Month: January 2018

Dow leader Boeing jumped 5%, set for a new all time high with a market cap north of $200 billion, after reporting earnings that blew away expectations, bolstered by surging deliveries of the 737, the planemaker’s biggest profit-center, and an unexpectedly large one-time gain from U.S. tax cuts.

The company reported adjusted Q4 earnings of $4.80 a share, or $3.06 a share excluding the tax gain; both numbers were comfortably above the $2.90 consensus estimate. Revenue for the aircraft maker rose 8.9% to $25.4 billion, also beating the $24.7 billion analyst estimate. The company announced a $1.74 per share benefit in Q4 from the lower corporate levy and said it expects more benefits to come this year. In more good news, the tax reduction is taking effect just as the company starts to see large, taxable cash gains from its 787 Dreamliner after a decade of losses.

The company’s forecast was just as impressive:

• Sees FY core EPS $13.80 to $14.00, estimate $13.38 (range $12.93 to $14.81) (Bloomberg data)
• Sees FY revenue $96.0 billion to $98.0 billion, estimate $93.58 billion (range $90.23 billion to $95.52 billion) (BD)
• Sees FY operating cash flow about $15.0 billion

But perhaps most importantly, in Q4 Boeing generated record operating cash flow of $13.3 billion; and repurchased 46.1 million shares for $9.2 billion

Just this January Boeing had already surged 15%, the largest gain among the 30 members of the Dow Jones Industrial Average and the biggest contributor to the index’s YTD gains. The stock has more than doubled since the start of 2017 as Boeing surpassed General Electric Co. to become the largest U.S. industrial company by market value, according to Bloomberg.

Meanwhile, the futures remains bright: in addition to its humming military business, lower taxes are combining with record jetliner deliveries to fuel the cash gush at Boeing, the biggest gainer on the Dow Jones Industrial Average last year and so far in 2018. Free cash flow was $2.47 billion in the fourth quarter, Boeing said in an earnings report Wednesday, exceeding the $1.66 billion expected.

“The buyback and cash flow have been the whole story on the stock for the last year,” Ken Herbert, an analyst at Canaccord Genuity, said in an interview prior to earnings. And speaking of buybacks, Boeing has promised to return the equivalent of its free cash flow to investors through an $18 billion share buyback program and 20 percent dividend increase approved by directors in December.

There has been bad news along the way too, but it was largely ignored: for one, revenue has declined since 2015. Boeing slowed deliveries of its highly profitable 777 jetliners as sales waned amid a shift to a new model, but EPS have continued to rise, largely boosted by buybacks which resulted in a 15% drop in the company’s average share count.

Under Chief Executive Officer Dennis Muilenburg, Boeing has rolled out new planes like the 737 Max and 787-10 with few glitches while rival Airbus SEbattled engine delays for its A320neo and A330neo. Muilenburg’s campaign to make Boeing leaner has lowered the cost of goods and services.

The planemaker is forecasting sales growth in 2018 as Boeing lifts 737 output by 11% and pockets additional tax savings. Revenue will range from $96 billion to $98 billion, the company predicted, compared with the $93.6 billion expected by analysts.

Most importantly, Boeing’s premarket surge has sent Dow Jones futures over 210 points higher, which may be all this market needed to BTFD.

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The months-long will-they-won’t-they back-and-forth between South Korea’s various regulatory bodies and the cryptocurrency market is finally nearing its final moment of clarity.

Today, in one of the more concrete indications that South Korean regulators aren’t planning a China-style stampout of the cryptocurrency market, the country’s finance minister assured jittery traders that the country is not planning to ban cryptocurrency trading – a possibility that has been raised several times in recent months, sending bitcoin plunging on every occasion.

According to CoinDesk, Kim Dong-yeon said, “there is no intention to ban or suppress cryptocurrency [market],” in response to a question from a lawmaker about the government’s plans to regulate the industry.

Instead of taking the dramatic step of shutting down all local exchanges – like China did – the minister assured his audience that, just as we reported last month, “regulating exchanges is [the government’s] immediate task.”

Reports that South Korea was considering a cryptocurrency ban hammered the market in December. Officials reportedly believed the market was overheating and required more scrutiny. However, officials quickly backtracked, and South Korea’s presidential office clarified on Jan. 11 that a plan to ban trading cryptocurrencies “is one of the measures prepared by the Ministry of Justice, but it’s not a measure that has been finalized.”

That plan has reportedly now been thrown out.

Instead, yesterday saw the introduction of new rules banning the use of anonymous virtual accounts for trading – from now on, South Koreans will need to use their real names on bank and exchange accounts. Furthermore, authorities said traders who don’t comply will face penalties.

As the above chart shows, South Korea is one of the world’s biggest markets for trading bitcoin and other digital currencies. But as China’s crackdown demonstrated, an outright ban in South Korea probably wouldn’t have a lasting impact on the market; many of the businesses would simply migrate to more open economies, and domestic traders would take their business to foreign exchanges.

Despite the reassurances, bitcoin and the other large cryptocurrencies were extending this week’s weakness Wednesday morning following President Donald Trump’s first State of the Union address.

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Former Lehman trader and BBG macro commentator Mark Cudmore, who traditionally has had a cheerful and quite bullish outlook on the market – with the occasional attempt to time the top – appears to have woken up on the wrong side of the bed this morning and in his latest Macro View note explains why he feels there is a persistent sense of dread surrounding markets, not for any tangible reason, but for a much simpler reason: “no-one else out there seems worried at all.”

Of course, record complacency is hardly new, but the moment of realization when all those “complacent” realize they are on the same side of the boat presents the biggest threat to the narrative, as it is precisely when the marginal buyers decide it is time to sell ahead of everyone else, that what ensues next is an avalanche of liquidation frontrunning.

His full thoughts below:

The Lack of Nervousness is Making Me Very Nervous: Macro View

I’m suddenly nervous about global equity markets and it’s not for any good fundamental reason. My concern is primarily driven by the fact that, for once, no-one else out there seems worried at all.

On Tuesday, the Dow Jones Industrial Average fell the most in eight months, with the MSCI All Country World Index suffering the most in five months. The losses are widespread but it seems nobody cares.

“This is just a healthy correction amid a strong bull market,” is the rough consensus. I’ve been repeating the same thing myself on Bloomberg TV. Where are the bears? A 33% jump in the VIX across two days would normally have them very animated. Yet they are silent.

Tax cuts are now cited as a positive game-changer, only a month after their impact was doubted. Higher yields are perceived as a sign of economic optimism rather than a reflection of monetary tightening. Dollar weakness now apparently only brings global economic benefits, even though the U.S. is the most important consumer market in the world.

Macro traders now suddenly value higher equity earnings and improved growth outlooks despite spending last year doubting whether those were enough to drive markets yet higher.

A record percentage of Americans expect equities to rise in the year ahead, according to a Conference Board survey which goes back more than thirty years.

This bullishness all seems logical to me. I’m the one who constantly reiterates that the three pillars — growth, earnings and liquidity — of the global equity bull market are solid and any correction is just that: a correction within an ongoing bull market.

But I’m also a big believer in Warren Buffett’s adage that it’s wise to be “fearful when others are greedy and greedy when others are fearful.” I’ve been happy for the past couple of years when my ever-present underlying bullishness has been ridiculed by some.

Now everyone seems to be on my side of the boat, and I want to move to the other side at least until others join me. Or until the boat capsizes.

Apple, the single largest-weighting in the S&P 500 and the bellwether for both U.S. equities and the technology sector, is trading terribly in technical terms. If no-one else is going to be concerned, then I’m now officially very worried for global equity markets.

 

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S&P futures rebounded 0.3% from the worst two-day selloff since May, and European and Asian stocks rose modestly from early weakness after Trump’s SOTU address did not deliver any major surprises, while traders were cautious ahead of the Fed’s last rate decision under Janet Yellen’s leadership expected to lean on the hawkish side.

On Tuesday, U.S. stocks tumbled amid concerns about a recent sharp rally in bond yields. Health-care shares slumped after Amazon.com, Berkshire Hathaway and JPMorgan agreed to collaborate on ways to offer health-care services to their employees; drugmakers will be in the spotlight again as Trump says prescription drug prices will come down “substantially.”

Despite the recent drop, it’s been a stellar month for stock markets, with major gains across most major gauges that were followed this week by the MSCI All-Country World Index’s biggest two-day slide since September 2016. Investors will now focus on Wednesday’s Federal Reserve rate decision, the ongoing earnings season and more big economic data points to see if the uptrend can resume.

On Tuesday night, Donald Trump sought to connect his presidency to the nation’s prosperity in his first State of the Union address, arguing the U.S. has arrived at a “new American moment” of wealth and opportunity. Trump vowed the “era of economic surrender is over,” but stopped short of naming the targets of his efforts to narrow the U.S.’s ballooning trade deficit, which prevented a major market reaction.

Trump also stated the US is finally seeing rising wages and that unemployment claims have hit a 45-year low. Trump also called on Congress to produce a bill that generates at least USD 1.5tln for new infrastructure investment and said that they will work to fix bad trade deals.

Overnight, the Dollar weakened again as Trump’s State of the Union speech offers few new details, while EMs rose as Trump failed to emphasize tariffs and trade.

“There was a moment where the dollar was bought on Trump’s infrastructure remarks, but that’s because the topic was in focus and markets reacted to that,” said Koichi Takamatsu, head of G-10 currency trading for Japan at Nomura Securities Co. in Tokyo. “On the other hand, after concerns about protectionism receded at Davos, Trump made clear his stance on ‘America First.’ Overall, the reaction to his speech was limited.”

The yen weakened as the BOJ unexpectedly boosted 3-to-5 year bond purchases in today’s open market operation and Kuroda affirmed stimulus policy, before erasing declines. Aussie grinds lower after inflation data misses, while the Aussie curve bull steepened as 3-year yield drops as much as seven basis points to 2.14% following a benign Australian inflation report. The British pound erased a gain as Prime Minister Theresa May headed to China to talk trade.

U.S. Treasuries were marginally firmer with 10-year yield just above 2.70%, despite Trump unveiling his plan for a $1.5 trillion debt-busting infrastructure plan.

European stocks erased gains of as much as 0.3%, with health-care shares (-0.5%) contributing the most to declines higher, after a two-day selloff as traders assess earnings and eye Federal Reserve Chair Janet Yellen’s final meeting on interest rates before her term ends. The Stoxx Europe 600 Index was flat heading for its best January in three years. Media shares lead gains, while Ericsson drags the tech sector lower after posting sales that missed analysts’ estimates. Capita is the biggest single-stock drag on the index after suspending its dividend and saying it plans to raise more equity, sending the stock for a record slump.

Asian stocks were mostly higher after Trump refrained from any comments that would have unnerved markets. As such, Australia’s ASX 200 (+0.2%) pared early losses and finished positive, although the commodity-related sectors continued their underperformance, while Nikkei 225 (-0.4%) swung between gains and losses with Japanese stock news dominated by earnings. Japan’s Topix index (-1.2%) slid to its lowest this year.

The region also mulled mixed Chinese Official PMI data in which Non-Manufacturing PMI topped estimates but Manufacturing PMI disappointed, which in turn disappointed local markets. The Shanghai Composite fell for a 3rd straight day, down 0.2% to 3480, while the Chinext index, tracking mid and small caps plunged near 2.7%, its biggest drop since January 15, and is now down 1% for year after rising as much as 3.7%. Big-cap blue chips outperformed with the SSE50 index tracking the 50 biggest stocks on Shanghai Stock Exchange climbed over 1.2%. The Koran Kospi index was boosted by Samsung’s stock split announcement, while the won strengthens in line with other Asian currencies. PBOC skips liquidity injections for fifth day; CSI 300 index 0.7% higher.

Of note: China’s onshore yuan climbed for its best month in at least a decade as the greenback drubbing continued. The Onshore yuan jumped 0.62% to 6.2855 per dollar in Shanghai; CNY has gained 3.5% so far in January, biggest monthly advance in CFETS data going back to April 2007 according to Bloomberg. Overnight, the PBOC weakened daily reference rate by 0.04% to 6.3339, matching average estimate in a Bloomberg survey of 25 traders and analysts; the predictions ranged from 6.3250 to 6.3414

Elsewhere, UK PM May said that there was a long-term job to do in Brexit and that she will publish Brexit impact studies during February speech in Munich. Furthermore, PM May said the UK is seeking a free trade deal with China and wants more access in the interim before trade deal.  EU officials are to reject the City of London’s intention to strike a post-Brexit free trade deal for financial services, according to financial executives.

In commodities, oil retreated and industrial metals reversed losses. A measure of China’s manufacturing sector came in below expectations, while the services gauge topped estimates. WTI and Brent crude futures trade lower in the wake of last night’s larger than expected build in headline API crude oil inventories with energy newsflow otherwise relatively light ahead of today’s official EIA release. WTI crude slides below $64. In metals markets, gold prices are seen higher amid a lacklustre greenback while copper was marginally supported overnight by the improvement in risk tone. Finally, Chinese steel futures were seen lower overnight as adverse weather conditions capped demand in China. Dalian iron falls two percent.

Expected data include MBA mortgage applications. Anthem, AT&T, Boeing, Facebook, Lilly and Microsoft are among companies reporting earnings.

Bulletin Headline Summary from RanSquawk

• European equities trade broadly higher albeit modestly so, as earnings dictate the state of play for Europe.
• The DXY remains vulnerable under the 89.000 handle as January draws to a close and month end portfolio hedging indices continue to flag sell signals
• Looking ahead, highlights include US ADP, Quarterly Refunding Announcement and FOMC rate decision.

Market Snapshot

• S&P 500 futures up 0.3% to 2,833.00
• STOXX Europe 600 up 0.2% to 396.98
• MSCI Asia Pacific down 0.2% to 184.23
• MSCI Asia Pacific ex Japan up 0.4% to 607.33
• Nikkei down 0.8% to 23,098.29
• Topix down 1.2% to 1,836.71
• Hang Seng Index up 0.9% to 32,887.27
• Shanghai Composite down 0.2% to 3,480.83
• Sensex down 0.1% to 35,993.63
• Australia S&P/ASX 200 up 0.3% to 6,037.68
• Kospi down 0.05% to 2,566.46
• German 10Y yield fell 1.3 bps to 0.67%
• Euro up 0.3% to $1.2444
• Italian 10Y yield rose 0.2 bps to 1.76%
• Spanish 10Y yield rose 1.3 bps to 1.422%
• Brent futures down 0.6% to $68.60/bbl
• Gold spot up 0.3% to $1,343.12
• U.S. Dollar Index down 0.2% to 88.95

 

Top Overnight News

• Donald Trump sought to connect his presidency to the nation’s prosperity in his first State of the Union address, arguing the U.S. has arrived at a “new American moment” of wealth and opportunity. Trump vowed the “era of economic surrender is over,” but stopped short of naming the targets of his efforts to narrow the U.S.’s ballooning trade deficit
• U.K. Prime Minister May landed in China with a message to rebels back home who want to oust her: she won’t quit. May said she would raise the sensitive topics of China’s human rights record and Hong Kong democracy
• Bank of Japan offered to buy more bonds at a regular operation for the first time since July, helping to bring down yields and weaken the yen as Governor Kuroda reaffirmed a commitment to his ultra-loose monetary policy
• Mark Carney said he can fully focus on tackling inflation as the drag from Brexit on investment and the economy starts to recede
• U.K. banks will have limited access to the European Union’s single market after Brexit if the government refuses to weaken its red lines, the European Commission told diplomats, according to two people familiar with private discussions in Brussels
• The BOJ isn’t at the point where it can change interest rates soon, says Bank of Japan Deputy Governor Kikuo Iwata, in his final press conference before leaving the board
• German jobless rate dropped to a record low of 5.4 percent in January, extending its decline as companies stepped up hiring to meet buoyant demand
• Siemens Reports Strengthening Orders Amid Global Economic Upturn
• H&M’s Biggest Profit Drop in Six Years Puts CEO Under Pressure
• Volvo Sees Rising Global Truck Demand Straining Supply Chain

A mixed tone was gradually seen in Asia, as equity markets somewhat recovered from the initial spill-over selling from Wall St. where the S&P 500 posted its worst 2-day performance since May last year. The overnight rebound in sentiment was alongside President Trump’s first State of the Union Address, which Trump was viewed to have delivered a composed and conventional speech, while he also refrained from any comments that would have unnerved markets. As such, ASX 200 (+0.2%) pared early losses and finished positive, although the commodity-related sectors continued their underperformance, while Nikkei 225 (-0.4%) swung between gains and losses with Japanese stock news dominated by earnings. Furthermore, the region also mulled over mixed Chinese Official PMI data in which Non-Manufacturing PMI topped estimates but Manufacturing PMI disappointed, which in turn clouded over the Shanghai Comp. (-0.6%) and Hang Seng (+0.1%), despite a brief turnaround which momentarily saw most stocks lifted with the tide. Finally, 10yr JGBs are higher, with prices supported from today’s Rinban operation in which the BoJ were in the market for JPY 850bln of JGBs across the curve and upped its purchases of 3yr-5yr maturities.

• Chinese Manufacturing PMI (Jan) 51.3 vs. Exp. 51.6 (Prev. 51.6).
• Non-Manufacturing PMI (Jan) 55.3 vs. Exp. 54.9 (Prev. 55.0)

BoJ Summary of Opinions from January meeting said must continue with powerful easing policy as inflation remains weak. There summary noted the opinion that BoJ must look at effects and costs of BoJ’s ETF and risky asset purchases given stock prices and corporate profits improving sharply, while there also may be a chance for the BoJ to consider adjusting level of yield targets if economy and prices continue improving. BoJ says it plans to keep the current pace of bond purchases in Feb for all maturities.

Top Asian News

• BOJ Lifts Bond Purchases as Kuroda Affirms Loose Policy Path
• Dealmakers Jump Ship as China Tycoon’s $5 Billion M&A Push Ends
• Japan Factory Output Surges in December on Strong Exports
• Sumitomo Mitsui Profit Rises on Fee Income, Share Sale Gains
• Vakrangee Tumbles by 20% Limit Amid Stock-Price Rigging Report

European equities trade broadly higher (Eurostoxx 50 +0.2%) albeit modestly so, as earnings dictate the state of play for Europe. In terms of sector specifics, utility names have seen some support with SSE (+1.6%) sitting near the top of the FTSE after lifting their guidance, while IT names are seen softer with Ericsson (-8%) lower following earnings and Infineon (-0.7%) at the bottom of the DAX after cutting guidance alongside earnings. Elsewhere, stock specifics have been dominated by earnings with reports from the likes of Electrolux (+6.3%), Volvo (+3.4%), H&M (-4.8%), Lonza (-3.6%), Julius Baer (-3.2%) and focus once again on Capita (-35%) with shares slammed following their latest profit warning.

Top European News

• Italy’s Jobless Rate Falls Before Election to Lowest Since 2012
• German Workers Begin Day-Long Strikes as Wage Talks Hit Snag
• EU Softens Push to Keep Clients From Exiting Failing Banks
• European Union’s Biggest Rate Hawks Are Poised to Hike Again
• European Pharma Stocks Drop After Trump Comments, Lonza Results
• VW, Continental Best Placed in Break-Up Scenarios, BofAML Says

In FX, the DXY remains vulnerable under the 89.000 handle as January draws to a close and month end portfolio hedging indices continue to flag sell signals, and strong for several USD/G10 pairs. The Dollar did derive some support from a buoyant from US President Trump’s buoyant SOTU address and clarification by Treasury Secretary Mnuchin that a strong Greenback is in the country’s best interest (long term at least). However, EUR/USD looks solid above 1.2400 and around the 1.2433 level (200 MMA), with decent option expiries between 1.2400-40 (1.5 bn) and 1.2450-55 (1.7 bn) perhaps adding to the aforementioned rebalancing bid tone. Cable briefly reclaimed 1.4200+ status before easing back again amid EUR/GBP month-end demand and news that EU officials are to reject the City of London’s intention to strike a post-Brexit free trade deal for financial services. USD/JPY is back below 109.00, but still within a broad 108.50-109.50 range.

In commodities, WTI and Brent crude futures trade lower in the wake of last night’s larger than expected build in headline API crude oil inventories with energy newsflow otherwise relatively light ahead of today’s official EIA release. In metals markets, gold prices are seen higher amid a lacklustre greenback while copper was marginally supported overnight by the improvement in risk tone. Finally, Chinese steel futures were seen lower overnight as adverse weather conditions capped demand in China.

US Event Calendar

• 7am: U.S. MBA Mortgage Applications, Jan. 26, no est., prior 4.5%
• 8:15am: U.S. ADP Employment Change, Jan., est. 185k, prior 250k
• 8:30am: U.S. Employment Cost Index, 4Q, est. 0.6%, prior 0.7%
• 8:30am: U.S. Treasury’s Quarterly Refunding
• 9:45am: U.S. Chicago Purchasing Manager, Jan., est. 64, prior 67.6, revised prior 67.8
• 10am: U.S. Pending Home Sales MoM, Dec., est. 0.5%, prior 0.2%; NSA YoY, Dec., est. 1.7%, prior 0.6%
• 10:30am: DOE U.S. Crude Oil Inventories, Jan. 26, est. 900k, prior -1.07m
• 2pm: FOMC Rate Decision (Upper Bound), est. 1.5%, prior 1.5%

Looking at the day ahead, the Fed monetary policy meeting outcome will be the highlight today. Flash January CPI reports for the Euro area will be closely watched, as will the January ADP employment print change for the US. The latter will also release the Q4 employment cost index, January Chicago PMI and December pending home sales. Microsoft, Facebook, eBay, AT&T, Boeing and Paypal highlight a busy day for high profile earnings releases. The ECB’s Coeure will also speak.

DB’s Jim Reid Concludes the overnight wrap

If you’re reading this in the Western Hemisphere, stand by today for an event we haven’t seen since 1866. No, not equity markets going down two days in a row but instead a “Super Blue Blood Moon”. To break this down, a blue moon is where there are two new moons in a month. A supermoon is where our satellite’s perigee (its closest approach in its orbit and appearing c.14% larger and is c.30% brighter) coincides with a full moon. A blood moon is a lunar eclipse when the moon passes into the earth’s shadow. The reddish tint that this will bring as the sun’s light is cut off and it’s visible through the filter of our atmosphere provides the blood reference.

As discussed above this astrological event coincides with a bad month end for markets with confidence suddenly sucked into a black hole. Indeed the last couple of days are perhaps a taster of what might actually happen when yields properly normalise rather than simply selling off a bit. However unless something extraordinary happens today, January will still go down as an exceptional month for risk although bond returns will see a lot of negatives in front of the numbers. We’ll do the full review of the month tomorrow.

One of the most impressive parts of the equity sell-off yesterday was that there wasn’t really a flight to quality into bonds. 10yr USTs rose a further 2.6bps and 10yr Bunds only fell 1.1bps even with a weaker than expected German inflation print.

Now reviewing the equity moves. The S&P 500 (-1.09%) saw its worse day since mid-August and worst 2-day fall (-1.76%) since May, while the Dow (-1.37%) and Nasdaq (-0.86%) also retreated. The mini-selloff in the S&P seemed to have a few contributing factors, including ongoing concerns over valuation, rising yields, a lower oil price and weakness in health care stocks (-2.13%). The latter partly reflects potentially higher competitive tensions in view of Amazon, JP Morgan and Berkshire’s plans to launch a new joint company to provide their US staff with tech solutions for simplified healthcare at lower costs. The risk off tone was also evident in Europe with key bourses down 0.9%-1.1% and the Stoxx 600 down the most for c2.5 months (-0.92%). The VIX jumped to an intra-day high of 15.42, before closing 6.9% higher to 14.79 – the highest since mid-August.

Focusing on Apple, Bloomberg reported that according to unnamed sources, the US DOJ and SEC are investigating whether Apple violated securities laws regarding its disclosures about a software update that slowed older iPhones. Notably, the inquiry is in early stages and Apple’s share price fell c1.5% intraday and closed -0.59% lower.

Staying with US equities, since tax reform was signed, banks have written off billions of dollars of deferred tax assets. Yet the effects extend far beyond finance firms. In fact, one in ten companies in the S&P 500 has net deferred tax assets. 

Also in the US, President Trump’s first State of the Union address touched on many issues but was short on details on his policy proposals. He highlighted his administration’s progress to building a “safe, strong and proud America” and
noted that “c3m workers have gotten tax cuts…this in fact is our new American moment…there has never been a better time to start living the American dream”. Then he spoke of unity in politics, such as “extending an open hand to work with members of both parties” and “…call upon all of us to set aside our differences… to deliver for the people we were elected to serve”. On trade, he touched on “America has finally turned the page on…unfair trade deals…” Then on the big infrastructure plans, he proposed to allocate $200bn federal funds over the next 10 years on roads and transit projects. Then the expectation is the investments would encourage further spending from the state, local governments and private sector – as least $1.5trn.

Elsewhere the Treasury Secretary Mnuchin sought to clarify his comments last week on the USD. He noted his comments were “not anything new” and “it was no way intended to talk down the dollar whatsoever”. Further he reiterated that “I absolutely support a strong dollar as being in the long term best interest of the country and….we have a free currency market that we don’t intervene in…”. As a reminder, today’s FOMC meeting will serve in part as a farewell to Chair Yellen, but is unlikely to result in any significant new signals for the market. Our US economists expect that the FOMC will want to see some more data and go through another round of forecasts before signalling a more aggressive tightening stance of four hikes this year (DB’s forecast).

This morning in Asia, markets are mixed but UST 10y yields is down c1.5bp. The Nikkei is down 0.47% while the Hang Seng (+0.06%), China’s CSI 300 (+0.14%) and Kospi (+0.44%) are all up, with the latter supported by Samsung, which is up c5% post its 4Q results and announcing a 50 to 1 stock split. Datawise, China’s January manufacturing PMI was a tad softer at 51.3 (vs. 51.6 expected) although the services number was a bit higher. Japan’s December IP was above market at 4.2% yoy (vs. 3.3%). Elsewhere, outgoing deputy BOJ governor Iwata warned against an early turn towards fiscal austerity, in part as “…achievement of the price stability target of 2% will become difficult” Now recapping other markets performance from yesterday. The US dollar index was marginally lower (-0.14%), while the Euro and Sterling gained 0.15% and 0.52%, respectively. Core 10y bond yields traded within a c3bp range intraday and closed little changed (Bunds -1.1bp; OATs -0.7bp; Gilts +0.7bp). In commodities, WTI oil fell 1.62% ahead of the API data, which later showed that US crude inventories rose for the first time since November. Elsewhere, precious metals softened c0.1% (Gold -0.13%; Silver -0.15%) and other base metals also weakened (Copper -0.34%; Zinc -1.06%; Aluminium -0.58%).

Away from markets, the BOE Governor Carney spoke on a range of topics in front of the House of Lords. On inflation, he noted the pass through from Sterling into inflation still has a way to go, but he is happy with the BOE’s inflation target. On Brexit, he denies that the BOE has a bias against it and that a “disorderly Brexit” is not a likely scenario. Elsewhere, he noted business investments is likely 4ppt lower than it would have been if the UK voted to stay in the EU bloc but also noted that investments could also pick up next year when uncertainty from Brexit reduces. On rates, he noted “as slack in the economy has been taken out…. (the focus for monetary policy) is increasingly on returning inflation sustainably to target over an appropriate horizon”. The implied Bloomberg odds of a rate hike in June was little changed, up 2ppt to 49%.

Returning to the UK, BuzzFeed has leaked the UK government’s forecasts of the potential economic impacts from Brexit. The worse scenario suggests the UK economy will be 8% smaller than otherwise in 15 years time and the  softest scenario would slow economic growth by 2%. Brexit minister Baker noted the documents “require significant further work” and “its’ not yet anywhere near being approved by the ministers”. DB’s Oliver Harvey has published an update on the state of play with Brexit. He argues that the newsflow in recent days suggests rising risks of a political crisis before agreement can be reached on transitional arrangements in March. Refer to his note for more details.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the January CB consumer confidence index was above market at 125.4 (vs. 123) and slightly lower than November’s 17 year high, with the mom increase mainly driven by a rebound in the expectations index. The November S&P corelogic house price index also beat at 6.41% yoy (vs. 6.3% expected).

The Euro area’s 4Q GDP was in line at 0.6% qoq and 2.7% yoy, while France’s 4Q GDP was also in line at 0.6% qoq. The Euro area’s January economic confidence (114.7 vs. 116.2) and business climate index (1.54 vs. 1.68 expected) were both softer than expected, but the final reading of consumer confidence was confirmed at 1.3 – a 17 year high. In Germany, the January CPI was lower than expected at -1% mom (vs. -0.7%) and 1.4% yoy (vs. 1.6%) – the lowest annual print since May. Elsewhere, Italy’s January consumer confidence was also slightly softer at 115.5 (vs. 116.7 expected). In the UK, the December mortgage approvals fell to the lowest level since January 2015 (61k vs. 63.5k expected) while net consumer credit was a tad higher at £1.5bn (vs. £1.4bn expected).

Looking at the day ahead, the Fed monetary policy meeting outcome will be the highlight today. Flash January CPI reports for the Euro area will be closely watched, as will the January ADP employment print change for the US. The latter will also release the Q4 employment cost index, January Chicago PMI and December pending home sales. Microsoft, Facebook, eBay, AT&T, Boeing and Paypal highlight a busy day for high profile earnings releases. The ECB’s Coeure will also speak.

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A senior Hamas official and one of the Palestinian terror group’s founding fathers has died after suffering a head wound in what reports are describing as an “unexplained shooting” . Hamas announced that Imad al-Alami died Tuesday after being unconscious since a January 9 mysterious incident said to have occurred at his Gaza City home, which sparked widespread speculation over what happened.

Fueling the speculation was a hasty Hamas statement released on January 9 which initially claimed he had died of “natural causes” but a subsequent statement was quickly issued saying he accidentally shot himself in the head while “inspecting his personal weapon in his home and is in critical condition.” The 62-year old Alami, who also went by Abu Hamam, had been in critical condition in a Gaza hospital for the three weeks before his death.

Imad al-Alami was classified as a “specially designated global terrorist” by the US in 2003 after a lifetime overseeing Hamas military operations. Image source: Arab News

Alami was classified as a “specially designated global terrorist” by the US in 2003 after spending a career holding key posts within Hamas’ policy-making body, which included years heading up Hamas headquarters-in-exile offices in Damascus, before returning to the Gaza strip in 2012. He also oversaw Hamas military operations in the West Bank during his time in Syria.

More significant, however, is that he was among the most internationally connected of Hamas’ founding members, having maintained extensive ties with Iran – a major financial sponsor and weapons supplier to Hamas – and with a close personal relationship with Hezbollah Secretary-General Hassan Nasrallah. Alami was further widely acknowledged to be in line as the designated successor to current Hamas head Ismail Haniyeh, and was active in operations as late as 2014, when he was seriously wounded – reportedly by Israeli airstrike during Israel’s ‘Operation Protective Edge’ – which resulted in the loss of one of his legs.

But adding further mystery to the Hamas leader’s final years, other sources claim his 2014 wounds were the result of a brutal attack by other factions within Hamas, possibly under the direction of a rival senior Hamas official with which he was fueding, Fathi Hamad.

After the January 9 reported “self-inflicted gunshot wound” Israeli media also theorized that there may be more to the story. Israel’s YNet News reported at the time:

The circumstances behind the injury are still unclear. It is possible he tried to take his own life after being diagnosed with cancer a year ago, or that he was hurt in an assassination attempt. A third option is that his handgun accidentally discharged, hitting him.

And Israel’s Arutz Sheva also commented on the divergent claims concerning his death within Palestinian leadership:

The shooting incident fueled a variety of conspiracy theories within the Palestinian Authority, ranging from claims al-Alami was assassinated, to suggestions he may have committed suicide following years of serious health problems.

Alami’s death comes two months after increased violence and tensions within Gaza and the Palestinian territories precipitated by President Trump’s early December announcement of formal US recognition of Jerusalem and the capital of Israel. The move unleashed a wave of violent clashes between Palestinian demonstrators and Israeli security forces, resulting in multiple deaths. Dozens of rockets were also launched out of Gaza, with Hamas leadership calling for a new ‘intifada’ – or mass uprising against Israeli occupation – soon after Trump’s announcement. 

Recently ISIS has also attempted to make inroads into Gaza and has reportedly come into increased conflict with Hamas leadership, which ISIS has condemned for its closeness to Shia Iran, which is seen a apostate. In early January the Middle East English daily Arab News reported, “Daesh [ISIS] last week released a video calling on its members and supporters in Gaza to fight Hamas, which it accused of moving closer to Iran. The video ended with an extremist from Gaza, killing another Sinai person by shooting him in the back of the head for allegedly collaborating with Hamas’s military wing to obtain arms through Sinai.”

Tensions between Israel and Iran have also escalated dramatically of late as the Syrian government supported by its Iranian allies have consolidated power over much of Syria, fully connecting the so-called Iranian ‘land bridge’ linking Tehran, Baghdad, Damascus and Lebanon. In early January Israeli media widely reported substantial rumors that both the US and Israel had green-lighted intelligence operations aimed at assassinating Iran’s top military officer, Iranian Revolutionary Guard al-Quds Force commander Maj. Gen. Qassem Soleimani.

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Authored by Irina Slav via OilPrice.com,

The 1950s were a turbulent time on both sides of the Iron Curtain.

With the Second World War over and the star role played by crude oil in its outcome, British and U.S. intelligence agencies wasted no time working out scenarios should the Soviets invade the Middle East.

In hindsight, especially to younger generations, this might seem eccentric, but not to those who remember the Cold War and the paranoia that raged on both sides. In the 50s, the British and U.S. intelligence services were genuinely concerned about a further Soviet expansion, into the Middle East, which at the time was the main source of crude oil for both countries. No wonder the region was a priority security issue for both countries.

The plans were first hatched by U.S. President Truman in 1949, Russian Sputnik writes, citing a number of recently declassified documents from both the UK and the United States.

Dubbed “oil denial”, the plans involved oil company personnel in the Middle East sabotaging their own oilfields and refineries in case of a Soviet invasion, in hopes of restricting the invaders’ access to the precious commodity.

While sound in themselves, the denial plans of the Brits faced problems: the empire’s influence in the Middle East was in decline. Iran’s and Iraq’s governments, according to declassified documents, were believed to be particularly unlikely to cooperate with oil companies in sabotaging their own oil industry.

The reason for this was that the UK no longer had a monopolistic presence in these two, despite the U.S.-led 1953 coup in Iran, which returned the shah to power and BP to the helm of the Iranian oil industry. BP was at the helm, true, but the Iranian government controlled the refineries, and was building more. The Soviet invasion scenario involved not just oilfields but also refineries.

Fearing the Iraqi and Iranian governments’ likely unwillingness to play along with the sabotage plans, Britain was left with few options to keep the Soviets from the oil. Air strikes were the most logical option, but there was a problem there, too: there were not enough airplanes to carry out all the necessary attacks in case of an invasion. As a result, the nuclear option was put on the table by a Joint Chiefs of Staff committee in the mid-1950s.

There were discussions with U.S. intelligence and military authorities on the joint use of nuclear strikes on government-controlled refineries in Iraq and Iran, but there are no documents declassified that state which nuclear plan was eventually approved. In any case, American nuclear strikes on Iranian oil facilities were deemed “the only feasible means of oil denial” for Iran, despite the pro-Western shah.

More discussions followed, and the nukes were eventually taken off the table, thanks to CIA operative George Prussing, who was assigned to work with oil companies in the Middle East on the best way to ensure the success of oil denial plans.

Prussing concluded that this way was via ground demolition of fields and facilities. Still, it’s good that the Soviets never tried to expand into the Middle East — so soon after Hiroshima and Nagasaki, nuclear weapons were still very popular as the ultimate problem solver.

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Germany will no longer be accepting relocated asylum seekers from Italy and Greece, reports Die Welt citing the German Interior Ministry.

The decision, announced Monday, ends Germany’s participation in an EU relocation agreement launched in the wake of the 2015 migrant crisis. The agreement officially expired on September 26, 2017, and saw Germany take in over one-third of the total refugees distributed under the plan. 

“There are now virtually no more asylum seekers in Greece who could be considered for resettlement,” according to the Ministry. To qualify, applicants had to be from a country where the chances of asylum are at least 75 percent.

Last month, some 500 migrants were still waiting to be relocated from Italy to Germany, while in Greece the number less than 40. 

“The relocation scheme ended in September 2017, meaning all applicants arriving after that date will no longer be eligible for resettlement,” Annegret Korff, a speaker for the Interior Ministry, said.

“Germany largely completed all outstanding relocations by the end of 2017. In the coming weeks, Germany will only carry out the odd resettlement case that was left outstanding from last year.” –DW.com

Based on the massive number immigrants arriving in Germany alone during the height of the migrant crisis – some 1.3 million in 2015 with 890,000 entering Germany, EU member states initially agreed to collectively take in some 160,000 refugees from Greece and Italy.

That number, however, was revised down to 100,000 after officials realized that fewer people were eligible than originally thought. In total, only 33,000 migrants actually took part in the transfer program – with Germany taking in 10,265. 

Migration also fell sharply following the 2015 peak, with just 280,000 migrants arriving in Germany in 2016, and 186,644 asylum seekers last year. 

Last October, Angela Merkel’s CDU and Bavarian CSU sister party agreed to cap Germany’s intake of asylum seekers at 200,000 per year. 

“We want to achieve a total number of people taken in for humanitarian reasons (refugees and asylum seekers, those entitled to subsidiary protection, family members, relocation and resettlement minus deportations and voluntary departures of future refugees) that does not exceed 200,000 people a year”.

And in December, 2017 Germany offered rejected asylum-seekers a one-time payment of $3,500 to go home, valid through the end of February. 

“If you decide by the end of February for a voluntary return, you will get in addition to first aid, a housing aid for the first twelve months in your country of origin,” Interior Minister Thomas de Maiziere told newspaper Bild am Sonntag.

That said, relocation schemes or not – refugees will continue to pour into Europe from Africa this summer. It is unclear how the EU intends on dealing with future waves of migrants, while a standout coalition of EU members refuse to take in migrants whatsoever. 

Bulgarian Prime Minister Boyko Borisov – whose country currently heads the EU as part of a six-month rotating EU presidency, said that the current asylum rules “literally split Europe.”

German Interior Minister Thomas de Maiziere hinted Berlin was willing to drop its insistence on quotas in order to make progress on asylum policy reform, saying “We will decide on this at the end of the negotiations.”

After meeting in Sofia, Bulgaria last Thursday to discuss asylum policy, EU Interior Ministers set a deadline of June to develop a solution. 

What is the current situation? (via DW.com)

• Current EU migration rules state that asylum requests must be processed in the country where asylum was first requested.
• This has put a heavy burden on Greece and Italy, the two major entry points to Europe.
• Proposed changes to the rules would create a permanent mechanism for all EU member states to admit refugees in the event of a new emergency. 
• The June deadline has been put in place because warm weather during this time tends to increase migrant flows across the Mediterranean.
• Hungary and its eastern European neighbors, including Poland, have refused to take in refugees since the European Commission pushed through temporary refugee quotas in 2015.
• Slovakia and the Czech Republic have also been reluctant to accept migrants from other EU countries, citing security concerns.

As the Greek and Italian relocation program draws to a close, and migrant-heavy EU nations such as Sweden, Germany, France suffering from increased crime rates vs. their non-refugee accepting EU counterparts, one has to wonder how much worse this crisis borne of regime change and perpetual war is actually going to become before the financial and civil consequences of a “borderless” Europe result in all out civil war. 

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