Month: January 2018

Amid soaring credit card use, the tumble in Americans’ savings rate continued in December with a modestly better than expected 0.4% MoM rise in incomes and as expected 0.4% rise in spending (but upward revisions in spending).

 

Income is growing at 4.1% YoY – the most since Nov 2015 – but spending is still outpacing that growth…

 

Income growth is dominated by private worker gains – up 5.2% YoY, the highest since Nov 2015…

 

Which means,this is the lowest savings rate since the crisis… (in fact the lowest since September 2005)

 

Recall the stunning Gluskin Sheff chart we presented a month ago, which showed that 13-week annualized credit card balances in the U.S. had gone “completely vertical” in the last few months of 2017 which we said “should make for some great Christmas.”

 

And remember David Rosenberg’s “haunting math” from the GDP number:

“The savings rate fell from 3.3% to 2.6%. If it had stayed the same, real PCE would have been 0.8% (annualized) instead of 3.8% and GDP would have been 0.6% instead of 2.6%.“

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Considering that President Trump declared himself “not a feminist” earlier this week, it’s unsurprising that the president was savagely mocked at the Grammy Awards this year – an event that, like the Golden Globes, was dominated by #MeToo.

But perhaps the most galling attack on the president came in a sketch featuring late-night host James Corden and a handful of celebrities – including Hillary Clinton, who was recently exposed for protecting a sexual harasser – reading passages from Michael Wolff’s controversial “Fire and Fury” book.

Other guests during the segment included John Legend, Cardi B, Snoop Dogg and Cher.

Following Clinton’s reading, Corden shouted ‘That’s it – that’s the one!’

However, rapper Cardi B’s reaction may have unintentionally touched on the truth about Wolff’s book: That many of the scandalous details were exaggerations or fabrications. She stopped mid-sentence and exclaimed “why am I reading this sh*t? I can’t believe this.”

Donald Trump Jr., Nikki Haley and a handful of other Trump associates lashed out at the Grammy’s for politicizing the awards:

 

I have always loved the Grammys but to have artists read the Fire and Fury book killed it. Don’t ruin great music with trash. Some of us love music without the politics thrown in it.

— Nikki Haley (@nikkihaley) January 29, 2018

 

 

Getting to read a #fakenews book excerpt at the Grammys seems like a great consolation prize for losing the presidency. #GrammyAwards

— Donald Trump Jr. (@DonaldJTrumpJr) January 29, 2018

 

 

 

…We now await a response from the president…

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In a shocking development – shocking because as everyone obviously knows market are never rigged or manipulated – late on Friday Reuters reported that the CFTC was set to announce it has fined European lenders UBS, HSBC and Deutsche Bank millions of dollars each for “spoofing” and manipulation in the U.S. futures market.

The enforcement action by the U.S. derivatives regulator was said to be the result of a multi-agency investigation that also involved the Department of Justice and the FBI – the first of its kind for the CFTC.

Reuters also reported that the fines for UBS and Deutsche Bank would be north of ten million, while the fine for HSBC will be slightly less than that. Spoofing, as a reminder, involves placing bids to buy or offers to sell futures contracts with the intent to cancel them before execution. By creating an illusion of demand, spoofers can influence prices to benefit their market positions. Spoofing is what Navinder Sarao was criminally accused of doing when he singlehandedly launched the May 2010 flash crash, for which he is now imprisoned.

And yes, spoofing is a criminal offense under a provision implemented as part of the 2010 Dodd-Frank financial reform.

* * *

Following the Reuters report, many asked why Sarao was arrested and jailed, while major banks caught spoofing and manipulating futures will get away with paying a fine that is a tiny fraction of how much they made from rigging markets in the first place.

Well, it appears that someone else is going to jail after all, because as Reuters followed up this morning, US authorities were set to arrest several people on Monday as part of the spoofing and manipulation probe. The individuals who are set to be perp walked, were previously employed as traders by UBS, Deutsche Bank and HSBC, and will be charged as part of the multi-agency probe,

Last August, a U.S. appeals court upheld the conviction of former New Jersey-based high-speed trader Michael Coscia who was the first individual to be criminally prosecuted for spoofing in the US, aside from Sarao of course.

This is the first time the CFTC, DOJ and FBI have worked together to bring both criminal and civil charges against multiple companies and individuals, sources said.

As Reuters adds, “the bank investigations have been going on for more than a year, but the CFTC has pursued the charges against the traders as part of a more recent effort led by the agency’s head of enforcement, James McDonald, to hold individual employees accountable for corporate wrongdoing, two of the sources said.”

McDonald, a former prosecutor in the Southern District of New York who was appointed to the CFTC role in March, has said he aims to achieve that by encouraging companies and staff to report their own wrongdoing and cooperate with investigators in return for more lenient penalties.

Once the names of market riggers are revealed we will promptly follow up, although we are sad to advise readers that the biggest manipulator of all will sadly be spared.

 

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It’s Merger Monday time: Dr Pepper Snapple Group and Keurig Green Mountain announced that the two companies will merge to create Keurig Dr Pepper, “a new beverage company of scale with a portfolio of iconic consumer brands and unrivaled distribution capability to reach virtually every point-of-sale in North America.”

The merger will combine such brands as Dr Pepper, 7UP, Snapple, A&W, Mott’s and Sunkist with coffee brand Green Mountain Coffee Roasters and the Keurig single-serve coffee system, as well as more than 75 owned, licensed and partner brands in the Keurig system.

Under the terms of the agreement, which has been unanimously approved by the Dr Pepper Snapple Board of Directors, Dr Pepper Snapple shareholders will receive $103.75 per share in a special cash dividend and retain 13% of the combined company, for a total consideration around $135, or a 40% premium to the Friday close of DPS.

Some more transaction details via Bloomberg:

• Dr Pepper holders to get $103.75/shr in special cash div
• Dr Pepper Snapple expects to pay its 1Q ordinary course dividend of 58c-shr
• KDP anticipates total net debt at closing to be about $16.6b and it anticipates maintaining an investment grade rating
• Keurig shareholders will hold 87% and Dr Pepper Snapple shareholders will hold 13% of the combined company

• Upon closing of the transaction, JAB will be the controlling shareholder, Mondelez International to hold about 13-14% stake in the combined company

• JPM, BofAML, GS have provided committed financing for the transaction

According to the press release, Keurig Dr Pepper will have pro forma combined 2017 annual revenues of about $11 billion.

Why the deal?

The company believes its complementary portfolio, access to high-growth segments of the beverage industry and shareholder value-focused management team will enable it to achieve sustained growth through continued innovation, brand consolidation opportunities and enhanced household penetration for its leading brands.

KDP targets realizing $600 million in synergies on an annualized basis by 2021. Dr Pepper Snapple expects to pay its first quarter ordinary course dividend of $0.58 per share. At the close of the transaction, the company expects to deliver an annual dividend of $0.60 per share.

The company will deliver strong cash flow generation and accelerate its deleveraging, with a target Net Debt/EBITDA of below 3.0x within two to three years after closing. KDP anticipates total net debt at closing to be approximately $16.6 billion and it anticipates maintaining an investment grade rating.

And some cheerleading commentary:

Bob Gamgort, Chief Executive Officer of Keurig, said, “Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats. The combination of Dr Pepper Snapple and Keurig will create a new scale beverage company which addresses today’s consumer needs, with a powerful platform of consumer brands and an unparalleled distribution capability to reach virtually every consumer, everywhere. We are fortunate to have talented leadership teams within both companies, and I look forward to working together with the Dr Pepper Snapple team to make this combination a success for all of our stakeholders.”

Bart Becht, Partner and Chairman of JAB Holding Company and Chairman of Keurig, said, “We are very excited about the prospect of KDP becoming a challenger in the beverage industry. Management’s proven operational and integration track record along with their commitment to innovation and potential future brand consolidation opportunities, while maintaining an investment grade rating, positions the company well for long-term success and material shareholder value creation.”

Dirk Van de Put, CEO of Mondelēz International, which will have a significant stake in KDP, said, “We have been very pleased with our coffee partnership with Keurig, and strongly support the strategic rationale for this transaction. We look forward to continuing to participate in the compelling value-creation and long-term growth opportunities inherent in this powerful beverage platform.”

* * *

Goldman served as lead financial advisor to Keurig. BDT & Company, AFW LP, J.P. Morgan Securities LLC and Bank of America Merrill Lynch also acted as financial advisors to Keurig with Skadden, Arps, Slate, Meagher & Flom LLP serving as legal counsel and McDermott Will & Emery LLP serving as tax counsel. Credit Suisse served as financial advisor to Dr Pepper Snapple and Morgan, Lewis & Bockius LLP is serving as Dr Pepper Snapple’s legal advisor. Clifford Chance U.S. LLP is serving as legal advisor to Mondelēz International.

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It’s Merger Monday time: Dr Pepper Snapple Group and Keurig Green Mountain announced that the two companies will merge to create Keurig Dr Pepper, “a new beverage company of scale with a portfolio of iconic consumer brands and unrivaled distribution capability to reach virtually every point-of-sale in North America.”

The merger will combine such brands as Dr Pepper, 7UP, Snapple, A&W, Mott’s and Sunkist with coffee brand Green Mountain Coffee Roasters and the Keurig single-serve coffee system, as well as more than 75 owned, licensed and partner brands in the Keurig system.

Under the terms of the agreement, which has been unanimously approved by the Dr Pepper Snapple Board of Directors, Dr Pepper Snapple shareholders will receive $103.75 per share in a special cash dividend and retain 13% of the combined company, for a total consideration around $135, or a 40% premium to the Friday close of DPS.

Some more transaction details via Bloomberg:

• Dr Pepper holders to get $103.75/shr in special cash div
• Dr Pepper Snapple expects to pay its 1Q ordinary course dividend of 58c-shr
• KDP anticipates total net debt at closing to be about $16.6b and it anticipates maintaining an investment grade rating
• Keurig shareholders will hold 87% and Dr Pepper Snapple shareholders will hold 13% of the combined company

• Upon closing of the transaction, JAB will be the controlling shareholder, Mondelez International to hold about 13-14% stake in the combined company

• JPM, BofAML, GS have provided committed financing for the transaction

According to the press release, Keurig Dr Pepper will have pro forma combined 2017 annual revenues of about $11 billion.

Why the deal?

The company believes its complementary portfolio, access to high-growth segments of the beverage industry and shareholder value-focused management team will enable it to achieve sustained growth through continued innovation, brand consolidation opportunities and enhanced household penetration for its leading brands.

KDP targets realizing $600 million in synergies on an annualized basis by 2021. Dr Pepper Snapple expects to pay its first quarter ordinary course dividend of $0.58 per share. At the close of the transaction, the company expects to deliver an annual dividend of $0.60 per share.

The company will deliver strong cash flow generation and accelerate its deleveraging, with a target Net Debt/EBITDA of below 3.0x within two to three years after closing. KDP anticipates total net debt at closing to be approximately $16.6 billion and it anticipates maintaining an investment grade rating.

And some cheerleading commentary:

Bob Gamgort, Chief Executive Officer of Keurig, said, “Our view of the industry through the lens of consumer needs, versus traditional manufacturer-defined segments, unlocks the opportunity to combine hot and cold beverages and create a platform to increase exposure to high-growth formats. The combination of Dr Pepper Snapple and Keurig will create a new scale beverage company which addresses today’s consumer needs, with a powerful platform of consumer brands and an unparalleled distribution capability to reach virtually every consumer, everywhere. We are fortunate to have talented leadership teams within both companies, and I look forward to working together with the Dr Pepper Snapple team to make this combination a success for all of our stakeholders.”

Bart Becht, Partner and Chairman of JAB Holding Company and Chairman of Keurig, said, “We are very excited about the prospect of KDP becoming a challenger in the beverage industry. Management’s proven operational and integration track record along with their commitment to innovation and potential future brand consolidation opportunities, while maintaining an investment grade rating, positions the company well for long-term success and material shareholder value creation.”

Dirk Van de Put, CEO of Mondelēz International, which will have a significant stake in KDP, said, “We have been very pleased with our coffee partnership with Keurig, and strongly support the strategic rationale for this transaction. We look forward to continuing to participate in the compelling value-creation and long-term growth opportunities inherent in this powerful beverage platform.”

* * *

Goldman served as lead financial advisor to Keurig. BDT & Company, AFW LP, J.P. Morgan Securities LLC and Bank of America Merrill Lynch also acted as financial advisors to Keurig with Skadden, Arps, Slate, Meagher & Flom LLP serving as legal counsel and McDermott Will & Emery LLP serving as tax counsel. Credit Suisse served as financial advisor to Dr Pepper Snapple and Morgan, Lewis & Bockius LLP is serving as Dr Pepper Snapple’s legal advisor. Clifford Chance U.S. LLP is serving as legal advisor to Mondelēz International.

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While there are reasons to be bullish on global equities in 2018 and bear market risks are low, a correction is becoming increasingly likely, Goldman’s equity strategist Peter Oppenheimer writes in an overnight note, repeating our observation from Friday that this has been the strongest start for global equity markets in any year since the infamous 1987.

As Goldman notes, this “melt-up” has occurred despite the already strong returns last year. The S&P 500 had its second-highest risk-adjusted returns in more than 50 years and MSCI World ($) had its second-highest risk-adjusted returns since the index began in 1970. More concerning, at least for the risk-party folks, is that te year-to-date sharp rise in equity returns has also continued even as bond markets are experiencing sharp risk-adjusted losses.

Confirming that a major market move lower is likely imminent – something Bank of America cautioned on Friday – the Goldman Bull/bBar Market Risk Indicator is at elevated levels – in fact at the same level it was before the dot com and credit bubble crash – though, Goldman adds in an attempt to mitigate growing fears, “the continuation of low core inflation and easy monetary policy suggests a correction is more likely than a bear market.” And while monetary policy may be easy now, is getting tighter by the day…

In this context, and expecting the inevitable, Goldman writes that “drawdowns within bull markets of 10% or more are not uncommon” and points out that “there are many historical examples of corrections — drawdowns of 10-20% – – that are short-lived and do not turn into drawn-out bear markets associated with economic weakness.”

Of course, there are many drawdowns of 10% or more which turn into full blown recessions, if not a depression. GS defines a bear market as a drop of 20% or more.

So if Goldman is right what happens next? The Goldman strategist calculates that the average bear market experiences falls of 30% over 13 months and takes 22 months to recover to previous levels (in nominal terms). The average bull market ‘correction’ is 13% over 4 months and takes just 4 months to recover.

Furthermore, Goldman also brings up the troubling observation made over the past week by every bank from Citi to BofA, namely that 2018 has begun with the S&P 500 and VIX both rising, which however now appears to be driven by a frenzied buying of S&P calls to capture every last bit of levered upside.

The increase in volatility amid a market rally may, in part, reflect increasing risks, and may also reflect a bullish willingness to spend premium to add to upside exposure.

Whatever happens, however, Goldman remains optimistic and tells its clients that it “would buy the equity market on a correction and, while we recommend being fully invested, would look to hedge downside risks.”

In conclusion, while Goldman lays out a variety of potential catalysts for a market crash, it notes that “whatever the trigger, a correction of some kind seems a high probability in the coming months.”

We do not believe that this would be prolonged or morph into a bear market, and so would see it as a buying opportunity. That said, technical factors and positioning could make it rather painful.

Finally, not one to shy away from a trade and never letting a crisis trade away from its flow desk, Goldman is urging clients to buy puts ahead of the upcoming drop in the S&P: “We would buy the equity market on a correction and, while we recommend being fully invested, would look to hedge downside risks. Our options strategists have suggested doing this through various structures, including SPX put spreads, which we think could be a good hedge across many markets.”

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Japan’s new cryptocurrency regulations were put to the test last week when CoinCheck – a popular, if unlicensed, Tokyo-based crypto-exchange – became the target of “the biggest heist in crypto history.”  As we reported last week, hackers made off with more than 500 million NEM tokens, worth $400 million before news of the hack triggered a 20% devaluation in what was until recently the tenth most popular cryptocurrency. That sum makes it bigger than Mt. Gox at the time of its implosion in February, 2014.

To save face, Japan’s financial regulator said on Monday it would inspect the country’s cryptocurrency exchanges; it also ordered Coincheck to review and repair its security systems, which, as Reuters pointed out, were irresponsibly lacking.

 

Coincheck executives bowing in apology during a press conference

The exchange apparently hadn’t bothered to implement what’s called multi-signature security – the same flaw that led to the Bitfinex hack about 18 months ago. 

Meanwhile, local media reports cited by Bloomberg say Japan’s Metropolitan Police Department has spoken to employees at Coincheck, has requested full access to the company’s servers, and will be conducting a full investigation. The police will also be analyzing records in Coincheck’s servers to identify the source of the hacking.

Coincheck – which halted withdrawals and trading in all cryptoassets except bitcoin last Friday following the hack, sending the market lower – said it would return 90% of its customers’ assets with internal funds, though it has yet to disclose how or when it will do this.

Japan started requiring exchange operators to register with the government in April 2017, and allowed pre-existing operators like Coincheck to continue ahead of being formally registered. So far, 16 exchanges have been registered by the FSA, Japan’s financial regulator.

Here’s Reuters, on what caused the hack, and what regulators are asking of Coincheck:

The theft highlights the vulnerabilities in trading an asset that global policymakers are struggling to regulate and the broader risks for Japan as it aims to leverage the fintech industry to stimulate economic growth.

The Financial Services Agency (FSA) on Monday ordered improvements to operations at Tokyo-based Coincheck, which on Friday suspended trading in all cryptocurrencies except bitcoin after hackers stole 58 billion yen ($534 million) of NEM coins, among the most popular digital currencies in the world.

Coincheck said on Sunday it would return about 90% of losses with internal funds, though it has yet to figure out how or when.

The NEM coins were stored in a “hot wallet” instead of the more secure “cold wallet”, which operates on platforms not directly connected to the internet, Coincheck said. It also does not use an extra layer of security known as a multi-signature system.

Cryptocurencies were slightly lower on Monday as the customers wondered whether they would receive any reimbursement for their stolen funds.  The FSA has given Coincheck roughly two weeks to improve its systems before it must submit a report on its progress:

The FSA said it ordered Coincheck to submit a report on the hack and measures for preventing a recurrence by Feb. 13, and that it will, if necessary, conduct on-site inspections of other cryptocurrency exchanges.

The regulator has yet to confirm whether Coincheck has sufficient funds to make the reimbursements. Hacks like these are particularly stressful for crypto traders because the collapse of Mt. Gox ended several months of torrid gains for bitcoin, sending it into a two-year bear market. And one researcher said the Coincheck hack underscores the need for exchanges to improve their security.

“It’s been long said that cryptocurrencies are a solid system but cryptocurrency exchanges are not,” said Makoto Sakuma, research fellow at NLI Research Institute.

“This incident showed that the problem has not been solved at all. If Coincheck screws up its crisis management, that could deal a blow to the current cryptocurrency fever.”

The Singapore-based NEM Foundation said it had traced the stolen coins, but it’s not clear if they’re contemplating the type of hard fork that Ethereum used to recover stolen coins following the hack of the DAO. That famously split the Ethereum blockchain into Ethereum and Ethereum Classic. 

Of course, Coincheck hasn’t been the only high-profile hack since Mt. Gox; Last month, Youbit was hacked by what South Korean intelligence believes were North Korea-linked hackers.

As Reuters reminds us, world leaders meeting in Davos last week issued fresh warnings about the dangers of cryptocurrencies, with U.S. Treasury Secretary Steven Mnuchin relating Washington’s concern about the money being used for illicit activity. Japan’s top financial diplomat said regulating cryptocurrencies would be on the agenda for the G20 finance chiefs’ meeting in Argentina in March.

* * *

That skepticism has spread to Wall Street banks, which are apparently not emulating Goldman Sachs’s embrace of cryptocurrency trading.

Deutsche Bank AG’s Wealth Management currently does not advise to invest in crypto-currencies, according to Markus Mueller, Global Head of Chief Investment Office, Bloomberg reported. Problematic issues include high volatility, possible price manipulation and data loss or data theft, he told Bloomberg News in an interview.

“We do not recommend that. It’s only for investors who invest speculatively,” he said. “There is a realistic risk of total loss.” According to Mueller, recent price increases reflect a lot of imagination, driven by the current situation in the market. There is hardly any return scope left in other asset classes such as fixed income, he said.

Mueller is not the only person warning against crypto-currencies.

While central bankers in the US have largely played down the risks cryptocurrencies pose to the broader economy, Bank of Spain Governor Luis Maria Linde said they are an asset that carries enormous risks. And Austria’s Financial Planners Association compared bitcoin investments with a “casino visit”.

In order to establish crypto-currencies as some kind of asset class in the future, more regulation, security and transparency, for example via official trading venues, are required, according to Mueller. “Important issues such as liability and documentation are unclear,” he said. “We are still at the very beginning.”

Still, Mueller maintains that blockchain technology – the distributed ledger system upon which cryptocurrencies are built – is still “interesting” and that the bank is still exploring ways to leverage that technology.

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The recent frantic moves in Treasurys and the dollar continued on Monday as we enter what is set to be a juggernaut of a “rollercoaster week“, and while the dollar collapse seems to have slowed for now, this is as a result of an acceleration in the Treasury selloff, with 10Y yields blowing out to 2.72% for the first time since early 2014, and now deep into what Jeff Gundlach called the “danger zone” for equities.

The TSY weakness is also hitting German Bunds, where the 10Y yield rose to 0.682%, the highest since 2015 and rapidly threatening another VaR shock should the selloff accelerate from here.

Also of notable: the German 5-year bond yield rose as much as 4bps from the open to turn positive for the first time since Dec. 2015, rising as high as 0.012% after ECB Governing Council member Klaas Knot over the weekend said there isn’t a single reason to continue with the QE program.

For once, the Greenback is a broad winner, if very modestly, as high/rising US Treasury yields, now at levels last seen in early 2014, are finally offering the USD some support after 7 weeks of losses, while month-end rebalancing is also prompting short covering given buy signals and latest weekly CTFC spec positioning showing another increase in shorts. The DXY looks firmer above the 89.000 level, but really needs to extend recovery gains beyond 89.500 for a more sustained retracement and to prevent bears from further attacks on key supports below 88.500.

“The higher Treasury 10-year yield is spurring dollar-buying,” said Ko Haruki, head of the financial solutions group at CIBC World Markets (Japan) in Tokyo. “The dollar is consolidating with major currencies failing to break Thursday’s highs.”

Meanwhile, the yen fell after Kuroda’s comments on stronger inflation. GBP/USD slid as much as 0.5% to 1.4094 amid media reports that the Conservatives are poised to trigger a vote of no confidence in U.K. PM May.

The Swiss franc fell versus all G-10 peers amid speculation of possible Swiss National Bank intervention first spurred leveraged buying of USD/CHF, before sellers responded and pulled the pair back down; SNB declined to comment on the matter.

The euro weakened as German bonds retreated for a fourth day, while the Stoxx Europe 600 Index turned lower after benchmarks were mixed in the Asian session.

After trading mixed early in the session, European tech stocks retraced much of their earlier gains on Monday, as traders cited the previously noted report that Apple has cut production as much as 50% for the iPhone X.  Nikkei Asian Review says Apple has alerted suppliers it has cut its production target for the flagship phone to 20 million units in Q1, from a previous estimate of 40 million envisaged in November. Apple suppliers Dialog Semiconductor DLGS.DE, STMicroelectronics STM.BN, Infineon IFXGn.DE, IQE IQE.L and AMS AMS.S all fade gains shortly after the report, though all five stocks remain up on the day after AMS reported results well ahead of expectations

In terms of sector specifics, material names outperform following price action in the metals complex with Rio Tinto, Anglo American, Glencore, Antofagasta and BHP all near the top of the FSTE 100. Elsewhere, focus has also been on the IT sector with AMS (+20%) and Wirecard (+1.7%) soaring in the wake of earnings. Other notable equity specific newsflow includes Sanofi acquiring Ablynx (+3.5%) for EUR 3.9bln and a double upgrade at BAML for Volkswagen (+1.5%) with BAML commenting on whether the Co. could be a potential break-up candidate.

Earlier, Asia-Pac bourses traded mixed: the ASX 200 (+0.4%) and Nikkei 225 (Unch.) opened positive with Australia buoyed by M&A activity including AWE shares which rose 16% on reports of a bid from Mitsui & Co., while Japan stocks were less decisive with price action dictated by currency moves and the stronger yen killed early upside equity momentum.

Notably, Chinese stocks slumped the most in 2 months as large caps retreated.  Equities in Hong Kong also fell, while the big-cap CSI 300 Index loses 2% as of 2:49pm local time. Shanghai Composite Index closed down 1.3% while the Shenzhen Composite Index fell -1.7%. Some Chinese investors are closing their books before Chinese New Year, which means inflows to the stock markets will slow, said Frank Lee, acting chief investment officer for North Asia at DBS Bank (HK) Ltd.

Elsewhere, U.S. oil fell, though it’s at about its strongest level in five months relative to Brent as a weaker dollar and falling stockpiles boosted the American marker. Metals advanced amid optimism over global growth and the impact of the softer greenback, with zinc soaring to the highest level in more than a decade.

Bitcoin climbed, holding its value above $11,000 even after a heist of nearly $500 million in a different digital token spurred calls for more cryptocurrency regulation

Janet Yellen’s final policy meeting as Federal Reserve chair will be the main focus of investor attention in what’s shaping up to be another active week for markets still finding their feet after the recent dollar selloff. There’s a string of fresh economic data due, as well as a State of the Union address from President Donald Trump and earnings releases from the world’s biggest tech companies.

Bulletin Headline Summary from RanSquawk

• The USD regains some ground against its major counterparts as US 10yr yields break above 2.7%
• European equities have kicked the week off with little in the way of sustained direction
• Looking ahead, highlights include US personal consumption and PCE data, NZ trade, ECB’s Coeure

Market Snapshot

• S&P 500 futures down 0.3% to 2,868.75
• STOXX Europe 600 down 0.01% to 400.53
• MSCI Asia Pacific down 0.08% to 187.07
• MSCI Asia Pacific ex Japan up 0.02% to 613.88
• Nikkei down 0.01% to 23,629.34
• Topix up 0.06% to 1,880.45
• Hang Seng Index down 0.6% to 32,966.89
• Shanghai Composite down 1% to 3,523.00
• Sensex up 0.8% to 36,332.10
• Australia S&P/ASX 200 up 0.4% to 6,075.41
• Kospi up 0.9% to 2,598.19
• German 10Y yield rose 5.1 bps to 0.682%
• Euro down 0.2% to $1.2406
• Italian 10Y yield rose 4.3 bps to 1.738%
• Spanish 10Y yield fell 0.7 bps to 1.402%
• Brent futures down 0.6% to $70.11/bbl
• Gold spot down 0.1% to $1,348.48
• U.S. Dollar Index up 0.2% to 89.23

Top Overnight News

• Donald Trump’s presidency would “end” if he followed through on efforts to fire Robert Mueller, the special counsel leading the investigation into Russian interference in the 2016 U.S. election, said Senator Lindsey Graham
• Trump’s Infrastructure Plan Hits Early Roadblock Over Funding
• Massive Cryptocurrency Heist Spurs Calls for More Regulation
• The European Central Bank has to end its quantitative easing as soon as possible, according to ECB Governing Council member Klaas Knot, who said there’s not a single reason anymore to continue with the program
• Sanofi Leapfrogs Novo With $4.8 Billion Cash Bid for Ablynx
• U.S. Is Said to Consider Building 5G Network Amid China Concerns
• The bumpy journey toward Brexit reaches another fork in the road this week as the upper chamber of the British  parliament plans to rewrite a key piece of Prime Minister Theresa May’s legislation
• Billionaire Singh Brothers Accused in Suit of Siphoning Cash
• Germany’s Social Democratic leader said he needs concessions from Chancellor Angela Merkel to sell party members on staying in her government
• Noble Group Said to Reach In-Principle Deal to Restructure Debt
• Ingvar Kamprad, Ikea’s Swedish Billionaire Founder, Dies at 91
• Brexit Woes Mount for May, Fox Says ‘Foolish’ to Challenge Her
• Europe Closes In on Fresh Trade Deal as Trump Puts Up Barriers
• Sentiment among London’s Brexit-hit bankers sank to its gloomiest depths since the 2008 financial crisis, a survey showed – a stark contrast to the bullish tone of finance executives gathered last week in Davos, Switzerland
• Japan’s Vice Minister for International Affairs and currency chief Masatsugu Asakawa says officials are watching foreign-exchange markets closely as volatility has increased

Asia-Pac bourses traded somewhat mixed, as the region failed to maintain the early broad momentum from last Friday’s gains on Wall St. where sentiment was underpinned by earnings and in which all major indices closed at their all-time highs. ASX 200 (+0.4%) and Nikkei 225 (Unch.) opened positive with Australia buoyed by M&A activity including AWE shares which rose 16% on reports of a bid from Mitsui & Co., while Japan stocks were less decisive with price action dictated by currency moves. Both the Hang Seng (-0.6%) and Shanghai Comp. (-1.0%) initially conformed to the gains in which the former continued to post fresh record levels, although the tone later deteriorated amid increases in money market rates after the PBoC skipped open market operations, coupled with underperformance in Shenzhen where Leshi fell limit down for a 4th consecutive day. In addition, Wynn Macau was a notable  underperformer in Hong Kong and slumped around 5% due to allegations of sexual misconduct by Wynn Resorts Chairman, CEO and founder Steve Wynn. Finally, 10yr JGBs are mildly lower as prices fell amid an initial positive risk tone in the region and alongside spill-over selling from their US counterparts, while the BoJ’s Rinban operation was relatively light with the central bank in the market for only JPY 435bln of JGBs. PBoC skipped open market operations for a net daily drain of CNY 140bln.

Top Asian News

•    Moody’s Cautions Vietnam Against Further Monetary Easing
•    Fitch Sells Stake in China Rating Firm Amid Market Opening
•    Alibaba, Foxconn Invest $350 Million in Chinese Car Startup
•    India Does Not Rule Out Fiscal Consolidation Pause This Year
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European equities have kicked the week off with little in the way of sustained direction (Eurostoxx 50 flat) after a relatively mixed session during Asia-Pac trade. In terms of sector specifics, material names outperform following price action in the metals complex with Rio Tinto, Anglo American, Glencore, Antofagasta and BHP all near the top of the FSTE 100. Elsewhere, focus has also been on the IT sector with AMS (+20%) and Wirecard (+1.7%) soaring in the wake of earnings. Other notable equity specific newsflow includes Sanofi acquiring Ablynx (+3.5%) for EUR 3.9bln and a double upgrade at BAML for Volkswagen (+1.5%) with BAML commenting on whether the Co. could be a potential break-up candidate.

Top European News

• Offshore Cash Spike Rattles World’s Biggest Covered-Bond Market
• Le Pen’s National Front Slips in First Votes of the Macron Era

In currencies, the Greenback is a broad winner (for once), as high/rising US Treasury yields are finally offering the USD some support, while month end rebalancing could also prompt short covering given buy signals and latest weekly CTFC spec positioning showing another increase in shorts. The DXY looks firmer above the 89.000 level, but really needs to extend recovery gains beyond 89.500 for a more sustained retracement and to prevent bears from further attacks on key supports below 88.500.

• USD/JPY has bounced off 108.50 again, but remains top heavy around 109.00 amidst offers at the big figure and a fib just above (109.07).
• EUR/USD is straddling 1.2400, but firmly supported above a 1.2344 Fib and via hawkish comments from ECB’s Knot, while Cable has retreated sharply from post-Brexit vote highs (1.4345) to 1.4100 or a few pips under amidst more UK political and EU divorce agreement uncertainty.
• USD/CAD is back up near 1.2350 after mixed NAFTA noises as some reports suggest progress and others big sticking points.
• USD/CHF around the middle of a 0.9335-0.9385 range with the SNB declining comment on any intervention
• AUD/USD and NZD/USD have both backed off from recent 0.8100+ and 0.7400+ peaks on the back of softer metals/commodity prices and cross currency flows (clear rebound over 1.1000 in AUD/NZD).

Very busy week ahead, with US President Trump’s State of the Union address, January’s FOMC meeting and the first NFP release of 2018.

In the commodities complex, WTI crude futures marginally extended above the USD 66.00/bbl level while Brent remains above USD 70bbl. Notable energy newsflow has included comments from the Iranian oil minister who stated that output declined in some oil fields due to lack of resources and added that Iran will seek lower production in coming years if it cannot be fixed. In metals markets, gold trades modestly lower as prices are hampered by the reprieve seen thus far for the USD. Elsewhere, focus has been on Zinc with prices surging to their highest levels in over 10 years amid speculation of contracting global supply. Iranian Oil Minister Zanganeh stated that output declined in some oil fields due to lack of resources and added that Iran will seek lower production in coming years if it cannot be fixed. JP Morgan raised their 2018 WTI forecast by USD 10.70/bbl to USD 65.63/bbl, and Brent forecast by USD 10/bbl to USD 70/bbl citing OPEC’s efforts to rebalance the market.

Kicking the week off the big focus today should be in the US with the December PCE core and deflator data due, alongside the personal income and spending data. Also due to be released is the Dallas Fed manufacturing activity index for January while late in the evening we’ll get the December jobless and retail sales data in Japan. Away from this, China’s NPC Standing Committee is due to kick off a two-day meeting in Beijing in which it’s expected that a revision to the constitution will be discussed. EU ministers will also meet in Brussels where they may decide on a new set of directives for Brexit negotiations. Elsewhere, the sixth round of NAFA talks are expected to conclude in Montreal and the ECB’s Coeure and Lautenschlaeger will also speak.

US Event Calendar

• 8:30am: Personal Income, est. 0.3%, prior 0.3%
• 8:30am: Personal Spending, est. 0.4%, prior 0.6%; Real Personal Spending, est. 0.4%, prior 0.4%
• 8:30am: PCE Deflator MoM, est. 0.1%, prior 0.2%; YoY, est. 1.7%, prior 1.8%
• 8:30am: PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 1.5%, prior 1.5%
• 10:30am: Dallas Fed Manf. Activity, est. 25.4, prior 29.7

DB’s Jim Reid concludes the overnight wrap

It’s a potentially electrifying week ahead with a number of the big rolling themes at the moment having fresh data points for us all to pore over. It’s fair to say that inflation is absolute key to macro at the moment and therefore the most watched print of the week will likely be average hourly earnings in Friday’s payroll report. With regards to inflation and wages we also have the US PCE core and the deflator readings today, the US ECI index on Wednesday, the flash January CPI report for the Euro area also on Wednesday with country level reports out in Germany (Tuesday) and France (Wednesday) and US unit labour costs and productivity on Thursday.

In today’s pdf we copy a chart from DB’s Marcus Heider’s inflation weekly from Friday night where he showed that periods of US$ weakness have typically been associated with higher inflation in developed markets over the past twenty years. He also discusses how Oil prices have benefited from news of another (counter-seasonal) weekly decline in US crude inventories and that recent news imply upside risks to oil price forecasts.

Regular readers will know we think that a number of variables are stacking up at the moment towards higher inflation and a combination of these two factors above potentially adds to the story.

Outside of inflation and labour costs, Friday’s payroll report will be a focus (consensus 180k, DB at 210k) as will tomorrow’s first State of the Union address by Mr Trump. It’s not entirely clear yet what he will talk about but expect the recently passed Republican tax reform bill, trade, the state of the US economy and markets, infrastructure proposals and immigration to all potentially play a part. We also have the latest Fed meeting on Wednesday which Mrs Yellen will chair for the last time with Jerome Powell taking over next week. This meeting could be a bit of a non-event with the next rate hike pencilled in for the March meeting (market pricing currently around 95%). DB continue to expect four rate hikes in 2018 (one above that implied by the Fed dot plots). Away from this, Thursday will be a busy day for manufacturing sector data with the final global PMIs due along with the ISM manufacturing in the US. Finally, earnings season will really ramp up this week with 120 S&P 500 companies due to report, including the turn of some of the big tech heavy hitters including Facebook, Microsoft and eBay on Wednesday, and Alphabet, Amazon and Apple on Thursday. Pfizer, McDonald’s (both Tuesday), AT&T, Boeing (both Wednesday), Shell, Alibaba (both Thursday), ExxonMobil and Chevron (both Friday) are amongst other notable companies scheduled to release results. The full week ahead is published at the end.

The week is off to a mixed start in Asia, with the Kospi 0.74% up, the Nikkei is broadly flat while the Hang Seng (-0.16%) and China’s CSI 300 (-1.05%) are down as we type. The YEN jumped 0.76% back on Friday after Governor Kuroda noted that on inflation “…I think we’re finally close to the target”, but over the weekend, the BOJ clarified the Governor did not revise the inflation outlook and his view is in fact no different to the bank’s Outlook for Economy Activities that was released earlier last week. This morning, the YEN is c0.2% weaker. Elsewhere, Bloomberg reported that hackers have stolen $500m of digital tokens from Japanese crytocurrency exchange Coincoin Inc. back on Friday.

In other news over the weekend, the ECB’s Knot noted QE should end as soon as possible as “the program has done what could realistically be expected of it” and there is not a single reason to continue with it. Further, he added there there’s enough proof for the ECB to end the program, which is also the current sentiment in the governing council.

Ahead of tomorrow’s state of the union address, Friday’s Davos speech by Mr Trump gave us some clues as to his current mood. Initially he noted the US would “no longer turn a blind eye” to what he described as unfair trade practices and will “enforce our trade laws and restore integrity to the trading system”. That said, his other remarks seemed a bit less protectionist. He noted the US is “open for business” and that “now is the best time to bring your money….jobs…businesses to America”. Further, he noted that he would always promote “America First”, but he added “America first does not mean America alone. When the US grows so does the world”. Elsewhere, he said “I may terminate NAFTA, I may not”. So lots bubbling along until his big speech.

Now recapping other markets performance from Friday. US equities rose to fresh highs following strong corporate results, including Intel (shares +11%) and Abbvie (+14%). The S&P (+1.18%), Dow (+0.85%) and Nasdaq (+1.28%) were all higher as all sectors within the S&P advanced. European markets were all higher too, with key bourses up 0.3%-0.7% (DAX +0.31%; Stoxx 600 +0.50%; FTSE +0.65%). The VIX fell for the first time in four days to 11.08 (-4.3%).

Over in government bonds, core 10y bond yields were 2-4bp higher with UST up 4.3bp to a fresh 3.5 year high (2.661%), while Bunds and Gilts rose 1.7bp and 3.2bp respectively. In currencies, the US dollar index extended its three year low (-0.36%), while the Euro and Sterling gained 0.25% and 0.13% respectively. WTI oil strengthened further, up 0.96% to $66.14/bbl (+4.5% for the week). Elsewhere, precious metals were slightly higher (Gold +0.06%; Silver +0.63%) and other base metals were mixed but little changed (Copper -0.60%; Aluminium -0.24%; Zinc +0.29%).

Away from the markets and onto some of the Brexit headlines. In Davos, President Trump said he would have taken a “different attitude” to Brexit talks and that “….I’d have taken a tougher stand in getting out”. Back home, the UK opposition Labour Party leader Corbyn reiterated “we’re not asking for a second referendum” on Brexit and that the UK should have a regulatory environment that is “commensurate with the EU, but must also have power to influence EU rules after Brexit. Elsewhere, a Guardian/ICM poll showed 47% of respondents would favour another referendum once the terms of UK’s departure are clear. If excluding those without a view, 58% of respondents would support a second vote on Brexit. There is also lots of press (incl. Bloomberg) here in the U.K. suggesting that PM May is under increasing pressure within her party to exercise control with rival factions repeatedly speaking out with competing Brexit visions. A vote of no confidence and leadership battle is increasingly being discussed, as per Bloomberg.

Over in Germany, Ms Merkel seemed a bit more open to compromise in order to further progress in the coalition talks with the SPD. The CDU state premier KrampKarrenbauer noted that “our scope (to negotiate with the SPD) is very narrow”, but Ms Merkel noted the preliminary agreement with the SPD is an “outline”, which suggests some room for negotiations in order to finalise talks by 4th February.

We wrap up with other data releases from Friday. In the US, the 4Q GDP was below consensus at 2.6% annualised (vs. 3%).Our US economists noted that despite strength in consumer spending, growth in the quarter was impacted by an outsized increase in imports and materially less inventory accumulation than expected. Net exports subtracted -113bp from headline growth while inventories were an additional -67bp drag. They expect the latter will likely reverse, hence they have raised their Q1 real GDP growth forecast to 3.1% (from 2.3% previously).

The 4Q core PCE was in line at 1.9% qoq while personal consumption was slightly above market at 3.8% (vs. 3.7% expected). The December durable goods orders (ex-transportation) was in line at 0.6% mom but the prior month was upwardly revised by 0.4ppt, while core capital goods beat at 0.6% mom (vs. 0.4% expected). Finally, the December advance goods trade balance deficit widened to -$71.6bln (vs. -$68.9bln) and wholesale inventories grew 0.2% mom (vs. 0.4% expected). In the UK, 4Q GDP was above market at 0.5% qoq (vs. 0.4%) and 1.5% yoy (vs. 1.4%). Elsewhere, France’s January consumer confidence was slightly below  expectations 104 (vs. 106) but manufacturing confidence was above at 113 (vs. 112 expected), which is back to November levels that was a c11 year high.

What to look out for on Monday: Kicking the week off the big focus today should be in the US with the December PCE core and deflator data due, alongside the personal income and spending data. Also due to be released is the Dallas Fed manufacturing activity index for January while late in the evening we’ll get the December jobless and retail sales data in Japan. Away from this, China’s NPC Standing Committee is due to kick off a two-day meeting in Beijing in which it’s expected that a revision to the constitution will be discussed. EU ministers will also meet in Brussels where they may decide on a new set of directives for Brexit negotiations. Elsewhere, the sixth round of NAFA talks are expected to conclude in Montreal and the ECB’s Coeure and Lautenschlaeger will also speak.

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Last week, JPMorgan surprised Wall Street when its tech/semi analyst Narci Chang slashed his outlook on iPhone X demand, forecasting production of Apple’s flagship phone would plunge of 50% Q/Q, “even larger than the decline of the iPhone 8/8+” and noted that the “weakness will continue in 1H18 as high-end smartphones are clearly hitting a plateau this year.”

Following JPM’s downgrade the Apple Supply Chain in mid-September given that: 1) iPhone X expectations are largely priced in, and 2) sustained growth into the 2018 iPhone cycle is unlikely, given limited design changes in the next cycle, Chang warned that “now we believe the peak has arrived even earlier than our expectations.“

One week later it appears he was right because as the Nikkei reports this morning, JPM’s worst case outlook has now been confirmed, and Apple will halve its production target for the iPhone X in the three-month period from January from the figure of over 40 million units envisaged at the time of its release in November. The Japanese news website writes that Apple notified suppliers that it had decided to cut the target for the period to around 20 million units, in light of slower-than-expected sales in the year-end holiday shopping season in key markets such as Europe, the U.S. and China.

According to Nikkei, “the iPhone X, Apple’s first smartphone equipped with an organic light-emitting diode display, has failed to catch on globally — something many put down to a price tag starting at $999.”

Looking forward, the lackluster sales could result in a delay to the company’s plans to introduce OLED screens in other models.

For a period after its launch, production of the model faced a supply shortage due to delays in component delivery. With the inventory now starting to rise, Apple can slow down production.

The high price tag is largely the result of the cost of OLED panels made by Samsung Electronics, the sole supplier of the component. The South Korean giant is currently the only company that can guarantee a steady supply of the screens. In response, Apple is believed to have started considering an increase to proportion of liquid crystal display iPhone models by reducing production of the OLED screen models scheduled for release this year.

The company is expected to maintain a total production target of 30 million units for lower priced models such as the iPhone 8, 8 Plus and the 7.

Aside from impacting Apple’s own top line and guidance, the production cuts for the X will have a domino effect on manufacturers that have supplied high-performance components for the handset, with the combined impact expected to run into billions of dollars. It could also slow down the shift at display manufacturers from LCD to OLED technology.

It is unclear how much of the news is priced in: last week, Morgan Stanley lowered Apple’s price target on slower iPhone demand, although Wall Street is still expecting a blockbuster quarter and forecast when the company reports its earnings on February 1.

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