnight Media Digest

WSJ

– U.S. President Donald Trump and GOP leaders proposed sharply reducing tax rates on businesses and many individuals, starting a major legislative push to overhaul the country’s tax code this year. on.wsj.com/2fSLNUq

– Hugh Hefner, the founder of Playboy magazine, died on Wednesday at the age of 91. on.wsj.com/2wYNup2

– Hain Celestial Inc reached an agreement with activist investor Engaged Capital LLC calling for changes to the food-and-beverage company’s board and opening the door to a possible sale, according to people familiar with the matter. on.wsj.com/2fSO4Pc

– Federal securities regulators are investigating an allegation by PepsiCo Inc’s former top lawyer Maura Smith that the company fired her in retaliation for the way she handled an internal probe into potential wrongdoing in Russia, according to people familiar with the matter and internal documents. on.wsj.com/2wTzd1v

– Uber Technologies Inc on Wednesday confirmed it is shutting down its U.S. auto-leasing business, known as Xchange Leasing, which will affect about 500 jobs. on.wsj.com/2k6ugwi

 

FT

Labour Party leader Jeremy Corbyn set out plans to take on landlords, big business and the establishment in his speech to the annual party conference in Brighton by raising the prospect of tighter rent controls.

HSBC Holdings Plc is aiming to become the first high-street lender to launch an app next year that allows customers to see all their accounts, as looming regulation threatens to weaken established lenders’ customer relationships.

Drax Group Plc, owner of Britain’s largest power station, expects its plant in North Yorkshire to play a significant role providing services to UK’s National Grid, such as helping to keep the electricity fed through the system at a stable frequency and providing reserve power to cater for unplanned losses of generation or peaks of demand.

Former Scottish National Party MP George Kerevan told a conference on Wednesday that he will apply for the top job at the Financial Conduct Authority after its current chairman steps down next year.

 

NYT

– Ford Motor Co and Lyft on Wednesday said they had struck a partnership to develop and test autonomous vehicle designs and technology, with the aim of putting Ford’s self-driving vehicles on Lyft’s ride-hailing network in the future. nyti.ms/2fAcEYj

– Ryanair Holdings Plc, dealing with staff shortages that prompted the cancellation of 2,100 flights this month, said on Wednesday that it would cut 18,000 more flights. nyti.ms/2wkXCch

– Brazil offered the world’s oil companies a chance to bid for drilling rights in its waters on Wednesday, and it declared the results encouraging in which 20 companies from eight countries made bids. nyti.ms/2fSn0zK

– Hugh Hefner, Playboy’s founder died Wednesday at his home, the Playboy Mansion near Beverly Hills, California. He was 91. nyti.ms/2fTmW2N

– Facebook Inc insisted it is pro-democracy and pro-truth and the German election shows it, after U.S. President Donald Trump took aim at Facebook on Wednesday calling the social network “anti-Trump.” nyti.ms/2yazEF4

 

Canada

THE GLOBE AND MAIL

** Canadian Finance Minister Bill Morneau says the federal government’s proposed new tax rules will target billions in “dead money” currently parked in small businesses, encouraging owners to pump those savings into the economy. tgam.ca/2hybJbG

** Netflix Inc will spend a minimum of C$500 million ($400 million) over five years on the production and distribution of Canadian movies and TV shows as part of a landmark agreement that will be at the centre of Ottawa’s new cultural policy, federal sources say. tgam.ca/2yK3kpo

** Stelco Holdings Inc plans to raise C$150 million in an initial public offering, money that the Hamilton-based company will plow into production of high quality steel for auto makers and construction projects. tgam.ca/2yKBNEy

NATIONAL POST

** There are 155,000 non-productive oil and gas wells sitting idle in Alberta that pose a potential C$8.6 billion liability to the energy industry and taxpayers, according to a new C.D. Howe Institute report. bit.ly/2yJ8H8k

** Most of Airbnb Inc revenue comes from people renting entire homes that they don’t live in, according to a study by real estate company CBRE, and commissioned by Ottawa-based Hotel Association of Canada. bit.ly/2yIONKO

** Vancouver tech incubator Istuary Innovation Group is facing lawsuits from investors alleging fraudulent activity and “unjust enrichment.” bit.ly/2yKjRKm

 

Britain

The Times

Piers Pottinger has stepped down as chairman of Bell Pottinger’s Asian division after its formal separation from its disgraced British parent company 10 days ago. bit.ly/2wXCwjK

Scania has been fined 880 million euros ($1.03 billion) as the European Commission closed its file on a cartel of lorry makers told to pay 3.8 billion euros for rigging prices on more than nine out of 10 vehicles they sold in Europe over 14 years. bit.ly/2wWYUi0

The Guardian

Google’s price comparison service will compete with rivals for the right to appear at the top of the search engine’s home page, in an effort to comply with an European Union anti-trust ruling. bit.ly/2fA7xHR

Ryanair Holding Plc is facing enforcement action from the Civil Aviation Authority for “persistently misleading passengers” about their rights, piling more woe on the no-frills carrier as it announced a second wave of flight cancellations that will affect 400,000 people. bit.ly/2wW6I3k

The Telegraph

Uber Technologies Inc has denied it treats drivers differently to other minicab firms in London as it appeals a landmark legal ruling that its drivers are owed workers rights such as sick pay and holiday leave. bit.ly/2yIRrQL

Civitas Social Housing plc which buys stock from housing associations in order to provide affordable homes, is to launch a 350 million pounds ($469.11 million) equity raise. bit.ly/2fsesPH

Sky News

Sky News has learnt that talks about a takeover of Palmer & Harvey which supplies every Tesco Corp outlet in the UK, remained in the balance amid an increasingly urgent need for new investment. bit.ly/2fRlI8b

Monarch Airlines has landed bids for parts of its struggling short-haul business from rivals including easyJet Plc and WizzAir as it seeks to extricate itself from a bitter industry price war. bit.ly/2xH1es3

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

In what is probably a "slightly" exaggerated figure, North Korea claimed on Thursday that some 4.7 million students and workers have volunteered to join or re-enlist in the North Korean army since Kim Jong Un called Donald Trump a “dotard” and vowed to retaliate against the US for President Donald Trump's threats to "destroy" North Korea. If accurate, that figure would represent nearly 20% of the North’s population (the country is believed to be home to 25 million people, making it about half the size, population-wise as South Korea).

Furthermore, according to the Rodong Sinmun, North Korea’s biggest newspaper  among the volunteers were 1.2 million women, which was cited by South Korean news agency Yonhap.

Of course, North Korea has made similar claims in the past when tensions with the US have intensified. Pyongyang usually claims that its young citizens voluntarily enlisted in the military in its propaganda campaigns aimed at bolstering national solidarity – even as recently as last month.

North Korea made a similar assertion last month when it condemned the UN Security Council for adopting US-led resolutions over Pyongyang's launches of intercontinental ballistic missiles in July.

On Tuesday, the US imposed another round of meaningless new sanctions on North Korea's banks, after President Donald Trump claimed an important victory by revealing that China had instructed its banks to halt business with North Korea. The president reiterated during a press conference with Spanish leader Mariano Rajoy that the US was “totally prepared” to use a military option against the North, which he said would be “totally devastating.” Earlier this week, National Security Advisor HR McMaster said the US had prepared “four or five different scenarios” for how the crisis with North Korea could be resolved, ominously adding that “some are uglier than others.”

In other news, South Korean officials said they expect more provocative acts by North Korea over the next month to coincide with the anniversary of the founding of the North Korean community party and China’s once-every-five-years Community Party Congress, according to Reuters.

North Korea has a widely observed penchant for marking holidays with demonstrations of its military strength. Reuters said National Security Adviser Chung Eui-yong said he expected Pyongyang to act around Oct. 10 and 18, but gave no additional details, during a meeting with President Moon Jae-in on Thursday.

The South Korean security adviser also claimed in a report that a conflict between the North and the US could erupt because of an accidental incident, according to Park Wan-ju, a lawmaker and head spokesman of the ruling Democratic Party.

“The president said the United States speaks of military and diplomatic options, but South Korea can’t go through war again,” said Park.

Tensions on the Korean peninsula have been simmering since Trump was inaugurated, as the president has engaged in an escalating war of words with North Korea. Last week, North Korea’s foreign minister accused the US during a speech at the UN of having “declared war” on North Korea, citing Trump’s threats.

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

As noted earlier, the return of the “Trump Trade”, however brief, on the back of tax reform euphoria and Hawkish Yellen has dominated market sentiment, resulting in the latest bond market “crash”, sending yields to a nearly three month high of 2.35% earlier this morning, and as Bill Blain showed in a chart, it took just three weeks to reverse the fall we saw in July and August, up 30bps in days, while Bunds are up 20bp and even JGBs are up 5bp (far greater rises in relative terms).

 

Meamwhile, the FX market has continued to shadow every tick in the bond market. The Dollar index reached its low point on 8 September, as EUR/USD spiked to just below 1.21. Since then the EUR/USD has fallen to levels not seen since mid-August, but that’s not a huge correction given that relative (real) yields are back to where they were in mid-May (when EUR/USD was under 1.11).

Putting the rate and FX moves in context, SocGen’s FX analyst Kit Juckes writes that the moves over the last three weeks are big, but can easily be dismissed as a reaction to the excessive gloom of late August (when the fed wasn’t going to hike again in 2017, Donald Trump’s war of words with Kim Jong-Un was beginning to make daily headlines, hurricane season was just beginning to affect economic sentiment and hopes of any fiscal easing had died). “On that take, the rise in US yields will slow, USD/JPY can rise further, and we’ll soon be at levels where EMFX carry trades and long EUR/USD are attractive.”

But most interesting is Juckes’ proposal that according to an “alternative theory” this month’s moves originate not in Washington, but Beijing… He explains below:

Plotting 10year Notes against DXY provides the conventional view and the basis for what follows: The dollar turned higher as yields troughed, and once we’ve pried in a tax plan, a December rate hike, a couple more Fed hikes for 2018 and some political uncertainty in Europe, we can get back to our central scenario. But 8 September also saw the low in USD/CNH and USD/CNY. They have bounced because over the weekend of September 9/10, the Chinese authorities decided to scrap two measures aimed at supporting the Yuan when it was falling too fast (reserve requirements for institutions settling forward Yuan positions and foreign banks’ reserves against offshore Yuan deposits.

 

 

The Yuan has appreciated by 4% against the US dollar this year, despite the fall in September. However, that tells only a very small part of the story. In trade weighted terms, the Yuan is cheaper than it was at the end of 2016, and considerably weaker that it was at its peak in 2015. The Chinese policy of letting the currency weaken is intact. 

 

One school of thought is that the Chinese have played their cards exceptionally well this year in the FX market. At the beginning of the year, as President Trump made accusations of FX manipulation and unfair trade practises, it was clear that a further rise in the USD/CNY rate would be inflammatory. But the stronger euro, and the weaker dollar generally, came to Beijing’s rescue. That allowed USD/CNY to fall without the value of the Yuan overall going up. At the same time, the weaker dollar stopped the fall in Chinese currency reserves. Official data show these recovering slightly. Data on their holdings of treasuries show a relatively bigger bounce. One interpretation is that China has been accumulating Treasuries to stop the Yuan appreciating too fast, buying Treasuries and driving yields lower than they would otherwise have been. Was that 2.03% 10year Note a function of expectations about the Fed, inflation and fiscal policy, or the result of Chinese buying in summer markets?

 

Lower US yields helped the dollar fall broadly, and so helped all the other currencies in China’s trade-weighted basket. A Machiavellian read would suggest that the Chinese were quietly buying EUR/USD to rebalance their reserves, preventing any correction and playing their part of the divergence of EUR/USD from relative yields, watching EUR/CNY reach levels not seen since 2014.

 

To summarize, if Chinese reserve accumulation drove yields and the dollar down, supporting higher-yielding currencies in general, then the previously discussed dramatic reversal by the PBOC on September 8 marked the turning point. Or as Juckes puts it, “policy was changed, signalling the end of Yuan appreciation, the end of the rally for Treasuries, high-yield currencies and the euro. When USD/CNY stops rising, buy EMFX and EUR/USD again?”

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

In a continuation of trading patterns observed over the previous two days, on Thursday the global bond rout deepened in the aftermath of the release of President Trump’s tax-cut plan, Janet Yellen’s recent hawkish comments and renewed optimism over the health of the U.S. economy. While global stocks were mostly mixed as investors tried to assess the implications of the much-anticipated tax proposal, there was less doubt in the bond market, where 10Y Treasurys tumbled as a result of heavy stop loss selling once the 200-DMA (2.3255%) was taken out, sending yields to three month highs around 2.35% as accelerating selling spread to all global rate products.

Bund futures slid from the open, with yield curves steepening as 10y yield briefly breached 0.5% for the first time since early August amid a surge in volume after the Treasury sell-off gained momentum in Asian hours.

“The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans,” said Commerzbank analyst Rainer Guntermann. “At the same time, this gives the Fed more ammunition to hike rates in the coming months.” Trump’s tax plan offered to lower corporate income tax rates, cut taxes for small businesses and reduce the top income tax rate for individuals.

Also helping to boost the dollar, the plan included lower one-time low tax rates for companies to repatriate profits accumulated overseas, which analysts say would lead to a temporary phase of sizable dollar buying. At the same time, others said it could be an uphill battle to get the changes approved. “It is hard to expect this proposal to pass the Congress smoothly.” Takafumi Yamawaki, chief fixed income strategist at J.P. Morgan Securities. “We have to pay attention to how the Republicans will view this,” he added “It is possible that the net fiscal spending will be smaller than what the stock markets expect.”

Meanwhile, after rising early in the session to a six-week high, the US dollar pared gains as the euro rose with German regional inflation data pointing to continued potential overheating. That offered some support to Treasuries, after a slide in Asian hours as a global selloff in core bonds continued.

• German Hesse State CPI YY (Sep) 2.1% (Prev. 1.8%)
• German Hesse State CPI MM (Sep) 0.3% (Prev. 0.0%)
• German Brandenburg State CPI YY (Sep) 1.6% (Prev. 1.8%)
• German Brandenburg State CPI MM (Sep) 0.2% (Prev. 0.1%)
• German Saxony State CPI YY (Sep) 2.0% (Prev. 1.9%)
• German Saxony State CPI MM (Sep) 0.2% (Prev. 0.2%)
• German Bavaria State CPI YY (Sep) 1.8% (Prev. 1.8%)
• German Bavaria State CPI MM (Sep) 0.2% (Prev. 0.2%)
• German NRW State CPI MM (Sep) 0.1% (Prev. 0.1%)
• German NRW State CPI YY (Sep) 1.9% (Prev. 1.9%)

US futures were little changed, with European stocks were steady holding onto recent gains as rising banks balanced retailers, while Asian stocks were mixed, generally lower except Japan where the latest Yen weakness sent local stocks up 0.5%. Gold touched the lowest in a month.

In Europe, the Stoxx Europe 600 Index fell less than 0.01% as publication time. The U.K.’s FTSE 100 Index climbed less than 0.05 percent, while Germany’s DAX Index jumped 0.3 percent to the highest in more than 12 weeks. Banks rose to fresh seven week highs, though that was partly offset as miners struggled and as underwhelming results from one of Europe’s biggest fashion chains, H&M, weighed on retailers, while weakness in Chinese commodity markets continued overnight.  Financials began where they left off yesterday and behave as one of the outperforming sectors in the Stoxx 600. And despite the positive open some EU markets lost early gains, as a fall among basic resources and the more defensive, consumer and health sectors weigh.

Emerging markets were the big losers from the surging dollar and as Treasury yield spike higher. MSCI’s emerging markets equity index was down 0.6% and was on course for its sixth straight daily decline.

Asian markets slipped as they headed to cap a third straight quarter of gains, the longest such winning streak since 2013. Japanese equities rose as the dollar strengthened, while Chinese shares fell ahead of a week-long holiday from Monday. The MSCI Asia Pacific Index dropped 0.2 percent, declining for a sixth day, the longest stretch of losses since Dec. 27. Energy stocks paced the retreat as crude oil fell for a third day, with China Petroleum & Chemical Corp. and PetroChina Co. the biggest drags on the industry gauge. ASX 200 (+0.1%) and Nikkei 225 (+0.47%) initially picked up on the recent US momentum however, Asia-Pac bourses pulled back from best levels amid a lack of catalysts to fuel the advances and as China clouded the tone with Hang Seng (-0.80%) and Shanghai Comp. (-0.2%) both subdued as investors took risk off the table ahead of the mainland’s week-long closure for National Day holidays.

“Japanese stocks rise today is boosted by the sentiment from the weaker yen,” Andy Ferdinand, head of research at PT Samuel Sekuritas Indonesia, says by phone from Jakarta. “Some traders might decide to tidy their books before the long holiday in China to avoid any unwanted surprises.”

The greenback did check back against the yen easing off to 112.62 yen to the dollar having hit a 2-1/2-month high of 113.26 yen the previous day. The Canadian dollar also reversed losses after suffering its biggest drop in eight months on Wednesday, after Bank of Canada Governor Stephen Poloz dampened expectations for further interest rate hikes this year. Canada’s loonie was last at C$1.2468 to the U.S. dollar, having early slid to its lowest in a month.

Commodities were mixed, rebounding after earlier losses, with West Texas Intermediate crude gaining 1.1% to $52.69 a barrel, the highest in more than five months, while gold dropped 0.1% to $1,281.30 an ounce, the weakest in more than six weeks. Copper increased 0.4 percent to $6,462.00 per metric ton on the largest climb in more than two weeks.

In geopolitical news, South Korea is said to believe North Korea could conduct action between October 10th-18th which coincides with North Korea’s Communist Party Founding and China’s Communist Party Congress, according to sources.

Brexit rumors have reemerged, with the EU Parliament saying no sufficient progress on Brexit talks, with sources saying the EU are reportedly in discussions with bringing forward talks about the Brexit transition period. At the same time, PM May has stressed the opportunity that Brexit and free markets bring.

Central bankers from the U.S., U.K. and Australia are among speakers at a Bank of England conference starting in London on Thursday, ensuring the focus will stay firmly on the policy outlook for some of the world’s biggest economies. But that won’t be the only thing on investors’ minds; data is also due on U.S. growth and spending, end-of-quarter volatility may be near and major markets including China will shut next week for a holiday.

Jobless claims, consumer comfort, 2Q gross domestic product, inventories are due Thursday

Market Snapshot

• S&P 500 futures down 0.05% to 2,503.25
• VIX Index retreats 1.4%, third day of declines
• STOXX Europe 600 down 0.02% to 385.54
• MSCI Asia down 0.2% to 160.54
• MSCI Asia ex Japan down 0.6% to 526.47
• Nikkei up 0.5% to 20,363.11
• Topix up 0.7% to 1,676.17
• Hang Seng Index down 0.8% to 27,421.60
• Shanghai Composite down 0.2% to 3,339.64
• Sensex up 0.1% to 31,202.16
• Australia S&P/ASX 200 up 0.1% to 5,670.39
• Kospi up 0.02% to 2,373.14
• German 10Y yield rose 2.2 bps to 0.49%
• Euro up 0.09% to $1.1756
• Brent Futures down 0.09% to $57.85/bbl
• Italian 10Y yield rose 2.7 bps to 1.857%
• Spanish 10Y yield rose 1.5 bps to 1.661%
• Gold spot down 0.08% to $1,281.80
• U.S. Dollar Index up 0.06% to 93.42

Bulletin Headline Summary From Ransquawk

• European markets trade mixed, financials continue to out-perform
• Greenback gives back slight ground following Trump’s Tax Plan
• Looking ahead, highlights include German CPIs, US GDP, PCE figures and a slew of central bank speakers

Top Overnight News

• Trump and Republican leaders announced a tax framework that would represent a major legislative win this year, while economists disagree on the value of cutting the corporate tax rate
• Alphabet Inc. was ordered by regulators to stop promoting its own shopping search results over competitors’ and to make changes designed to give rivals fairer treatment by Sept. 28
• Hong Kong’s appeal as a derivatives hub is growing as Brexit and MiFID II rules set to complicate transactions in Europe
• The
  Bloomberg Dollar Spot Index extended its advance to a six- week high in
  Asian session before trimming gains as Europe came to the market;
  EUR/USD traded as low as 1.1721 before reversing losses in European
  session amid quarter-end flows and profit taking on shorts.
• Treasuries
  continued to slide in Asian hours with futures volumes running ~200% of
  recent averages for the session. Losses accelerated after breaking
  200-DMA. Buying of downside in options was seen, in strikes offering
  protection beyond 2.50% in 10y yields. Bunds futures flushed lower from
  the open in Europe, briefly breaching 0.50% for the first time since
  early August, and Treasuries extended losses before stabilizing. On the
  curve the 10y point has seen sharp underperformance.
• Japan’s opposition forces appeared set to consolidate around Tokyo Governor Yuriko Koike, whose new political group narrowed a gap in opinion polls with Prime Minister Shinzo Abe’s ruling party weeks ahead of a general election
• European Union leaders are considering going some way to meet one of the U.K.’s demands; they are discussing bringing forward talks about the transition period that would follow Brexit, according to three people familiar with the situation
• BOE’s chief economist Haldane told Sky News he’s among the majority of policy makers who believe that the economy is “nearing the point” where a reduction in some stimulus might be warranted and that signs on pay growth have become more ‘encouraging’
• Euro-area economic confidence surged more than economists forecast in September; “A very substantial degree of monetary accommodation is still needed in the euro area for underlying inflationary pressures to gradually build up,” ECB Governing Council member Erkki Liikanen said
• CAD
  trimmed losses vs USD after drifting below 1.25 for the first time in
  almost four weeks in late Asian hours following soft comments by BOC’s
  Poloz Tuesday.
• NZD fell a fourth day; RBNZ held official
  cash rate at record-low 1.75% and said monetary policy will remain
  accommodative for a considerable period.
• Senate Judiciary Tech Subcmte Sets Oct. 4 Hearing on Equifax; Facebook, Twitter, Google Invited to Nov. 1 Senate Cmte Hearing

Asia equity markets traded mixed after momentum from US petered out and as China prepares for National Day Golden Week. ASX 200 (+0.1%) and Nikkei 225 (+0.47%) initially took firm impetus from the gains on Wall St, where Trump tax plans and outperformance in financials and tech led the S&P 500 to fresh intraday records. However, Asia-Pac bourses have pulled back from best levels amid a lack of catalysts to fuel the advances and as China clouded the tone with Hang Seng (-0.80%) and Shanghai Comp. (-0.2%) both subdued as investors took risk off the table ahead of the mainland’s week-long  closure for National Day holidays. 10yr JGBs were lower amid a positive risk tone in Japan and after Japanese yields rose across the curve to mirror their US counterparts, while today’s 2yr auction also failed to provide support with its b/c and lowest accepted price weaker than prior. PBoC injected CNY 50bln via 14-day reverse repos and CNY 20bln via 28-day reverse repos. PBoC set CNY mid-point at 6.6285 (Prev. 6.6192) Japan’s lower house of parliament was dissolved as expected ahead of snap elections.

Top Asian News

• Hedge Funds Bet Billions on Japan Stocks Before Abe Called Vote
• Indonesia Pledges to Guard Currency as Rupiah Nears 10-Month Low
• Bank Indonesia Keeps Exchange Rate Target at 13,420/USD Yr- End
• Toshiba Inks $18 Billion Deal to Sell Chip Arm to Bain Group
• China to Start New Energy Vehicle Production Quota From 2019

European equities opened with a marginal bid, following President Trump’s tax plan, sending the greenback and global yields higher. Financials have begun where they left off yesterday and behave as one of the outperforming sectors in the Stoxx 600. Despite the positive open some EU markets lost early gains, as a fall among basic resources and the more defensive, consumer and health sectors weigh. The US fiscal package sell-off has found some support in Europe, with bund yields finding some resistance around the 0.50% level, despite a brief spike through this level we have consolidated below.

Top European News

• EU Is Said to Consider Brexit Compromise on Transition Talks
• Carney Hails BOE Independence, But Says It Can’t Do Everything
• Liikanen Sees Need for Very Substantial Degree of Accommodation
• Novartis Is Said to Consider Acquisition of Advanced Accelerator
• Deutsche Boerse Said to Take Stake in Big Data Company Trifacta
• Etihad Airways Appoints Tony Douglas as CEO to Lead Overhaul

In currencies, the greenback remains on the front foot with this being down to somewhat of a corrective move which may continue in the short term. The strength in the USD has been pushed USD/JPY through 113.00 with bulls eyeing key levels of 114.00 through 114.50 (July high). Slight uncertainty from the German election has pressured EUR down to the low 1.17s. EUR relatively flat this morning with month-end buying in EUR/GBP providing some modest support. German CPI regional figures have been mixed, with EUR not finding any momentum following the figures, with anticipation likely to now be on the headline German CPI figure. Last night the RBNZ kept the key interest rate unchanged as expected, stating that accommodation will remain for some considerable time. This is seen in the futures where a hike is not fully priced in until the back-end of next year. The RBNZ also toned down its rhetoric on the currency, given the slightly TWI easing of NZD and as such from the release there was a muted reaction.

In commodities, WTI continues to trade within the week’s range, yet does continue to recede at the top end, bulls will look to break through this 52.50 area to spur further pressure toward this run. Markets have been aided by early comments from a KPC official says, expects OPEC to extend oil supply cuts beyond March 2018. Gold continues to grind lower amid the recent risk tone, now trading to an over one-month low, weighed upon by the week’s bullish dollar.

Looking at the day ahead, there is the third reading of 2Q GDP (3% expected), Core PCE and personal consumption. Elsewhere, the Kansas City Fed manufacturing activity index, August wholesale inventories and stats on continuing claims and initial jobless claims are also due. Onto other events, the Fed’s George and Fischer will speak. In the UK, the BOE will hosts the “20 years on” independence conference from the government, with BOE’s Carney, Praet and Lautenschlaeger due to speak

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 3.0%, prior 3.0%; Personal Consumption, est. 3.3%, prior 3.3%
  • GDP Price Index, est. 1.0%, prior 1.0%; Core PCE QoQ, est. 0.9%, prior 0.9%
• 8:30am: Initial Jobless Claims, est. 270,000, prior 259,000; Continuing Claims, est. 1.99m, prior 1.98m
• 8:30am: Advance Goods Trade Balance, est. $65.1b deficit, prior $65.1b deficit, revised $63.9b deficit
• 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 0.6%; Retail Inventories MoM, prior -0.2%, revised -0.1%
• 9:45am: Bloomberg Consumer Comfort, prior 50.6
• 9:45am: Fed’s George Speaks on Economy and Monetary Policy
• 11am: Kansas City Fed Manf. Activity, est. 14.5, prior 16
• 10am: Fed’s Fischer Speaks at BOE Independence Conference, London
• 1:30pm: Fed’s Raphael Bostic to Speak about Careers in Economics

DB’s Jim Reid concludes the overnight wrap

Today sees a very high quality conference of speakers to celebrate the 20th anniversary of the Independence of the Bank of England. How time flies! Watch out for headlines emanating from the event. The surprise announcement just after the UK election in May 1997 was the main reason I’m in Research today as the events around that day proved how average I was at my job at the time. I realised I had to find a new one. Yes as a young bond salesman the shock BoE Independence announcement led to a huge rally in Gilts that day and every client was on the phone to us simultaneously to try to buy Gilts. I got a call from my biggest client to buy him tens of millions of the 7% 2002 issue. However at the same time every other client was trying to do the same thing and quite frankly their sales person was older, more pushy and more aggressive than me. I was at the back of the queue. From that moment I’d worked out that sales was actually quite difficult. So to all the salespeople on this list……. I admire you!! To all the clients I covered…. “I’m sorry”.

Bonds yesterday went the other way to that seen on that fateful 1997 day. Yields rose across the globe as firstly Yellen’s words the previous night set the tone but more importantly optimism over Trump’s tax speech later in the day grew. Strong Durable Goods didn’t harm the story either. The reality has been for some time that tax reform is looking increasingly tough but that markets were pricing a near zero probability of anything passing. Such an outcome might still be the case but when expectations are so low any hopes can help the reflation trade.

On the back of Mr Trump’s tax framework, the S&P 500 rose 0.41% back towards its record high, 10-year treasury yields jumped 7.5bps to 2.311% and the US dollar index gained 0.42% yesterday. Before we recap Mr Trump’s proposals, it’s worth noting that his plans are unfunded and initial estimates by DB’s Peter Hooper and Brett Ryan suggests it could cost up to US$3trn over 10 years, so it will be interesting which part of his plans will eventually make it to formal legislations.

In terms of specifics it seems to be broadly similar to the leaked details as mentioned in our note yesterday, which includes: 1) cutting the corporate tax rate to 20% (from 35% existing) with businesses allowed to immediately write off their non-building capex for at least five years, 2) companies with untaxed offshore profits (c$2.6trn est.) will be subject to a one-time tax, but the rate is unclear, 3) simplify and cut the individual tax rate to 12%, 25% and 35% (from 39.6%), but leaving the door open for Congress to set a fourth tax bracket for high income earners, 4) middle income earners will benefit from a $12k deduction (c2x higher), 5) for pass-through entities (eg: partnerships and limited liability companies), their tax rate will be capped at 25%, and 6) repealing the existing individual alternative minimum tax (AMT), the estate tax and eliminating most itemized deductions (tax incentives for home mortgage interest and charitable contributions are retained).

Early reactions on the political front have been somewhat mixed. Trump called the tax framework as “revolutionary change” and the 20% corporate tax rate as a “perfect number” and non-negotiable. Elsewhere, House speaker Ryan said “this is a now or never moment” and “we can finally get this done” and the Ways and Means Chairman Kevin Brady of Texas said the committee “is ready to turn this framework into legislation”. Conversely, the Senate Finance committee Chairman Orrin Hatch has pledged his committee “would not be a rubber stamp” of the plans, and Senator Bernie Sanders said the  plans are “providing hundreds of billions in tax breaks to the wealthiest people and most profitable corporations”. We shall wait and see how Mr Trump’s plans evolve into legislations. Our US team’s early take is that they see a prospect of some reforms occurring at the corporate level (particularly for small corporates), but the potential for substantive reform of personal tax is much lower.

Turning to the bond market sell-off. In the US, 10y treasury (2y: +3.5bp; 10y: +7.5bp yesterday) yields arenow up c30bp since early September and back at similar levels to late July. They’ve climbed another +2.7bps overnight to 2.337%. In Europe, core bond yields rose c6p (Bunds 10y +6bp; Gilts +5bp; OATs +6bp) while peripherals slightly outperformed with yields up 3-6bp (Italian BTPs +3bp; Portugal: +6bp; Spain +4bp). At the 2 year part of the curve, core bond yields rose by c2bp with US yields hitting 9-year highs.

This morning Asian markets are trading mixed but little changed. As we type, The Nikkei (+0.30%) and ASX 200 (+0.13%) are up slightly, while the Kospi (-0.14%), Hang Seng (-0.34%) and Shanghai Comp. (-0.17%) are marginally softer.

Back onto markets performance yesterday now. US bourses have all strengthened back towards their record highs. The S&P rose 0.41%, with gains led by the financials (+1.30%) and tech (+1.14%) sectors, while utilities and real estate names fell, partly reflecting the prospects of higher yields. Elsewhere, the Dow (+0.25%) and Nasdaq (+1.15%) have traded higher. In Europe, markets were also higher, with the Stoxx 600, DAX and FTSE all up c0.4%, while the peripherals slightly outperformed (FTSE MIB +0.85%; IBEX 35 +1.76%). Notably, the US small cap index (Russell 2000) had one of the best days since March, rising 1.92% yesterday on the back of Trump’s tax plans.

Turning to currencies, the US dollar index strengthened 0.42% (up 2.2% since early Sep.), while the Euro and Sterling fell 0.41% and 0.53% respectively. In commodities, WTI oil was little changed (+0.50%) while precious metals fell modestly (Gold -0.87%; Silver -0.29%) given the risk on bias. Elsewhere, other base metals are trading a bit mixed (Copper +0.02%; Zinc +0.14%; Aluminium -0.37%) but little changed this morning.

Away from the markets and onto central bankers’ commentaries now. In the US, the Fed’s Bullard sounded a bit dovish, noting “the current level of the policy rate is appropriate” given that inflation “has surprised to the downside in recent months”. Elsewhere, the Fed’s Rosengren said “it’s my view that regular and gradual removal of monetary accommodation seems appropriate”. Notably, the odds of a December rate hike as per Bloomberg remains at 70%. Over in Canada, after hiking rates twice since July (+0.50%) to 1%, BOC’s Governor Poloz sounded a bit more cautious, noting there is no  “predetermined path for interest rates” and “the appropriate path for interest rates in this situation is very difficult to know”.

Over in Europe, Germany’s long serving Finance Minister Wolfgang Schaeuble (c8 years in the role) is expected to leave Merkel’s cabinet and take up the role of President of the lower house. Some sees his departure as Germany becoming more accommodating towards the Euro area, but the possibility of a member from the FDP taking up the finance post could mean little will change.

Back in the UK, Bloomberg reports that EU leaders are considering bringing forward talks on the transition period post Brexit as a small concession to kick start the Brexit talks. Elsewhere, the US Commerce Department has imposed a 220% import duties on Canada’s Bombardier jets, citing a complaint by Boeing that the aircraft had received improper subsidies in Canada (Bombardier shares fell 7.49%). The reduced demand for these aircrafts could lead to job losses for workers at the Northern Ireland plants that help build these jets.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the August core capital goods orders (non-defence and ex aircraft) was above markets expectations at 0.9% mom (vs. 0.3% expected) and up 3.6% yoy. The durable goods orders (ex-transport) was in line at 0.2% mom, although the underlying reading is likely stronger given the prior month has been revised upwards by 0.2ppt. Elsewhere, pending home sales fell 2.6% mom (vs. -0.5% expected), partly impacted by Hurricane Harvey, while MBA mortgage applications fell 0.5% (vs. -9.7% previous).

In Europe,Italy’s September business confidence index rose to a 10-year high at 108.0 (vs. 107 previous). Elsewhere, confidence indicators on manufacturing (110.4 vs. 108.2 expected) and consumers (115.5 vs.110.6 expected; highest since January 2016) were also above expectations. In France, consumer confidence was a touch softer at 101 (vs. 103 expected) while the Eurozone’s M3 money supply expanded at 5% (vs. 4.6% expected). In the UK, the September CBI’s Distributive Trades Survey for September was fairly upbeat, with a net 42% of retailers reporting that sales had grown over the past year – the strongest result in two years.

Looking at the day ahead,Germany’s September CPI (0.1% mom, 1.9 yoy expected) and GfK consumer confidence readings will be due. For the Eurozone, there is a range of confidence indicators including: consumers, business climate, economy and industrial. Over in the US, there is the third reading of 2Q GDP (3% expected), Core PCE and personal consumption. Elsewhere, the Kansas City Fed manufacturing activity index, August wholesale inventories and stats on continuing claims and initial jobless claims are also due. Onto other events, the Fed’s George and Fischer will speak. In the UK, the BOE will hosts the “20 years on” independence conference from the government, with BOE’s Carney, Praet and Lautenschlaeger due to speak.

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

Submitted by Bill Blain of Mint Partners

Blain’s Morning Porridge – Why Bond markets are going down and Markets have no memory

“And everything around her is a silver pool of light, the people who surround her feel the benefit of it. It makes you calm…”

Before delving into the collapse in global bonds on tightening speak, the improving prospects for real policy drivers and tax-cuts out of the US, wondering what the stock market is trying to tell us, and all the other madness likely to dominate our trading day.. I have to admit to an ever-so-slightly fuzzy head.

I’m not a Chelsea fan, but one of my clients is. Since he didn’t have time for a trip to Madrid for last night’s game, we watched it at Stamford Bridge instead. Yep, a gang of us were the only people in the stadium last night (which, to be honest, is a most enjoyable alternative to being surrounded by a pack of ravening Chelsea fans!) Although I’m a closet Gunner, it was a marvellous evening – made better by the last kick of the ball victory! (And that is absolutely the last time ever, and I mean ever, I will ever write something nice about Chelsea! )

Back in the real world, it’s a combination of the recent Yellen hawk-talk on a December hike and the prospects Trump will get his tax-cuts and modest reforms passed that have pushed down Treasuries and hiked up the dollar. Rest of global bond market is following in their wake on anticipated global recovery.

I’ve attached a graph (courtesy Martin Malone), showing the 2017 bond market – a series of 2-3 week crashes followed by longer rallies. Looking at the “shapes” you might conclude this bear phase is going to reverse into a rally. But, this time may be different – although we’ve said that before! Some of the factors are obvious; like the coordinated tightening bias across Central banks now embracing normalisation (yep, even the ECB accepts it) and improving economic outlooks, but we’ve also got rising corporate sentiment and a shift towards more positive government policy initiatives at a time when global output gaps are turning positive (after years of post-crisis negatives).

It all points to a longer-term bond bear market.. Its coming… the question, as always, is timing…

One sign its close is we’re seeing more signs of strain in corporate bond spreads as folk realise that being paid a few basis points more for a load more risk “because we needed the yield” is unlikely to prove a long-term career multiplier.

Yet, you wouldn’t know there is any risk of spread de-compression if you talked to new issue buyers. That would be heresy. Such is the hunger for assets, the creed of “ever tighter” has become rote. When some syndicate head is quoted in the FT saying “this is a hot issue… you get a decent yield for what is a highly rated issuer..” you have to wonder exactly how much his weekly recreational pharmaceuticals bill comes to…

The market clearly agrees with him. He was talking about Saudi Arabia’s multi-tranche deal at 145 bp (10-yr) over Treasuries, which offered a “good spread” (US readers: sarcasm alert) over Treasuries as $40bln of orders chased a $12.5bln deal causing the deal price-talk to ratchet in and tighten after launch. But… really.. is Saudi so devoid of perceivable risks that the deal provided a “yield-Christmas” to the lucky buyers?

I have a list of things and places I know are likely to cause me sleepness nights in coming years.. so why put them in the account?  

Meanwhile, I had a number of interesting discussions with clients, analysts and my own Macro-man, Martin Malone, yesterday about Trump and policy. Thus far, Donald has achieved a remarkable clean sheet in not passing any of his headline policies. Although the Tax-cut plans are bound to trigger open warfare on Capitol Hill, the consensus among Washington watchers is increasingly positive they will get passed. Not everyone agrees – but some of the numbers and probabilities point to a good chance of getting them passed this year or early next year.

The tax reform policies are certainly worth a look . They could be real game changers (especially allowing US corporates to repatriate the enormous amounts of cash they’ve stockpiled offshore (mainly in Dublin apparently!). (If nothing else, it might stop the EU getting their hands on disputed taxes!)

Now all this positivity about US policy and the end of bond markets must be positive for stocks – well, so you’d think.. But my stock guru, Steve Previs, (a man who wears wizard robes and a pointy hat in the office, who’s idea of fun is drawing lots of lines on charts and incanting from the Book of Nison!) reckons the charts are telling him there is imminent trouble ahead. He’s talking a “Global Financial Reset.” I’m still sticking to a short-sharp stock correction next month and then its “buying-boots-on” time!

Finally, as if to illustrate were in la-la land, I found myself deeply engrossed in a fascinating Bloomberg article about a young Citicorp banker who’s made a stunning success selling new synthetic CLOs over the past few years.

I couldn’t help but reminisce about my own youth, and as I read the tale I was transported back to the 90s and early Naughties…. as we pushed incredibly complex (but actually very very simple) packaged derivative deals on semi-naïve investors. (And pushing is the right word – I could tell you stories that make Narcos look like Trumpton.)

As I read through the story, I realised the young lady is doing today exactly what we did then… persuading investors a bit of complexity and yield makes it worth the risk. And like we did then, she probably believes utterly in the product.

A line came unbidden to my mine: “The real test of these credit derivative based products will be in a crisis situation..” How wise that commentator was.. oh.. it might have been me!

Of course, we got carried away. Structured derivatives got more and more complex, culminating in the CPDO – a fiendish bouillabaisse of over-leverage and rolling low grade debt. Somehow ABN managed to persuade the ratings agencies these were AAA investments. When it all went wrong, they went predictably horrible.

Apparently the new synthetic CDO market is lapping up new supply.

I simply remind you of Blain’s market mantra no 3: “The Market has no memory.”

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

Authored by Nick Cunningham via OilPrice.com,

Turkey and Iraq have stepped up the pressure on Kurdistan after the semi-autonomous region of Iraq voted for independence. Turkey’s President Recep Tayyip Erdogan threatened to block Kurdish oil exports through Turkish territory, while Baghdad called for an international boycott of Kurdish oil sales.

The Kurdish people appeared to have voted overwhelmingly for independence on Monday, pending final results. But the Kurdish Regional Government has said that the vote, which won’t be recognized internationally, will be a starting point for negotiations with Baghdad, and not the culmination of real independence.

Turkey’s President called the referendum “illegal, null, and void,” and threatened to shut down exports through the pipeline that runs from Kurdistan to the Turkish Mediterranean port of Ceyhan.

“Let’s see where they are going to drain off the petrol — we control the valve,” he said. “Once you turn off the valve, it will be over.”

The referendum was also opposed by Iran, as well as the United States, which argued that it would destabilize the region.

Iraqi Prime Minister Haider al-Abadi said on Sunday that all foreign countries should not purchase oil from Kurdistan, arguing that the sales are illegal if not conducted under the auspices of the Iraqi central government.

Iraq “asks the neighboring countries and the countries of the world to deal exclusively with the federal government of Iraq in regards to entry posts and oil,” a statement from the Prime Minister’s office said.

Kurdistan produces just over 600,000 bpd, or about 15 percent of Iraq’s total output. Most contentiously are the oil fields around disputed areas in Kirkuk, which the Kurds took control of in 2014 when ISIS burst onto the scene and rapidly seized swathes of territory from the Iraqi government.

“The Iraqi government is not going to stand still and watch Kirkuk’s integration into Kurdistan, and the mobilization that we’re seeing is an Iraqi effort to reassert control over the contested territory,” Ayham Kamel, director of the Middle East and North Africa at Eurasia Group, said in a Bloomberg interview. Ethnic clashes “might become a pretext for much wider mobilization,” he added.

Kurdistan is largely at the mercy of its much more powerful neighbors. The bulk of the region’s finances come from oil exports, much of which go through a pipeline across Turkey to the Mediterranean. If Turkey takes draconian action to shut down Kurdish oil exports, it would cripple the Kurdish economy.

“If this boycott call proves successful, a good 500,000 fewer barrels of crude oil per day would reach the market,” Commerzbank said in a note.

The threat of the boycott, as well as the possible shuttering of oil flows through Turkey, led to a significant increase in crude prices, which touched two-year highs on Monday. Brent rose above $58 per barrel, the highest price in more than two years, although prices fell back slightly on Tuesday.

A more serious scenario would be some sort of military clash between Kurdistan and its neighbors. Turkey conducted military exercises along its border with Kurdistan, and Turkish President Erdogan ominously warned that “we may arrive one night, suddenly.”

Kurdish President Massoud Barzani called for calm and diplomatic negotiations, but on Tuesday the Iraqi government ruled out talks. “Barzani is playing a dangerous game of poker,” Anthony Skinner, a director with U.K.-based forecasting company Verisk Maplecroft, told Bloomberg by email. “He is counting on Turkey, Iran and the U.S. not being able to sustain a united stance on pressuring the KRG.”

The gamble is risky, but if the Kurds can stave off retaliation, there is an upside. Because any clash would be a lop-sided affair, given the lack of international support for formal Kurdish independence, military hostilities are unlikely. Turkey could shut down the pipeline that carries Kurdish oil, but Ankara also benefits from tariffs it receives for allowing those shipments to proceed. Baghdad has much less influence, so if Turkey declines to follow through on its threats, the independence vote could give the Kurdish government some leverage with Baghdad in negotiations over revenue sharing, a longstanding grievance that has not been addressed. The Iraqi government has tried for years to halt Kurdish oil exports, but to no avail.

The Kurdish government also recently resolved some outstanding issues with energy companies operating within its borders, restructuring debts and sending payments to some drillers. Rosneft just announced plans to invest $1 billion in Kurdistan to build a natural gas pipeline, a move that comes on the heels of hundreds of millions of dollars’ worth of loans to the Kurdish government earlier this year, to be paid back by future oil sales. The recent deals bolster Kurdistan’s energy outlook.

In short, the belligerent rhetoric surrounding the independence vote between Kurdistan and its neighbors could have already peaked. That might mean that the case for higher crude oil prices will need to come from elsewhere; oil bulls cannot base their bets on supply disruptions from Kurdistan.

via http://ift.tt/2fTH5FK Tyler Durden

If you are a precious metals investor then you may be wondering why the price of gold and silver has been slammed in recent weeks… amid ever-increasing nuclear armageddon rhetoric, storms, quakes, floods, and a central bank (that is notoriously bad at forecasting) about to attempt to do something with its balance sheet thathas never been achieved…

The answer is surprisingly simple… China's Golden Week Holiday.

As SHTFplan.com's Mac Slavo wrote a year ago, and appears to be proved correct once again… Ask the expert pundits on financial media and you’ll get a swath of explanations for how the strength of the dollar or the improving health of the global economy are to blame.

One could reasonably argue that dollar strength this week could certainly put downward pressure on the gold price. So, too, could one make the point that mainstream perspective is such that the economy is improving, which means investors aren’t in panic mode and have no reason to hold a safe haven asset. But neither of these arguments could realistically lead to the smack down we witnessed this week.

So what happened?

Well known gold and silver analyst Andy Hoffman suggests the answer could be much simpler than we have been led to believe.

There’s no reason… there’s not even a propaganda meme of why [gold has been smashed]… there isn’t even a such thing as negative news for precious metals anymore…

 

The fact is, [like the last few years, when prices collapsed], China is closed for the week.

One glance at the last few years gold price action suggests he may well be correct…

After this Friday's close, China will be on vacation for its Golden Week National Holiday and this weakness appears to be traders front-running the traditional chaos that the rest of the world plays when China leaves the playing field.

China will be back in business on October 9th, and that means the Shanghai Gold Exchange, which opened in 2015 to counter Western manipulation of precious metals, will likely help re-balance prices to where they were before this recent takedown.

We could be wrong, but something tells us gold and silver prices won’t stay this low for much longer and that they could well see a complete turnaround when China reopens on October 9th.

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