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Having been down over 1% overnight, US equity futures are all back in the green now, going vertical in the last few minutes as the dollar and bond yields suddenly slump…
Overnight weakness is gone…
Thanks to another ramp in XIV…
And this is happening as Bond yields and the dollar suddenly drop…
Notably 10Y hit 2.87% this morning and did not trigger the selling in stocks that we have seen over the last week.
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In back-to-back speeches last night, Democratic leader Chuck Schumer and Republican Majority leader Mitch McConnell heralded what they described as a promising and fair two-year budget plan – what would be the first of the Trump era – replete with legislative priorities demanded by both sides: Raising spending caps for domestic programs and the military by a combined $300 billion, providing a generous disaster relief package for states and territories wracked by hurricanes and wildfires, generating funding to combat the opioid abuse epidemic and – crucially for US debt markets – agreeing to suspend America’s borrowing limit for two years.
With at least nine Democratic votes needed to pass the bill. McConnell was forced to agree to open a freewheeling debate next week on immigration to help pass a bill that will enshrine DACA into law, include funding for border security and revamp some legal immigration laws.
As it stands, the agreement would raise defense spending by $80 billion over current law in this fiscal year and $85 billion in the one that begins Oct. 1.. Non-defense spending would rise by $63 billion this year and $68 billion next year. Though Congress would still need to pass appropriations bills for both this year and next.
But unfortunately for Schumer and McConnell, the deal has not been met with the same enthusiasm in the House. As we reported last night, members of the Freedom Caucus angrily rebelled against the deal, with one calling it a “Christmas tree on steroids”.
And on the Democratic side of the aisle, Nancy Pelosi vowed during an unprecedented eight-hour speech yesterday to oppose the bill unless Speaker Paul Ryan agrees to open debate on an immigration bill – something he has so far been reluctant to do.
Combined with the recently passed Republican tax cuts, the US budget deficit even more than recent troubling forecasts such as those from Goldman, which recently predicted US debt issuance would more than double, rising from $488bn in 2017 to $1,030 billion in 2018…
Still, as Bloomberg reports, even without the agreement from Ryan, Pelosi hasn’t explicitly advised her caucus to vote against the bill, and some – particularly red state Dems who fear they might’ve taken too big of a political hit from last month’s government shutdown – might still vote for it.
But more progressive members have vowed to oppose any bill unless a DACA deal has been reached first.
Representative Luis Gutierrez, an Illinois Democrat, said a budget deal is unacceptable without protection for the young undocumented immigrants and he wants Pelosi to pressure other Democrats to vote no.
“The deal has everything the Democrats wanted except immigration, because immigration is the glue that holds the Republican Party together,” he said.
However, another Democratic lawmaker said some members didn’t want Pelosi to make a stand on immigration after the party took a political hit over forcing last month’s three-day shutdown. The lawmaker asked for anonymity to discuss private conversations.
More details about the House whip count will likely emerge Thursday morning following a meeting of the House Democratic caucus.
Even if they do agree, President Trump, who has frequently inveighed against the direction of immigration negotiations, could threaten a veto.
But the real question for Democrats is whether McConnell will keep his word and following through with the immigration debate next week. With the deadline for cancellation of DACA protections rapidly running out, Democrats are facing a difficult choice: Risk hurting their 2018 chances with another shutdown, or risk alienating their base by failing to preserve DACA.
With government funding set to expire tonight at midnight, expect frenzied negotiations to continue for most of the day – if not into the evening…
For now, the market seems to believe the government will not shutdown as the Bill curve has normalized…
And the longer-end of the yield curve is pricing in the additional supply implied by the budget deal…
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An undercover FBI informant embedded in the Russian nuclear industry who was made to sign an “illegal NDA” by former Attorney General Loretta Lynch has finally given his testimony to three Congressional committees.
William D. Campbell became an FBI counterintelligence asset after spending several years as a CIA operative who developed working relationships in the nuclear industry in Kazakhstan and Russia.
“For several years my relationship with the CIA consisted of being debriefed after foreign travel,” Campbell noted in his testimony, which was obtained by this reporter. “Gradually, the relationship evolved into the CIA tasking me to travel to specific countries to obtain specific information. In the 1990’s I developed a working relationship with Kazakhstan and Russia in their nuclear energy industries. When I told the CIA of this development, I was turned over to FBI counterintelligence agents.” –saracarter.com
The FBI embedded Campbell in the Russian nuclear industry for six years, where he gathered extensive evidence of two separate but related “pay for play” schemes related to the United States uranium industry:
First, Campbell discovered that Moscow had compromised an American uranium trucking firm, Transport Logistics International (TLI) in violation of the Foreign Corrupt Practices Act – which bribed a Russian nuclear official in exchange for a contract transport Russian-mined U.S. uranium, including “yellowcake” uranium secured in the Uranium One deal.
Second, Campbell says that Russian nuclear officials told him of a scheme to route millions of dollars to the Clinton Global Initiative (CGI) through lobbying firm ARPCO, which was expected to funnel a portion of its annual $3 million lobbying fee to the charity.
“The contract called for four payments of $750,000 over twelve months. APCO was expected to give assistance free of charge to the Clinton Global Initiative as part of their effort to create a favorable environment to ensure the Obama administration made affirmative decisions on everything from Uranium One to the U.S.-Russia Civilian Nuclear Cooperation agreement.“ –William Campbell
Campbell told Congressional investigators that the Uranium One deal along with billions in other uranium contracts inside the United States during the Obama administration was part of a “Russian uranium dominance strategy” involving Tenex and its American arm Tenem – both subsidiaries of state-owned Russian energy company Rosatom.
“The emails and documents I intercepted during 2010 made clear that Rosatom’s purchase of Uranium One – for both its Kazakh and American assets – was part of Russia’s geopolitical strategy to gain leverage in global energy markets,” he testified. “I obtained documentary proof that Tenex was helping Rosatom win CFIUS approval, including an October 6, 2010 email … asking me specifically to help overcome opposition to the Uranium One deal.”
“Rosatom/Tenex threw a party to celebrate, which was widely attended by American nuclear industry officials. At the request of the FBI, I attended and recorded video footage of Tenam’s new offices,” he added.
Officials with APCO – the lobbying firm accused of funneling the money to the Clinton Global Initiative, told The Hill that its support for CGI and its work for Russia were not connected in any way, and involved different divisions of the firm.
Bribery scheme
While undercover, the Russians forced Campbell to deliver bribes from Maryland transportation company TLI in $50,000 increments to Russian nuclear official Vadim Mikerin of Tenex. Campbell did so under the direction of the FBI in order to maintain his cover, fronting hundreds of thousands of dollars he says he was never reimbursed for.
As a result of Campbell’s work, TLI co-president Mark Lambert was charged in an 11-count indictment in connection with the scheme, while Vadim Mikerin, who resides in Maryland, was prosecuted in 2015 and is halfway through a four-year sentence.
Beginning at least as early as 2009 and continuing until October 2014, Lambert conspired with others at “Transportation Corporation A” to make corrupt and fraudulent bribery and kickback payments to offshore bank accounts associated with shell companies, at the direction of, and for the benefit of, a Russian official, Vadim Mikerin, in order to secure improper business advantages and obtain and retain business with TENEX. –DOJ
Of note, Rod Rosenstein failed to interview Campbell before prosecuting Vadim Mikerin when Rosenstein was Maryland’s chief federal prosectuor, instead relying on the evidence Campbell had gathered. This backfired after prosecutors insisted on sitting down with Campbell to glean more information – forcing prosecutors to recast their entire case against Mikerin.
Campbell got one debriefing after the criminal charges were filed, but was never brought before the grand jury that indicted the Russian figure in November 2014 even though the informer was portrayed as “Victim One” in that indictment, the officials confirmed
When prosecutors finally interviewed Campbell more extensively in early 2015 and reviewed all of the records he had gathered for the FBI, they learned new information about the sequence of transactions he conducted while under the FBI’s supervision, as well as the extensive nature of his counterintelligence work for the U.S. government that went far beyond the Mikerin case and dated to at least 2006, the officials said. –The Hill
Uranium One approval
An extremely important aspect of Campbell’s timeline is that the Obama FBI , headed by Robert Mueller, knew of the bribery scheme with the transportation company before approving the Uranium One deal which would have utilized TLI for transporting the mined uranium.
“The Russians were compromising American contractors in the nuclear industry with kickbacks and extortion threats, all of which raised legitimate national security concerns. And none of that evidence got aired before the Obama administration made those decisions,” a person who worked on the case told The Hill, speaking on condition of anonymity for fear of retribution by U.S. or Russian officials.” –The Hill
Thus, the Uranium One deal clearly never should have been approved.
Praising Campbell
Campbell testified that the FBI thanked him for his undercover with a check for $51,000 in 2016 – which, according to a November report, was given to him at a 2016 celebration dinner in Chrystal City, VA according to Campbell’s attorney, (former Regan Justice Department Official and former Chief Counsel to the Senate Intelligence Committee), Victoria Toensing.
“My FBI handlers praised my work,” testified Campbell. “They told me on various occasions that details from the undercover probe had been briefed directly to FBI top officials. On two occasions my handlers were particularly excited, claiming that my undercover work had been briefed to President Obama as part of his daily presidential briefing,” he testified
Smearing Campbell
Following reports by John Solomon of The Hill and Sara Carter of Circa News revealing that Campbell had gathered evidence implicating the Clinton charity and the Obama administration, Michael Isikoff of Yahoo News wrote an article slamming Campbell – saying he would be a “disaster” as a witness because some of his claims could not be documented, an anonymous source told Isikoff.
And where have we heard Michael Isikoff’s name recently?
Another Yahoo News article written by Isikoff was used by the FBI as supporting evidence in a FISA warrant application by the FBI against one-time Trump campaign advisor Carter Page. Isikoff used information provided by former UK spy Christopher Steele – who assembled the infamous and unverified anti-Trump dossier which the FISA application was largely based on.
Isikoff says he was “stunned” to learn that his article was cited in the FISA warrant. We “believe” him.
Sessions and Rosenstein were running Interference
And in a move which can only be interpreted as an effort to protect the FBI, the Obama administration and the Clintons, AG Jeff Sessions and Deputy AG Rod Rosenstein even tried to suggest the nuclear bribery case uncovered by Campbell is not connected to the Uranium One deal.
Via John Solomon of The Hill last November:
“Attorney General Jeff Sessions in testimony last week and Deputy Attorney General Rod Rosenstein in a letter to the Senate last month tried to suggest there was no connection between Uranium One and the nuclear bribery case. Their argument was that the criminal charges weren’t filed until 2014, while the Committee of Foreign Investment in the United States (CFIUS) approval of the Uranium One sale occurred in October 2010.”
This rubbed several Congressional GOP the wrong way:
“Attorney General Sessions seemed to say that the bribery, racketeering and money laundering offenses involving Tenex’s Vadim Mikerin occurred after the approval of the Uranium One deal by the Obama administration. But we know that the FBI’s confidential informant was actively compiling incriminating evidence as far back as 2009,” Rep. Ron DeSantis, (R-Fla.) told The Hill, adding “It is hard to fathom how such a transaction could have been approved without the existence of the underlying corruption being disclosed”
Senate Judiciary Committee Chairman Chuck Grassley (R-IA) sent a similar rebuke to Rosenstein, saying the deputy attorney general’s first response to the committee “largely missed the point” of the congressional investigations.
“Ask your politics”
When Campbell asked the FBI why all of the illegal schemes he uncovered weren’t being prosecuted, he was explicitly told it was political:
“I remember one response I got from an agent when I asked how it was possible CFIUS would approve the Uranium One sale when the FBI could prove Rosatom was engaged in criminal conduct. His answer: ‘Ask your politics,’ ” Campbell said.
Since his undercover work in Russia, Campbell has undergone 35 intensive radiation treatments after being diagnosed with brain cancer and leukemia.
Watch John Solomon and Sara Carter discuss the Campbell evidence last November:
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Twitter shares have stormed out of the gate, following today’s Q4 earnings which smashed expectations, with revenue of $731.6 million, up 2% Y/Y, beating the highest estimate ($709MM) and certainly the consensus of $686.4MM, while EPS of 19 cents was also above the 14 cent estimate.
Twitter was quick to point out its reversal in revenue noting that “total revenue in Q4 was $732 million, reflecting year-over-year growth of 2%, as compared to a decline of 4% in Q3 2017, a decline of 5% in Q2 2017, and a decline of 8% in Q1 2017.”
Commenting on the result, Twitter said that “Q4 was a strong finish to the year with total revenue increasing 2% year-over-year, and owned-and-operated (O&O) advertising revenue increasing 7% year-over-year, reflecting better-than-expected growth across all major products and geographies.”
Also of note, EBITDA of $308.2MM was over 20% higher than the $241.6MM expected.
The company’s outlook was also impressive, with Twitter predicting that in Q1, Adjusted EBITDA would be between $185 million and $205 million, vs est of $188.3MM, on adjusted EBITDA margin to be between 33% and 34%. For the full year, Twitter expects capital expenditures to be between $375 million and $450 million.
And yet, not all was well, for one the number of MAUs failed to grow sequentially (up 4% Y/Y), and at 330MM, missed expectations of 333MM. More ominous, and an echo of recent events at Facebook, Twitter’s US MAUs declined by 1 million.
Also a concern: US ad revenue tumbled by 10% to $342MM from $382MM a year earlier.
Not helping is the sharp drop in ad engagements, which at 75% were down by more than half from the year ago period.
This is how the company explained the drop in US revenue:
Total US revenue was $406 million, down 8% year-over-year. Total international revenue was $326 million, increasing 17% year-over-year. We saw continued regional strength in Asia Pacific and improvement in some EMEA markets. Japan grew 34% year-over-year and contributed $106 million, or 15% of total revenue.
For now, however, Twitter shareholders like what they see – which perhaps is the better than expected outlook, and have sent the stock soaring over 20% on what appears to be an aggressive short squeeze.
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In light of the previously noted speculation that the BOE may come out on the hawkish side in its commentary today, that’s precisely what the Bank of England did today when it kept rates unchanged at 0.5%, and QE flat as expected in a unanimous 9-0 vote…
MPC vote unanimously to keep #BankRate at 0.5% pic.twitter.com/mn0i3r6ceW
— Bank of England (@bankofengland) February 8, 2018
… but what traders have immediately honed in on is the following language from the statement, in which the BOE raised its growth forecast and said that the “Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target.”
Some other observations:
On inflation, a slightly dovish take:
On balance, CPI inflation is projected to fall back gradually over the forecast but remain above the 2% target in the second and third years of the MPC’s central projection.
On the labor market:
The firming of shorter-term measures of wage growth in recent quarters, and a range of survey indicators that suggests pay growth will rise further in response to the tightening labour market, give increasing confidence that growth in wages and unit labour costs will pick up to target-consistent rates.
On growth:
GDP growth is expected to average around 1¾% over the forecast, a slightly faster pace than was projected in November despite the updated projections being conditioned on the higher market-implied path for interest rates and stronger exchange rate prevailing in financial markets at the time of the forecast.
While modest by historical standards, that rate of growth is still expected to exceed the diminished rate of supply growth. Following its annual assessment of the supply side of the economy, the MPC judges that the UK economy has only a very limited degree of slack and that its supply capacity will grow only modestly over the forecast, averaging around 1½% per year.
On Brexit:
The low cost of capital and limited spare capacity, strong global activity is supporting business investment, although it remains restrained by Brexit-related uncertainties.
The kneejerk response has been a burst higher in cable, which has spiked by over 100 pips.
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U.S. stock index futures turn negative in an illiquid, volatile session as investor sentiment has yet to stabilize amid doubts whether the U.S. equity selloff is over as yields remain just south of the critical 2.85% level. S&P E-mini contracts slid 0.1%, while the VIX is up 1% to 28.1 after 2 days of declines. Including fair value, the Dow is expected to have an implied open of over 200 points lower while the S&P will open around 2,665.
Meanwhile, in this post-VIX ETP world, liquidity remains non-existent, as this chart from nanex shows.
It’s not just the US however which can’t find its footin, as all risk-related assets trade under pressure in a generally muted session following yesterday’s whipsawed session which saw stocks spend much of the day in the green, only to slide at the close.
European equity losses hit ~1.0% as the mining sector underperforms while banks are supported by decent earnings reports from Commerzbank, SocGen and UniCredit. In terms of sector specifics, the financial sector is the outperformer with earnings from the likes of Commerzbank (+2.4%), SocGen (+4.1%), UniCredit (+2.6%) and Zurich Insurance (+3.8%) lifting the sector with Swiss Re (+3.8%) also lending a helping hand near the top of the SMI after news that Softbank could acquire a stake in the Co. Elsewhere, GSK (+2.3%) has been supported by news that Novartis’ launch of their Advair copy will be delayed. In terms of bourses, the CAC (-0.3%) has seen some modest outperformance, with domestic earnings from Total (+1.8%), Pernod Ricard (+2.2%) and Publicis (+3.8%) capping losses.
Earlier, shares in Japan closed higher after a turbulent session while China’s stocks fell for a third day, even as Hong Kong equities climbed. Australia’s ASX 200 (+0.2%) was lower for most of the day as weakness in the commodity complex weighed on mining names, however, the index then gradually pared losses as strong Chinese Imports provided some encouragement. The Nikkei 225 (+1.1%) outperformed with corporate earnings back in the limelight, while Hang Seng (+0.4%) and Shanghai Comp. (-1.4%) ignored strong trade data and were indecisive after the PBoC skipped open market operations for the 11th consecutive occasion, and with heavy losses seen across the big 4 banks in the mainland.
The biggest highlight of the overnight session, however, was the yuan which, as we reported overnight, fell the most since the currency’s devaluation in August 2015 after China reported a much narrower-than-expected trade surplus as imports jumped. According to Reuters, China has resumed its Qualified Domestic Limited Partnership plan after a two-year halt, granting licenses to about a dozen global money managers that can raise funds in China for overseas investments. Increasing imports and investment overseas both contribute to a weaker currency, and the result was a sharp plunge in the Yuan, a move which may again be criticized by Trump as indicative of currency wars.
“Selling of offshore yuan has spurred short covering of the dollar,” said Ko Haruki, head of the financial solutions group at CIBC World Markets (Japan) in Tokyo. “The dollar’s gain against the yuan is lifting dollar-yen, which had also seen short covering as the Nikkei 225 stayed in positive territory.”
In other words, in today’s interlinked market, the plunge in the Yuan, ended up boosting Japanese stocks by way of a dollar, that traded higher much of the overnight session.
Meanwhile, the all important catalyst for the recent equity selloff, U.S. 10-year Treasuries, were steady after Senate leaders unveiled a bipartisan deficit busting deal while weak demand at Wednesday’s 10Y auction pushed the yield back toward the recent four-year high.
At the same time, the pound drifted higher before a Bank of England rate decision, and the euro weakened as ECB member Jens Weidmann said the central bank will monitor the impact of the currency on inflation. USD continues to find support across G-10, with ZAR and TRY particularly weak; yuan in focus after overnight selloff, which was driven by narrower trade surplus and increased outbound investment reports.
A summary of key macro moves, courtesy of Bloomberg:
In commodities, WTI and Brent crude futures have seen relatively sideways trade overnight and this morning as prices remain in close proximity to yesterday’s lows seen in the wake of the ramp up in US production shown via the DOE’s with output above 10mln bpd and perhaps more crucially, above that of Saudi Arabia. Elsewhere, latest reports confirm that the Forties pipeline has now resumed operations. In metals markets, spot gold is trading lower as the yellow metal succumbs to the firmer USD, while copper’s attempt to nurse losses during Asia-Pac trade was restricted by the risk averse tone in its largest consumer China.
Bulletin Headline Summary from Ransquawk
Market Snapshot
Top Overnight News from BBG
Fed’s Kaplan: 3 hikes this year is appropriate; best way to continue expansion is to remove accommodation
Reuters: China revives QDLP outbound investment scheme; licenses granted for some funds to raise money in China for investment overseas ending a 2-year halt, according to people familiar
Japanese investors dumped U.S. sovereign bonds for a third month in December, taking sales last year to the highest in a decade. Total withdrawals for 2017 were 3.83 trillion yen, the most since 2007, when they offloaded 3.98 trillion yen. They were net buyers between 2014 and 2016.
Asian equity markets traded mixed with the region somewhat cautious following the subdued lead from Wall St. where price action was choppy and all majors closed in the red. ASX 200 (+0.2%) was lower for most of the day as weakness in the commodity complex weighed on mining names, and with industry giant Rio Tinto also pressured after investors bought the rumour and sold on the news of a strong earnings report. However, the index then gradually pared losses as strong Chinese Imports provided some encouragement. Elsewhere, Nikkei 225 (+1.1%) outperformed with corporate earnings back in the limelight, while Hang Seng (+0.4%) and Shanghai Comp. (-1.4%) ignored strong trade data and were indecisive after the PBoC skipped open market operations for the 11th consecutive occasion, and with heavy losses seen across the big 4 banks in the mainland. Finally, 10yr JGBs were marginally lower with demand subdued amid gains in Japanese risk assets, while the 30yr JGB auction also failed to provide support despite increased demand and higher accepted prices. PBoC skipped open market operations and was net neutral on the d
Top Asian News
China trade from CapEco: Trade appears strong but seasonal effects muddy the waters. Chinese trade beat expectations at the start to 2018. But seasonal volatility means that we won’t get a clear reading on the pace of foreign shipments until next month. Export growth edged down from 7.4% y/y in December to 6.0% last month in renminbi terms (the Bloomberg median was 2.6%, our forecast was 0.0%). Adjusting for a rise in export prices, we estimate that growth in export volumes dropped from 6.9% y/y to 5.2%. It is surprising that growth in outbound shipments didn’t decline by a wider margin given that Chinese New Year falls later this year than last, which should have meant that less of the pre-holiday rush to meet orders took place in January. We estimate that export volumes rose around 3% m/m in seasonally adjusted terms last month, reaching an all-time high. This suggests that strong foreign demand – the global manufacturing PMI remained close to a seven-year high in January – has continued to support shipments of Chinese goods. Meanwhile, import growth jumped in January, from 0.9% y/y to 30.2% (Bloomberg 5.3%, CE 6.0%). Adjusting for price effects, we estimate that growth in import volumes also surged, from -3.9% y/y to 26.0%. A pick-up was expected given that more of the build-up in inventories ahead of the pre-New Year rush should have taken place in January this year relative to 2017. But as with exports, the outturn exceeded expectations. We estimate that, even after stripping out seasonal factors, import volumes jumped 15% m/m last month, more than reversing a 7.2% fall in December. On the face of it then, the data point to a very strong start to the year for Chinese trade. But the figures need to be treated with caution since although we have done our best to adjust for shifts in the timing of Lunar New Year, it is not always possible to iron out these distortions entirely. The picture will become clearer once we are able to average across the data for first two months of the year. We think export growth will rise further in February but expect import growth to drop back sharply as the seasonal base effects reverse.
European equities (Eurostoxx 50 -0.6%) trade lower across the board in sympathy with the broader pull-back in risk around the globe today and in the US on Wednesday. In terms of sector specifics, the financial sector is the outperformer with earnings from the likes of Commerzbank (+2.4%), SocGen (+4.1%), UniCredit (+2.6%) and Zurich Insurance (+3.8%) lifting the sector with Swiss Re (+3.8%) also lending a helping hand near the top of the SMI after news that Softbank could acquire a stake in the Co. Elsewhere, GSK (+2.3%) has been supported by news that Novartis’ launch of their Advair copy will be delayed. In terms of bourses, the CAC (-0.3%) has seen some modest outperformance, with domestic earnings from Total (+1.8%), Pernod Ricard (+2.2%) and Publicis (+3.8%) capping losses. Finally, Talk Talk (-10%) are enduring a difficult morning of trade after announcing a GBP 200mln share placement.
Top European News
In currncies,the Nzd/Usd has pared some losses to trade back over 0.7200 from a circa 0.7175 low overnight after the RBNZ stood pat on rates as widely expected, but surprised with a broadly dovish accompanying statement and additional comments projecting a further downturn in the Kiwi on a TWI basis. While maintaining guidance for tightening from Q2 next year, Governor Spencer and his assistant McDermott cautioned that the next move could be a cut or hike. Hence, the Aud/Nzd cross has rebounded above 1.0800 again and almost touched 1.0900 at one stage, as Aud/Usd keeps its head above 0.7800 despite RBA governor Lowe RBA Governor Lowe stating that the RBA does not see a strong case for raising interest rates in the near term. Elsewhere, Usd/Jpy has climbed towards the top of a broad 109.00-110.00 range amidst a renewed pledge from BoJ head Kuroda to continue with powerful QE to achieve price stability as it remains some way from reaching the inflation target. Eur/Usd has also broken out from recent trading parameters, partly on ECB claims that the US is keeping the Dollar weak, but mainly as the Greenback gleans more of a yield advantage. The headline pair has bounced in advance of a series of key chart supports in the 1.2222-27 area, but may not get close to decent option expiry strikes between 1.2300-10 (1.35 bn). Sterling is holding up relatively well in the run up to a potentially more hawkish BoE post-meeting QIR with Cable above 1.3850 and Eur/Gbp sub-0.8850 vs 0.8900 and over of late. Note, option pricing suggests a big market move on the event, 120 pips either way. Usd/Cad still hovering just below 1.2600 as Canadian President Trudeau repeats that no NAFTA deal is better than the wrong one, while Usd/Chf is sitting near the top of a higher 0.9425-50 band having pushed through strong tech resistance at the lower end. Usd/Cny has bounced firmly on a much smaller than forecast Chinese trade surplus and reports about relaxed capital controls – hence the DXY has rallied above 90.000 and as far as 90.500.
In commodities, WTI and Brent crude futures have seen relatively sideways trade overnight and this morning as prices remain in close proximity to yesterday’s lows seen in the wake of the ramp up in US production shown via the DOE’s with output above 10mln bpd and perhaps more crucially, above that of Saudi Arabia. Elsewhere, latest reports confirm that the Forties pipeline has now resumed operations. In metals markets, spot gold is trading lower as the yellow metal succumbs to the firmer USD, while copper’s attempt to nurse losses during Asia-Pac trade was restricted by the risk averse tone in its largest consumer China. North Sea Forties crude oil pipeline has restarted.
Looking at the day ahead, the BoE should be the highlight today with the MPC meeting due around midday. The latest inflation report will be released alongside this and Governor Carney will then follow with his press conference. Away from that, the December trade data is out in Germany and the latest weekly initial jobless claims data in the US are also due. The Fed’s Kashkari and Harker are also slated to speak in the afternoon at separate events, while the ECB’s Mersch, Praet and Villeory will speak. AIGand CVS Health are due to report earnings.
US Event Calendar
DB’s Jim reid concludes the overnight wrap
Has the phrase “healthy correction” ever been used more than it has over the past 24 hours? Given that the VIX traded above 50 on Tuesday (a level it hasn’t closed at since March 2009) I’d hate to see what an unhealthy correction looks like. Having said that markets are broadly adhering to the script of what normally happens after the largest VIX spikes seen on record. As a reminder on Tuesday night we published a quick note showing what happens 1 week, 1 month and 3 months after the largest 10 VIX spikes in history. Basically the VIX usually rallies over all subsequent periods but equities tend to be higher the week after but on average fall 3 months later. The reverse is true for bonds.
Things were adhering to this script for most of the day (especially in Europe) but a late US equity sell-off provided some renewed jitters to markets. The VIX did fall 7.5% to 27.73 but the S&P 500 fell -0.50% – well off the day’s highs of +1.21% just before Europe’s strong close (more below) and including a near 1% drop in the last 20 minutes of trading. Activity remains high and according to Bloomberg volume on US exchanges exceeded 9 billion shares for a fourth straight day after surpassing that total just once in the past seven months.
The reversal seemed to stem from a disappointing 10 year Treasury auction which lifted yields around 8bps from the lows for the session (+3.4bps on the day to 2.837%) and perhaps also because of the Senate’s additional spending plans (more below). Given the turmoil this week it is very telling that 10yr US yields are back to where they were at payroll Friday’s close having climbed 19.1bps from Tuesday’s lows.
Very soon we’ll start building up to next Wednesday’s US January CPI print and although the importance of one number should be downplayed in theory, in reality it’s fair to say that this will be an incredibly closely watched number for global markets. A higher than expected print will likely extend the volatility and probablycause risk to sell-off whereas an in-line or softer print will be very risk positive.
We’ve got no idea about where one number is going to come in but we’d expect inflation to more often beat on the upside in 2018. Interestingly DB’s Alan Ruskin yesterday highlighted that over the last 25 years, January core CPI m/m% was lower than Dec core CPI m/m% on only 5 occasions. The Feb core CPI was higher than January core CPI on only 6 of the last 25 occasions. He points out that there is a bias in the seasonally adjusted data for a bump up in January m/m% relative to both December and February. Food for thought.
In the US, Senate leaders have announced a bipartisan two year budget deal – including c$300bn of new spending and suspension of the federal debt ceiling until March 2019. The agreement is expected to extend the government funding until 23 March while the lawmakers refine details on the longer term plans.
Looking ahead, the bill will be voted on in the Senate today and then move to the House, where it is not certain that it will pass. House Minority leader Ms Pelosi noted she won’t back the bill without a commitment from Speaker Ryan to allow an open debate on the immigration issues, similar to the promise made earlier by Senator McConnell.
In Germany, Ms Merkel and the SPD have reached an agreement to form the next coalition government, with the SPD likely to gain the finance and foreign affairs ministry posts as part of the concession (as per Bloomberg). Notably, the SPD has held these two ministries before, back in the 2005-2009’s grand coalition government. For now, Ms Merkel has reaffirmed her commitment to a “solid” fiscal policy and noted “you can only spend the money you have…I’m not worried at all”. In view of the SPD gaining many of the key Government positions and their previously stated desire to create a United States of Europe by 2025, the result could boost the potential for a deeper EU integration as proposed earlier by France’s President Macron where he advocated a joint budget and common finance ministers for the region. Looking ahead, the deal needs to be approved by the SPD’s 463k rank and file members, where confirmation is not certain.
This morning in Asia, markets are mixed but firming as we type. The Nikkei (+1.22%), Kospi (+0.74%) and Hang Seng (+0.77) are all up whilst the China’s CSI 300 (-0.89%) is lower. Datawise, China’s January trade surplus was less than expected at $20.3bn (vs. $54.7b) as a strong rise in imports (36.9% vs. 10.6% expected) outpaced exports growth (11.1%). Elsewhere, in his first public speech since joining the BOJ’s board, Mr Suzuki noted the central bank must continue with easing for a while as inflation is still far from the BOJ’s 2% target.
Now recapping other market performance from yesterday. As mentioned earlier, US bourses fluctuated during the day before closing lower (S&P -0.50%; Dow -0.08%; Nasdaq -0.90%). Within the S&P, modest gains in the telco and financials were more than offset by losses from energy and tech stocks. European markets were all up and rebounded c2%, in part playing a catch up to the positive US lead from the prior day. The Stoxx 600 rose for the first time in seven days and printed the largest gain since June 2016 (+1.97%), while the DAX (+1.60%) and FTSE (+1.93%) also rose. The VSTOXX fell 29% back to April 17 levels (21.37).
Over in government bonds, core 10y bond yields rose 3-5bp (UST +3.4bp; Bunds +5.2bp; Gilts +3bp) while peripherals outperformed, with yields down 1-4bp, in part boosted by the potential for tighter EU integration post the German coalition talks. Turning to currencies, the US dollar index firmed for the fourth consecutive day (+0.75%), while the Euro and Sterling weakened 0.91% and 0.49% respectively. In commodities, WTI oil dropped 2.52% following the latest EIA data showed a rise in US crude inventories and domestic oil output.
Elsewhere, precious metals weakened c1% (Gold -0.44%; Silver -1.64%) and other base metals also retreated (Copper -2.1%; Zinc -1.56%; Aluminium +0.32%). Away from the markets and onto the four Fed speakers. On the recent US equity sell off, they all seemed to be taking it in their stride. The Fed’s Dudley noted that “having a bump like this has virtually no consequences on my view of the economic outlook”. The Fed’s Kaplan added these corrections “can be healthy” and has little implication for the US economy. Then the Fed’s Williams noted “I don’t see any of the movements in asset prices of late to fundamentally change my view of the economy”. Elsewhere, the Fed’s Evans noted the US economy is “firing on all cylinders” and believe the recent equity selloff was “an outsized response”.
Moving onto rates and inflation. Mr Williams who is a voter this year said “we should have a gradual increase in rates this year and next…right now, I’m not taking any signal” from the data, although he also added “even four rate hikes is very gradual”. Elsewhere Mr Evans has reaffirmed his views of keeping rates flat until mid-18 in order to assess the incoming inflation data. Although he also added “suppose inflation picks up more assuredly….then we still could easily raise rates another three or even four times in 2018 if that were necessary”.
Finally, Mr Kaplan noted that “we are likely to overshoot full employment and it would be wise to be removing accommodation in a patient and balance manner”. Back in the UK and ahead of today’s BOE, DB’s Oliver Harvey argues that it will be difficult for the Bank to out-hawk current market pricing at this meeting. While the Bank is unlikely to push back against the tighter path implied by the market forward curve, they think that it is still too difficult for it to signal confidence in a May hike given ongoing risks about Brexit transition, the wedge between domestic and external demand and limited evidence of an overheating labour market.
Staying in Europe, the European Commission has upgraded its GDP growth forecasts for the Euro area. Growth for 2018 is now 2.3% (+0.2ppt from previous) and 2% for 2019. Elsewhere, inflation is expected to be marginally higher to 1.5% this year but unchanged at 1.6% for 2019. The EC forecasts UK growth to slow to 1.4% this year and 1.1% next year (DB expects growth of 1.3% and 1.5% respectively). Elsewhere, the ECB’s Lautenschlaeger noted price trends justify ending the QE program this year.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the December consumer credit was lower than expected at $18.5bln (vs. $20.0bln), but prior revisions meant annual growth was up 5.4% yoy. Following a stronger November reading, Germany’s December IP fell a bit less than expected at -0.6% mom (vs. -0.7%), leading to an annual growth of 6.5% yoy. In France, the December trade balance deficit narrowed to -EUR3.5bln (vs. -EUR4.9bln) – the smallest deficit since May 2016. A rebound in exports boosted annual growth to 4.1% yoy whereas imports rose 3.0% yoy. In the UK, the January Halifax house price index fell -0.6% mom (vs. 0.2% expected) leading to an annual growth of 2.2% yoy (vs 2.4% expected). Finally, Italy’s December retail sales was lower than expectations at -0.1% yoy (vs 1%).
Looking at the day ahead, the BoE should be the highlight today with the MPC meeting due around midday. The latest inflation report will be released alongside this and Governor Carney will then follow with his press conference. Away from that, the December trade data is out in Germany and the latest weekly initial jobless claims data in the US are also due. The Fed’s Kashkari and Harker are also slated to speak in the afternoon at separate events, while the ECB’s Mersch, Praet and Villeory will speak. AIGand CVS Health are due to report earnings.
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By RanSquawk
Bank of England Monetary Policy Decision, Minutes and Quarterly Inflation Report at 12:00GMT (07:00EST), Press Conference with Governor Carney at 12:30GMT (07:30EST)
BACKGROUND
The Bank of England is expected to keep its policy instruments on hold at this meeting. All analysts surveyed by Reuters expect the bank rate to remain unchanged at 0.50%, the Gilt QE program unchanged at GBP 435bln and the Corporate Bond QE program unchanged at GBP 10bln. The vote split is expected to be 9-0 for no change in interest rates although two of 21 analysts expect two people to vote for a hike (likely McCafferty and Saunders) while one analyst surveyed expects one to vote for a hike.
With no change expected, markets will be looking for comments in the Quarterly Inflation Report (QIR) or the minutes for any signal that a rate hike could come in May (the next month when the QIR is released). Markets are currently pricing in just a 47% chance of a hike at the May meeting which could change depending on what the BoE signals. Berenberg has identified three tools it could employ to prepare the markets for a hike in May:
If the BoE deploys one or a number of these tools it could be seen as a hawkish move, although they may want to hold off signalling a move is coming in May, given the uncertainty surrounding Brexit negotiations and the recent softness in some data.
Markets should also be looking out for details regarding the reinvestment from maturing bonds held under the current QE program. RBC note that the Bank of England currently holds GBP 15.8bln of the Mar’2018 bond which expires on March 7th. They expect reinvestment operations to commence on 12th March and continue for four weeks, implying an average of circa GBP 4.6bln of purchases per week, to be split over three buckets (3-7y, 7-15y, and +15y). Back in November, Carney said that the BoE would prefer the Bank Rate to be higher before adjusting the QE program
DEVELOPMENTS SINCE THE PREVIOUS MEETING
Growth, Inflation, Labour Market and other data
The preliminary reading of Q4 GDP was stronger than expected, printing at 0.5% Q/Q, up from 0.4% in Q4. This took the Y/Y rate to an unremarkable 1.5% as UK growth lags that of its developed peers. The disappointing growth looks set to continue as the recent PMI surveys suggest GDP growth of under 0.3% Q/Q in Q1, compared to 1.0% for the Eurozone as a whole. Obviously this data covers just one month of the quarter but it is clear that the UK is lagging behind its European neighbours.
Inflation continues to track above target although declined to 3.0% in December from 3.1%. In November, the BoE had said that inflation was near its peak and was then expected to fall back. So far, they appear to be correct after the slowdown in December although Governor Carney still has to write a letter to Chancellor Hammond explaining why inflation is over 1 percentage point away from the BoE’s target of 2.0%, this will be published alongside the decision. Back in January, Carney said he still expects inflation to remain above 2% in the near future.
The most recent labour market data from the UK was relatively strong: employment rose to a record high and average earnings (excluding bonus payments) rose 2.4% Y/Y. However, the timely claimant data was less favourable as the claimant count rose by 8.6K, above the expected 5K and up from 5.9K in November.
Elsewhere, December retail sales were soft (although this follows a strong November as consumers front loaded Christmas purchases) and the housing market has shown further signs of slowing. Mortgage approvals fell to their lowest level in almost five years in December, although October and November were strong ahead of the rate hike in November.
Brexit
Since the November meeting, the UK and EU appeared to make a breakthrough in Brexit negotiations. The two parties reached a deal on citizens’ rights, the border with Ireland and the size of the divorce bill, meaning talks can move onto the next stage – the future trade arrangements and a transitional period. Talks on the transition agreement continue this week and markets will be looking for comments from the BoE on how they view the recent developments. In November, the BoE said that a transition period would reduce the chance of a “disorderly Brexit” which they could echo this time around and would be seen as a relatively neutral stance.
MPC Rhetoric
The Monetary Policy Committee has been relatively quiet since the last meeting in December with only Governor Carney, Saunders and Tenreyro hitting the wires. Carney sounded relatively upbeat, suggesting that wages are showing signs of picking up and that they have seen a bit of a pick up in growth. Carney also added that the inflation pass through from the exchange rate shock still has further to go and expects inflation to remain above target in the near future.
Tenreyro, one of the newest members on the MPC, said she saw “ample time” before the BoE would need to raise rates again and expects only a couple more rate hikes over the next three years. Whether “ample time” means as early as May is up for debate but it appears unlikely that Tenreyro will be voting for a hike at this meeting.
Saunders speech was full of mixed messages and contradictions. On one hand, he said that interest rates will likely need to rise over time while on the other hand stated that Brexit could push BoE policy in either direction.
CURRENT FORECASTS
The BoE currently forecasts inflation to remain above target over the forecast period although drift down towards 2.0% by the end of 2020. Barclays note that the new forecasts will have to incorporate significantly different exchange rates and oil prices. The pound (GBP) has appreciated approximately 1.4% against all currencies since the November report and Barclays estimates that if that was sustained then it will subtract 0.1ppt from inflation in 2018. On the other hand, oil prices have been mostly resilient to increasing US production and have risen approx. 10% since November, which Barclays estimates will add 0.1ppt to inflation in 2018.
Regarding growth, Berenberg notes that the BoE identified a “speed limit” that the UK economy can manage without generating excess inflation, which stands at just over 1.5%. If the BoE raises their growth forecasts higher above this limit than the current 1.7% then it might be seen as further preparing the market for another rate hike.
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By Bloomberg Markets Live commentator Christopher Antsey
It’s been said of the Roman army that their training drills were like bloodless battles, and their battles like bloody drills. Something similar may be true of the market this year: the sell-off across asset classes is like a tough drill that will leave it in a stronger position to cope with the real battle ahead — the reversal of QE.
The near 7% tumble in the S&P 500 Index from its record high has been termed a “healthy correction” by so many that it’s practically a cliche by now. But as short-volatility trades clear out, a swathe of speculative and leveraged positions will have been removed.
Retail investors will also have had the fear of the gods put in them: clients at TD Ameritrade had boosted equity allocations for 11 straight months through December, pushing the brokerage’s Investor Movement Index, which tracks client positioning, to a record.
And traders are unwinding positions at a time when liquidity is still abundant — the big three central banks are, on a collective basis, still expanding their balance sheets. Contraction probably won’t begin until October at the earliest, when the European Central Bank could end its asset purchases.
In addition, the shakeout comes at a time when the underlying economic fundamentals are solid — the world is still enjoying the glow of a synchronous expansion. The IMF less than three weeks ago boosted its global forecasts for 2018, seeing the fastest growth since 2011.
So even though the sell-off in stocks and bonds in recent weeks will end up being painful for many, it will build up some scar tissue for the far more serious challenge to come: coping with higher borrowing costs as the unprecedented balance-sheet unwind begins in earnest, removing a backstop for markets that’s been there for a decade now.
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Authored by Andrew Korybko via Oriental Review,
Germany’s recently decided to freeze arms exports to Turkey as well as to the countries involved in the War on Yemen.
This latest step was taken in response to “Operation Olive Branch” while the earlier one was due to the rising grassroots pressure on Berlin to distance itself from the Saudis’ disastrous military campaign. The Central European country has long been leveraging its arms export industry in order to expand its influence in the Mideast, but it’s nowadays coming at the cost of the country’s soft power due to the Western public’s disapproval of the Saudi and Turkish operations. Germany is making an effort to show that it’s responding to this criticism, though it’s unclear as of now whether it’s only paying superficial lip service to its citizens or if it truly intends to reevaluate its military relationship with these two Muslim Great Powers.
The reason for such suspicion is because the Yemeni announcement is very vague and leaves open the possibility that exports to so-called “transfer countries” such as the UK and France will still occur, thus maintaining a workaround to enable Germany to indirectly sell its wares to Saudi Arabia and others. Furthermore, there’s no confirmation yet as to whether this will affect existing contracts that are currently being implemented or will only pertain to future ones. As for Turkey, the decision is a lot more clear-cut because Berlin announced that it’s suspending talks for upgrading the country’s German-made tanks, thus dealing yet another blow to the already fractured German-Turkish relationship.
Foreign Minister Sigmar Gabriel also indicated that the sale of weapons to conflict regions is becoming a highly sensitive issue in the drawn-out coalition talks that have been going on for months already, apparently trying to attribute some blame for the impasse on Berlin’s arms exports to the Mideast. This is probably a “politically convenient” deflection from Merkel’s unwillingness to moderate her EuroLiberal agenda in order to form a new government, but it nonetheless suggests that the issue is becoming contentious enough to warrant a public response of some sort. Even so, it’s unlikely that Germany will cede its position as one of the world’s largest arms exporters just to satisfy the same EuroLiberal base that it ironically helped cultivate.
For as liberal as Germany is on the domestic and continental front, its leadership embraces ruthless realism when it comes to non-European affairs in Africa and the Mideast, and its “military diplomacy” is part and parcel of the EU leader’s interactions with its civilizationally dissimilar geopolitical periphery. In the case of Africa, Berlin is promoting multilateral military deployments in Niger and elsewhere in order to stem illegal migration, while its engagement with the Mideast sees it sell arms to Great Powers in order to strengthen state-to-state partnerships, to say nothing of Germany’s open support of regime change in Syria. Altogether, the lesson is that even hyper-liberal countries shrewdly utilize a set of Neo-Realist policy options on the international stage, no matter how much this may contradict their stated values.
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US disarmament ambassador Robert Wood warned yesterday during a Geneva forum hosted by the United Nations that the international community shouldn’t be fooled by North Korea’s recent warming of relations with the South, ostensibly catalyzed by the PyeongChange Winter Games.
“What I would call ‘the charm offensive’ frankly is fooling no one,” Wood said. Instead, he suspects the North is using the games as a propaganda tool to keep international pressure at bay while the rogue regime completes its first ICBM capable of accurately delivering a nuclear payload to the US mainland.
Now, in a move unprecedented in recent Korean history, the Wall Street Journal is reporting that Kim Jong Un’s sister Kim Yo Jong will travel to South Korea to observe the games, where the two Koreas have created a joint women’s field hockey team that is functioning as a symbol of Korean unity.
At first brush, the younger Kim’s presence at the games might appear to be a fairly innocuous gesture. But in the complicated world of statecraft, US exports say it is functioning as a wedge that could blunt the impact of sanctions while driving a wedge between the US and South Korea. If the South allows her into the country, it could set the stage for further exemptions down the road.
In sending Kim Yo Jong, Pyongyang also appears to be thumbing its nose at sanctions imposed by the U.S., the United Nations and South Korea. Ms. Kim faces travel restrictions, as does Choe Hwi, a senior sports official whom Pyongyang also intends to dispatch. Air Koryo, the North Korean carrier that would likely convey them to the South, is also sanctioned.
It is unclear how this would be dealt with, but success in obtaining the relevant sanctions exemptions could prompt Pyongyang to make further demands down the road, such as the cancellation of U.S. military exercises and the resumption of shuttered inter-Korean economic projects, said Duyeon Kim, a visiting senior fellow at the Korean Peninsula Future Forum in Seoul.
“It’s all a strategy to try to test and further weaken the sanctions regime and try to pull Seoul and Washington further apart,” she said.
Meanwhile, US officials contend that the South has been blinkered into believing that the presence of a Kim dynasty member at the games could help set the stage for direct talks between the North and the US.
“We believe that the North’s announcement of the delegation shows its willingness to ease tensions on the Korean Peninsula along with a message of celebration for the Pyeongchang Olympic Winter Games,” a spokesman for the Blue House – the residence of South Korea’s president – said.
It is unclear whether Kim Yo Jong would arrive in time for the opening ceremony on Friday evening in Pyeongchang, WSJ said.
A spokeswoman for the Blue House said the government would “make sure that there will be no inconvenience during the stay of the North’s high-level delegation.”
“Sending Ms. Kim as part of North Korea’s delegation shows that Kim Jong Un is trying to show that he really wants to improve relations with South Korea,” said Cheong Seong-chang, a senior fellow at the Seoul-based private think tank Sejong Institute. The decision also seems to have taken into account reports that U.S. President Donald Trump would send his daughter Ivanka to Pyeongchang, Mr. Cheong said.
Of course, the North has made similar gestures in the past, sending delegations to pan-Asian games.
But according to one official who spoke with WSJ, the delegations mostly focused on the games, and left the diplomacy for another day. The question now is, will this be the case in PyeongChang?
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