Month: June 2018

Suggesting that some North Korean government hardliners remain opposed to denuclearization, and may even have had political overhaul ambitions in Kim’s absence in one week, Yonhap and Reuters reported Monday morning that Kim Jong Un has removed the top three military officials from their posts ahead of the historic June 12 summit with Trump in Singapore.

While there has been no specific reason cited for the “replacement”, it is possible that Kim was worried about the military – which holds an immense amount of power in North Korean society – staging a coup in his absence one week from today.

Rumors about the officials’ removal were first reported by a Japanese newspaper early Monday local time, and Reuters later reported the rumors were indeed confirmed by a senior US official.

According to the Japanese source, the officials were replaced because they “lacked flexibility in thinking” indicating that the suddenly reformist Kim is setting out to purge the hardliners in his government. It’s widely believed that the North Korean military would oppose any denuclearization deal with its longtime arch-nemesis.

Here’s a breakdown of who is replacing who, courtesy of Yonhap:

No Kwang-chol, first vice minister of the Ministry of People’s Armed Forces, replaced Pak Yong-sik as defense chief, while Ri Myong-su, chief of the KPA’s general staff, was replaced by his deputy, Ri Yong-gil, according to the source.

These changes are in addition to Army Gen. Kim Su-gil’s replacement of Kim Jong-gak as director of the General Political Bureau of the Korean People’s Army. The replacement was confirmed in a North Korean state media report last month.

Meanwhile, North Korean state media reported that Kim Su Gil had replaced Kim Jong Gak, but was silent about the other personnel changes. Reuters added that Secretary of State Mike Pompeo spoke with Kang Kyung-hwa, his South Korean counterpart, in a 15-minute phone call on Monday where they talked about the upcoming summit.

One senior intelligence official cited by Yonhap said the firings could represent a “generational change”, as Kim – already one of the world’s youngest heads of state – seeks to install younger, forward-thinking officials who share his desire to revive the North’s moribund economy, which has been increasingly choked by sanctions passed by the US and the United Nations Security Council.

Furthermore, the firings will allow Kim to further tighten his grasp on the North Korean military. One academic who spoke with Reuters said that Kim will need to “put the KPA [Korean People’s Army] in a box and keep it there” if he’s serious about following through on his denuclearization promise.

“If Kim Jong Un is set on making peace with the U.S. and South Korea and dealing away at least part of the nuclear program, he will have to put the KPA’s influence in a box and keep it there,” said Ken Gause, director of the International Affairs Group at CNA, a non-profit research and analysis organization.

[…]

“This reshuffle has brought to the fore the officers who can do just that. They are loyal to Kim Jong Un and no one else.”

Another academic said the future of the North’s nuclear program was a “side issue” in Kim’s decision to order the military shakeup.

Given the military’s secondary role in the North’s nuclear and missile programs, the moves are likely more about installing a younger, even more trusted cohort of officials who Kim Jong Un can rely on as he confronts a variety of domestic and international issues, said Michael Madden, a North Korea expert at Johns Hopkins University’s 38 North website.

“The nuclear weapons are a side issue,” he said.

The moves are likely linked in part to Kim Jong Un’s drive to have the military take a bigger role in critical infrastructure projects. That could explain why newly appointed director of the KPA’s General Political Bureau, Army General Kim Su Gil, accompanied Kim Jong Un on a field guidance trip to a beach tourist zone with other officials, Madden said.

Kim Jong Un is also likely expecting to receive more international economic aid and investment soon as part of the ongoing talks and he wants to prevent corruption that plagued some past projects, Madden said.

Reuters confirmed that the newly installed military leaders are much younger than their predecessors.

All of the newly promoted officials are younger than their predecessors, including 63-year-old Ri Yong Gil, who is 21 years younger than Ri Myong Su.

“This points to two things: the consolidation of Kim Jong Un’s power as the sole leader of North Korea and strengthened cooperation between the North’s party and military as the country works towards further economic development,” said Yang Moo-jin, professor at the University of North Korean Studies in Seoul.

“They’re all young but capable people,” Yang said.

Despite their youth, all three of the new officials have experience in foreign affairs.

All three of the new military officials have at least some experience interacting with foreign delegations, a factor that is critical as Kim seeks to line up meetings with leaders from the United States, China, Russia, and Syria.

“They are shaping these guys up because there is going to be a lot of foreign interaction,” Madden said. “They know to sit there and not get too drunk at the parties … they know how to behave themselves.”

In the past, major shakeups in the North Korean military have been accompanied by high-profile executions, as Kim has ruthlessly sought to purge any potential challengers to his power. Kim once had an uncle executed as a “traitor” after he purportedly “confessed” to planning a coup. Last February, Kim executed five government officials using an anti-aircraft gun to send a message.

North Korean military leaders have long maintained that the country’s nuclear weapons program is essential to the long-term survival of the regime, which suggests that just like members of the US deep state, some senior N.Korean see the detente initiated by Kim as an irrevocable policy blunder. Talks between US and North Korean officials have continued, but are making only “halting progress”, according to one US source, as the pace of an eventual denuclearization deal remains a key point of contention.

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Where previously the threat of renewed trade war between the US, also known as the “+1” in this weekend’s meeting of G6+1 nations, and EU, Canada, Mexico, and of course, China, would have been sufficient to pummel futures and stocks, today stocks are approaching life with a “glass half full” approach, and global markets and US equity futures are green across the board.

There were two key factors for today’s bout of optimism: i) the return of the US-North Korea summit on June 12 and ii) Friday’s strong (pre-tweeted) US payrolls report, which surprised to the upside and has put protectionist fears to the side, spurring Euro stocks and S&P futures to a gain after peers in Asia jumped. Treasuries slipped alongside the dollar, while the pound and euro rose.

Helping sentiment was the continued sharp drop in Italian yields, with both the Italian 2Y spread to German bunds..

… as well as the 10Y sliding to levels far below last week’s crisis highs.

“NFP was good” and it helped boost investors’ risk appetite in Asian trading, said Kapstream Capital money manager Raymond Lee in Sydney. “After markets and risk assets got constructive again, the yen sold off”

Europe’s Stoxx 600 Index jumped (0.5%) as every industry group traded in the green, with utility companies leading the way as markets continue to digest Friday’s NFP report and the rescheduling of the NK-US summit on June 12th, thus outweighing the lingering trade concerns which saw the US and China fail to reach an agreement over the weekend, albeit both parties stated that progress had been made. The IBEX (+1.2%) is the outperformer amid positivity on the domestic political front. The FTSE MIB is fluctuating between positive and negative as political uncertainty in the region is leading to volatile trade. Utilities are currently outperforming with Iberdrola leading the sector (+3.0%) after an upgrade at Goldman Sachs.

Earlier in the session, Asia equity markets started the week higher across the board with the MSCI Asia Pacific Index surging 1.3% even as China warned it will withdraw from commitments it made on trade if President Donald Trump carries out a separate threat to impose tariffs on the Asian country; instead traders found support in the abovementioned double-dose of optimism from strong jobs data and after US President Trump confirmed the summit with North Korea will go ahead as initially planned in Singapore on June 12th. ASX 200 (+0.5%) and Nikkei 225 (+1.4%) were both positive from the get-go with CYBG shares leading the advances in Australia after the Co. sweetened its merger bid for Virgin Money, while the Japanese benchmark was among the outperformers as it coat-tails on a weaker currency. Hang Seng (+1.3%) and Shanghai Comp. (+0.2%) also conformed to the broad upbeat sentiment following a net liquidity injection by the PBoC and amid reports that China widened the collateral for its Medium-term Lending Facility which will include qualified credit bonds.

In the US, S&P 500 futures are up roughly 10 points, and point to an extension of Friday’s advance. The 10-year Treasury yields traded above 2.90% even as the USD slid.

In macro and FX markets, safe-havens were under strain in which JPY took the brunt of the heightened risk appetite which saw USD/JPY and JPY-crosses extend Friday gains, with the yen and the dollar weakening against most major peers as demand for haven assets faded now that Italy and Spain are fixed again, if only for the next few hours, and Asian stocks rallied following Friday’s better-than-expected U.S. payrolls data. After rising 7 consecutive weeks, the Bloomberg Dollar Spot Index fell 0.4% to start the week.

The euro reversed its decline from Friday and retested the $1.17 handle boosted by unwinds versus the yen and the Swiss franc, as demand for haven assets wilted; the Aussie jumped on purchases against the yen and was later boosted further by stronger-than-expected local retail sales data, while Scandinavian currencies benefited from the improved risk sentiment. The Turkish lira advanced after a surge in inflation (CPI soared 12.15% from 10.85% last) spurred speculation the central bank will raise rates this week The Aussie jumped on purchases against the yen and was later further boosted by stronger than expected local retail sales data. AUD/JPY rallied 0.6% to 83.435 while EUR/JPY rose 0.3% to surpass Friday’s high of 128.14.

Still, as Bloomberg notes, with concerns about the euro area somewhat assuaged and emerging markets settling down after the recent sell-off, attention may yet turn back to trade. The G-7 meets in Quebec later this week, with the European Union and Canada threatening retaliatory measures unless Trump reverses course on new steel and aluminum levies. Trump will be present at this meeting.

“There is a lot of to-ing and fro-ing which so far hasn’t led to the imposition of some of these threatened tariffs, but I think the tit-for-tat and the possibility that this will start to gain unwanted momentum is very important to the markets,” John Wraith, head of U.K. macro rates strategy at UBS Group AG, told Bloomberg Television. “That said, it’s somewhat of a slow burner, it takes time to have an impact and issues like the situation on the Korean Peninsula and recently the Italian political situation, they have more immediate impact.”

For those who missed the latest trade developments, over the weekend US Commerce Secretary Ross travelled to Beijing for the 3rd round of trade talks with China which ended without a deal. However, there were comments by Ross that meetings were friendly and frank, while China commented that they have made concrete progress but warned any action by US to impose punitive tariffs would derail the negotiations. White House Economic Advisor Kudlow stated that Canadian PM Trudeau’s response to the US tariffs on steel and aluminium was an overreaction, while he added the tariffs may last a while or not which is subject to negotiations and that he views the issue as more of a family quarrel. Meanwhile,  Canada launched WTO and NAFTA cases on US metal tariffs.

In geopolitics, weekend reports suggested North Korea could have faked detonation of its nuclear test site last month, as it cited dust from explosions and journalists being 500 metres from the explosion which indicates small blasts. US officials reported that North Korea’s top three military officials have been replaced.  Syrian President Assad plans to visit North Korea to meet with Kim Jong Un.

Elsewhere, WTI crude edged lower, sliding below the 100DMA for the first time since September, amid speculation OPEC may phase out supply cuts at a time when American shale continues to surge. WTI (-0.7%) and Brent (-1.4%) prices have thus far failed to significantly rebound from the losses seen at the back end of last week after shedding more than 9.9% from the multi-year high levels, while the unofficial OPEC+ meeting during the weekend also continued to signal an unwillingness to ease restrictions. Prices were also subdued by the weekly Baker Hughes rig count showing an increase of 2 oil rig. Elsewhere, gold (+0.1%) is uneventful while shanghai copper hits highs of more than six weeks, underpinned by a marginally softer dollar and labour negotiations at the world’s largest copper mine. Dalian iron ore however fell almost 2% as it moved in tandem with steel prices amid the iron ore stockpiles at China’s port surging to record levels.

Economic data include orders for durable goods. Palo Alto Networks, Dell Technologies are among companies reporting earnings. ECB Governing Council member Ewald Nowotny, Bank of England policy maker Silvana Tenreyro speak.

As we first mused over the weekend, and UBS did this morning, Trump has so far not tweeted an advance preview of this morning’s durable goods number.

UBS: “US durable goods and capital spending data is due today. US President Trump has not tweeted anything about these numbers – that might be a signal that the data is bad, or it might be that the president was distracted and tweeting about other things”

— zerohedge (@zerohedge) June 4, 2018

Bulletin headline summary from RanSquawk

• European equities are positive (Stoxx 600 +0.6%) as markets continue to digest Friday’s NFP report and the rescheduling of the NK-US summit on June 12th
• US Commerce Secretary Ross travelled to Beijing the past weekend for the 3rd round of trade talks with China which ended without a deal
• Looking ahead, highlights include US factory orders, ECB’s Nowotny and BoE’s Tenreyro

Market Snapshot

• S&P 500 futures up 0.3% to 2,742.75
• STOXX Europe 600 up 0.5% to 388.66
• MXAP up 1.3% to 174.42
• MXAPJ up 1.2% to 571.60
• Nikkei up 1.4% to 22,475.94
• Topix up 1.5% to 1,774.69
• Hang Seng Index up 1.7% to 30,997.98
• Shanghai Composite up 0.5% to 3,091.19
• Sensex down 0.3% to 35,139.80
• Australia S&P/ASX 200 up 0.6% to 6,025.55
• Kospi up 0.4% to 2,447.76
• German 10Y yield rose 0.5 bps to 0.391%
• Euro up 0.4% to $1.1708
• Brent Futures unchanged at $76.79/bbl
• Italian 10Y yield fell 10.4 bps to 2.422%
• Spanish 10Y yield fell 7.8 bps to 1.363%
• Brent Futures unchanged at $76.79/bbl
• Gold spot up 0.03% to $1,293.83
• U.S. Dollar Index down 0.3% to 93.90

Top Overnight News from Bloomberg

• President Trump is headed for a showdown with America’s allies at a G-7 summit this week in Quebec, with the EU and Canada threatening retaliatory measures unless he reverses course on new steel and aluminum levies
• China is reaching out to Europe with pledges to improve market access for companies in a charm offensive that contrasts with Trump’s escalation of trade disputes worldwide
• North Korea will get relief from international sanctions only when it has shown irreversible moves toward denuclearization, U.S. Secretary of Defense Mattis said ahead of a summit next week between President Trump and North Korean leader Kim Jong Un
• Three days after being sworn in, Italy’s new populist government is preparing for one final hurdle before it sets about trying to overhaul EU rules and the established order: a confidence vote in both houses of parliament
• China’s fast-growing dollar-bond market is facing a fresh test as investors that counted on a type of credit-protection pledge seldom seen elsewhere find out just what those promises actually mean
• After a mid-May pause, the curve-flattening phenomenon that dominated the Treasuries market for months has roared back. The gap between yields on two- and 10-year notes shrank to as little as 40 basis points last week, the smallest since 2007, as traders rebuilt bets on Fed rate hikes
• Gilts had a stellar month in May and could be headed for an encore in June. Last month’s rally came after investors pared bets for a rate increase by the BOE this year on concerns about a grimmer outlook for the economy
• Japan’s life-insurance companies increased hedging of euro-denominated assets in the six months through March as the cost of doing so became cheaper
• Companies looking to sell euro debt after a near-market shutdown may find that last week’s volatility has stoked growing assertiveness among once-acquiescent bond buyers
• Brexit is back this week as lawmakers return from their recess. U.K. Prime Minister Theresa May has some important decisions to make on what kind of future customs relationship she will formally pitch to the European Union ahead of a key summit at the end of the month

Asian equity markets began the week higher across the board as the region got a double-dose of optimism from stronger than expected US NFP jobs data and after US President Trump confirmed the summit with North Korea will go ahead as initially planned in Singapore on June 12th. ASX 200 (+0.6%) and Nikkei 225 (+1.4%) were both positive from the get-go with CYBG shares leading the advances in Australia after the Co. sweetened its merger bid for Virgin Money, while the Japanese benchmark was among the outperformers as it coat-tails on a weaker currency. Hang Seng (+1.7%) and Shanghai Comp. (+0.5%) also conformed to the broad upbeat sentiment following a net liquidity injection by the PBoC and amid reports that China widened the collateral for its Medium-term Lending Facility which will include qualified credit bonds. Finally, 10yr JGBs were lacklustre amid a similar performance in T-notes and with demand subdued by risk appetite, while the BoJ’s Rinban announcement also failed to support as the central bank maintained its purchase amounts across the curve. PBoC injected CNY 20bln via 7-day and CNY 20bln via 28-day reverse repos for a net daily injection of CNY 20bln

Top Asian News

• Japan’s Finance Minister to Forego One Year’s Pay Over Scandal
• China Banks’ Waning Demand Suggests More Corporate Bond Defaults
• Penny-Pinching Imbibers Fuel Higher Alcohol Drinks in Japan
• China and Hong Kong Shares Advance as Property Developers Rally

European equities are positive (Stoxx 600 +0.6%) as markets continue to digest Friday’s NFP report and the rescheduling of the NK-US summit on June 12th, thus outweighing the lingering trade concerns which saw the US and China fail to reach an agreement over the weekend, albeit both parties stated that progress had been made. The IBEX (+1.8%) is the outperformer amid positivity on the domestic political front. The FTSE MIB is fluctuating between positive and negative as political uncertainty in the region is leading to volatile trade. Utilities are currently outperforming with Iberdrola leading the sector (+3.3%) after an upgrade at Goldman Sachs. M&A news is in focus, primarily with Accor’s interest in an Air France KLM (+7.0%) stake. Additionally Bayer announced a EUR 6bln cash call for the June 7thMonsanto acquisition. Finally, there were rumblings that Unicredit (+0.5%) and SocGen (+2.0%) were considering a merger; this was denied by SocGen, however.

Top European News

• CYBG Ups Virgin Money Offer With Bigger Share in Merged Bank
• Latvian Central Bank Nominates Swedbank’s Kazaks for Board
• Intrum, Kingfisher, Getinge, Lagardere Short Sellers Active
• Euro Calls and Puts in Limbo as Italy, NFP Offer Little Impetus

In FX, the dollar index is pivoting 94.000 having failed to derive any lasting benefit from Friday’s strong NFP release, as the key wage component continues to lag.  AUD was the clear G10 outperformer on several bullish/supportive factors, including overnight data in the form of retail sales, company profits and Q1 business inventories that all exceeded expectations. Coupled with broadly risk-on sentiment on the back of Friday’s upbeat US jobs report and geopolitical news (June 12 summit between US and NK back on track), which offset another US-China summit ending without anything tangible in terms of import tariff trade-offs, Aud/Usd has finally established a firmer foothold above 0.7600 and breached chart resistance through 0.7605-13 incorporating the 50 DMA (0.7610). Aud buyers are now testing 0.7643- 60 that encompasses a key Fib and a chart channel, but the bout of strength may not be greeted with enthusiasm by the RBA on Tuesday given recent policy statements highlighting the adverse impact of a strong currency on the growth, wage and inflation outlook. Note, the latest GDP update follows hot on the heels of the RBA policy meeting on Wednesday. JPY Usd/Jpy nearer the base of a 109.45-75 band, with offers seen above 109.90 according to market observers and big option expiries also keeping the headline pair in check (1.7 bn at the 110.00 strike vs 1.4 bn between 108.90-109.05). TRY Off worst levels prompted by Moody’s ratings downgrade alert for Turkey as a pick up in inflations underpins CBRT rate hike prospects for this Thursday. Usd/Try near the base of 4.6780-5940 trading parameters.

In commodities, WTI (flat%) and Brent (-0.2%) prices have thus far failed to significantly rebound from the losses seen at the back end of last week after shedding more than 9.9% from the multi-year high levels, while the unofficial OPEC+ meeting during the weekend also continued to signal an unwillingness to ease restrictions. Prices were also subdued by the weekly Baker Hughes rig count showing an increase of 2 oil rig. Elsewhere, gold (flat) is uneventful while shanghai copper hits highs of more than six weeks, underpinned by a marginally softer dollar and labour negotiations at the world’s largest copper mine. Dalian iron ore however fell almost 2% as it moved in tandem with steel prices amid the iron ore stockpiles at China’s port surging to record levels.

It’s a fairly quiet start to the week with final April factory, durable and capital goods orders in the US. The ECB’s Nowotny is due to speak in the afternoon at a conference in Vienna. EU Trade Commissioner Malmstrom is also due to participate in the UN Conference on Trade and Development in Geneva, while votes of confidence on the new Italian government is expected to happen early this week. Elsewhere, the ECB’s Nowotny and BOE’s Tenreyro are due to speak.

US Event Calendar

• 10am: Factory Orders, est. -0.5%, prior 1.6%; Factory Orders Ex Trans, prior 0.3%
• 10am: Durable Goods Orders, prior -1.7%; Durables Ex Transportation, prior 0.9%
• 10am: Cap Goods Orders Nondef Ex Air, prior 1.0%; Cap Goods Ship Nondef Ex Air, prior 0.8%

 

DB’s Jim Reid concludes the overnight wrap

Wow. What a week we saw last week. My 33-month old Maisie has just learnt the word boring and now says it all the time. So at the moment I’d guess she’d be the only person on the planet to have found last week’s wild ride in BTPs dull. To recap Italian 2 and 10 year bonds rose 54.8bp (to 1.01%) and 21.3bps (to 2.64%) over the week, but the 2y traded in a range of 0.25% to 2.76% from intra-day lows to highs last week. To cut a long story short the market was at its lows when it thought that fresh elections were likely. The concern being that the populists would use the President’s refusal to sign off on proposed finance minister Savona as a lightening rod for even more support and perhaps a firming of extreme views on Euro membership. However we rallied back as all sides got back round the negotiating table and an alternate FM nominee found. As such it feels like we go back to this being more of a slow  burning clash between the new government and the EU over immigration, Italy’s budget and the general direction of the Eurozone. The budget is set to be delivered on September 20th so whether the market can sustain perpetual interest in this story between now and then probably depends on how strong the rhetoric of the new administration is.

Staying with Italy, the new Interior Minister and League Party Leader Salvini travelled to Sicily over the weekend and told his supporters that “Italy and Sicily cannot be Europe’s refugee camp” and illegal immigrants to “pack their bags”. Meanwhile, the 5Star Leader Di Maio has told reporters from Ansa that one of his first measures will be a guaranteed income for poorer Italians, while he also indicated that the prior administrations’ 2015 labour reforms – “the Jobs Act must be reviewed” without elaborating more. Elsewhere, the latest Ipsos poll suggests more balanced support between the two populist parties, with support for the League Party growing to 28.5% vs. 17.4% of votes received in  the March 4 election, while support for 5Star fell to 30.1% from 32.7%.

Moving along, one of the most interesting side stories last week was the flight to quality into bunds in a week where German HICP inflation printed at 2.2% yoy vs 1.8% expectations. Clearly if Italy implodes over the next few months the move is fair enough. However if it doesn’t, this could go down as a once in a generation opportunity to short bunds. If you think this is hyperbole, a reminder that we published a quick note (see link ) last week showing that the gap between German yields and inflation was getting back to the highest on record with data stretching back to the 1950s. So maybe we should have said ‘once in 3 generations’.

Turning now to the US / China trade talks over the weekend, which didn’t seem to go that smoothly. After the talks, China’s Xinhua agency warned “if the US introduces trade sanctions including raising tariffs, all the economic and trade achievements negotiated by the two parties will be void”. On the other side, Commerce Secretary Ross said “our meetings so far have been friendly and frank, and covered some useful topics about specific export items” without elaborating more. DB’s Zhiwei Zhang and team believes if the US decides to impose tariff on the US$50bn Chinese exports on June 15, they think China will retaliate with tariffs on US exports of similar value. Overall, this would be a clear escalation of the trade war with significant impact on the Chinese and global economy. China would likely have to loosen fiscal policy and boost investment growth, halt the deleveraging process, and potentially loosen control over the property sector as well. In their view, such policy measures would help to keep the economy stable in the short term, but worsen macro risks in the longer term.

Following on with trade, the G7 meetings over the weekend also didn’t seem to reach tangible agreements. The G7  Finance Ministers did request that US Treasury Secretary Mnuchin communicate their “unanimous concern and disappointment” regarding the US imposing steels tariffs on its allies, with the Canadian Finance Minister Morneau indicating “decisive action” is needed at a Leaders’ summit this week in Quebec. Meanwhile Germany’s Economy Minister Altmaier said the EU will present retaliatory tariffs on the US within the next two weeks, while French Finance Minister Le Maire left the door open for more talks as he noted “we want to avoid a trade war, but everything is ready” and “we still have a few days to avoid an escalation”. So lots bubbling along.

This morning in Asia, markets have shrugged off trade and G7 tensions and are trading higher following the positive US lead from Friday, with the Nikkei (+1.29%), Hang Seng (+1.24%), Kospi (+0.28%), and Shanghai Comp. (+0.25%) all up as we type. Meanwhile, the yield on UST 10y is up c1bp while futures on the S&P are marginally up.

Now recapping performance from Friday. The S&P rose +1.08% after the above market US employment report lifted optimism about the US economy, while the Stoxx 600 also firmed +1.01% following reduced political uncertainty in Italy and Spain. The Nasdaq (+1.51%) and Italian banks outperformed while the VIX fell 12.8% to close modestly higher for the week (13.46). In government bonds, core 10y bond yields climbed 4-5bp (UST & Bunds +4.4bp; Gilts +4.9bp) while Italian BTPs and Spanish bonds both rallied with yields down 6-11bp. Meanwhile, the US dollar index firmed for the first time in three days (+0.19%) while the Euro weakened -0.29%. Elsewhere, WTI oil extended losses to be $65.81/bbl (-1.8%; -3.1% for the week).

Over in Spain on Saturday, the Socialist Leader Mr Sanchez was sworn in as the new PM after he won a no confidence vote against the incumbent PM Rajoy. DB’s Marc de-Muizon believes a Sanchez-led government would be a pro-EU government with new elections unlikely to occur until later in 2019. Overall, Marc believes Sanchez will likely try to facilitate dialogue over the Catalan situation. However, he would have little ability to either push for reforms or cancel previous reforms. Meanwhile, on a fiscal basis, Sanchez will likely remain very close to what was defined by the latest budget passed by Rajoy (Link) Moving onto geopolitics and North Korea. Back on Friday, President Trump has confirmed his summit with NK’s Kim Jong Un is now back on, although the Secretary of Defense Mr Mattis has warned that “we can anticipate at best a bumpy road to the negotiations” while reaffirming that NK “will receive relief only when it demonstrates verifiable and irreversible steps to denuclearisation”.Meanwhile, Yonhap has reported that Kim has replaced three of his top military officials, which was later confirmed by unnamed US officials to Reuters. US officials believe there was some dissent in the military regarding Kim’s approach to the US.

Back to Italy, this morning Michal in my team published the report “Assessing Contagion from Italy to Corporate Credit” in which he analysed the intensity of contagion across various parts of the credit market, from vanilla bonds to AT1s to derivatives. He notes that while contagion to most of credit has been limited so far, the system remains vulnerable to any rise in perceived Eurozone break-up risks which should keep vol. and spreads elevated until there is more clarity about Italy’s politics and stance towards Europe.

Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, the macro data releases were broadly stronger than expectations. The May change in nonfarm payrolls was above market at  223k (vs. 190k expected) while the six-month average gain was also solid at 202k. In the details, employment in the service sector rose the most since February (+171k), while solid gains were also recorded in the manufacturing and construction sectors. The average hourly earnings growth beat at 2.7% yoy (vs. 2.6% expected), to just below the January high of 2.8%. Meanwhile, the May unemployment rate edged down 0.1ppt to 3.8% (vs. 3.9% expected), which now joins April 2000 as the lowest unemployment rate since 1969. Elsewhere, the May ISM manufacturing was also above expectations at 58.7 (vs. 58.2 expected) with the prices paid index now at the highest since April 2011 (79.5 vs. 78 expected). The final reading of May’s manufacturing PMI was also revised 0.2pt lower to 56.4. Following the above, the Atlanta Fed’s estimate of Q2 GDP growth has edged up a 0.1ppt to 4.8% saar, while the NY Fed’s estimate was revised up 0.3ppt this week to 3.3% saar.

In Europe, the final readings for the May manufacturing PMIs were broadly in line. The Euro zone’s PMI was confirmed at 55.5 while Germany was revised up 0.1pt to 56.9 and France down to 54.4 (vs. 55.1 expected). Meanwhile, for flash PMIs, Italy was slightly below expectations to an 18-month low of 52.7 (vs. 53 expected) while the UK’s print was above market and rose for the first time since last November (54.4 vs. 53.5 expected). The final reading for Italy’s 1Q GDP was confirmed at 1.4% yoy.

As for this week, it’s a classic quiet post-payroll week with the data highlights being the final European May PMIs (services and composite) also due on Tuesday including a first look at the non-core and UK.

What to look out for today: It’s a fairly quiet start to the week with the most significant data releases being the May construction PMI in the UK, along with the June Sentix investor confidence and April PPI report for the Euro area, and final April factory, durable and capital goods orders in the US. Away from that the ECB’s Nowotny is due to speak in the afternoon at a conference in Vienna. EU Trade Commissioner Malmstrom is also due to participate in the UN Conference on Trade and Development in Geneva, while votes of confidence on the new Italian government is expected to happen early this week. Elsewhere, the ECB’s Nowotny and BOE’s Tenreyro are due to speak.

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By Garfield Reynolds, macro commentator and Markets Live blogger for Bloomberg

Trump’s Trade Truculence Will Keep Feeding Dollar: Macro View

The law of unintended consequences is striking again. This time it’s the surge in the U.S. dollar that’s being fueled by decisions from President Donald Trump -who seems to prefer a weaker currency – to intensify his attacks on the current “unfair” global trade regime.

The dollar’s spectacular turnaround from first-quarter whipping boy to second-quarter world beater coincided with Trump’s hard turn on global trade.  Investors may be deciding that it’s easier to invest in a strong U.S. economy, where winners and losers from Trump’s mercurial policy shifts are more easily identified.

The U.S.’s insistence on using tariffs as a weapon came as the White House dropped any effort to seek trade rebalancing through a weaker USD and decided against naming any nations as FX manipulators.

As Trump’s trade stance became more truculent, the dollar just kept climbing. That was puzzling because classic havens such as JPY, CHF and gold were seeing little benefit as market fears heightened.

It’s become clear that the dollar gained because the impact of Trump’s stance was seen benefiting U.S. assets on a relative basis.

Yes, a major trade war is likely to cause damage to the U.S. economy, but a lot of that will be in the longer term. It’s going to cause significantly more pain, especially in the short term, to all those exporters Trump is targeting; and the U.S. is far and away the world’s largest net importer.

This issue is helping to leach investment out of EM in particular, with major developing economies among those most at risk from a U.S.-initiated trade war. Developing Asia, for example, sends 18% of its exports to the U.S., almost three times what it sends to Japan, the next- biggest single-country destination.

The dollar had plenty of reasons to rise before the trade wars kicked in as an issue: U.S. economic strength amid slowdowns in Europe, China, Japan; prospects for tax-reform induced repatriation flows; Fed rate hikes; and, growing oil exports.

Adding a trade war to that mix makes for plenty of USD strength, especially if such strength adulterates the impact of tariffs and makes Trump all the more determined to play hardball on trade.

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Authored by Rob Slane via TheBlogMire.com,

I have asked a lot of questions in relation to the Skripal case and many, if not most, are still unanswered. However, I want in this piece to go further than asking questions, and to start to join a few dots together. There is much to say, and rather than doing it in one long piece, which only three people will have the attention span to sit through, I want to do it over a number of articles. Probably four or five. We shall see.

When I say that I am hoping to join some dots together, please note that what I am not attempting to do is state anything conclusively. Rather, I am simply advancing a theory, based on what I have observed so far, and I do so in the full knowledge that there may well be things I have missed, facts which I am as yet unaware of, and other facts which are still to be revealed. These things may well blow any theory I advance apart.

But before I get to that, there is a question that must first be asked: Why is a theory needed in the first place? It’s not as if there isn’t an official one out there. Indeed there is. In which case, why the need for another theory to explain what happened?

The reason is that the official story, put forward by the British Government, is wholly lacking in credibility. It has actually come as a surprise to me just how many people there are out there who don’t buy the official story. Anecdotally, I would say that those looking at the official narrative and wondering how on earth it stacks up includes many who would perhaps not normally question the official line on things.

And so attempting to come up with another theory of what happened has nothing to do with advancing what is usually called a “conspiracy theory”. If the claims of the official story did match the facts, then advancing an entirely different theory could well be seen as a conspiracy theory. But since the claims made by the British Government and in the compliant media do not stack up, this is simply a case of seeking an alternative theory that tries to make more sense of the known facts.

But what is it about the Government story that makes it lack credibility? There are a number of things, but let’s just keep this simple. Let’s begin by looking at what it alleges. This can best be summed up by the words of the British Prime Minister, Theresa May, in the statement she made to the House of Commons on 14th March 2018:

“Mr Speaker, on Monday I set out that Mr Skripal and his daughter were poisoned with a Novichok: a military grade nerve agent developed by Russia. Based on this capability, combined with their record of conducting state sponsored assassinations – including against former intelligence officers whom they regard as legitimate targets – the UK government concluded it was highly likely that Russia was responsible for this reckless and despicable act. And there were only two plausible explanations.

Either this was a direct act by the Russian State against our country. Or conceivably, the Russian government could have lost control of a military-grade nerve agent and allowed it to get into the hands of others.”

Leaving aside Mrs May’s allegations for a moment, any impartial observer would immediately notice something odd about this. Her statement was made on 14th March. This was just 10 days since the Skripals were poisoned. At that time, the investigation had hardly begun, and had not yet established any of the following basic facts:

• Where the Skripals were poisoned

• When the Skripals were poisoned

• How they were poisoned

• Who it was that poisoned them.

In other words, she reached conclusions before the establishing of facts, and it goes without saying that this is the very opposite of a rational approach. Indeed, as Sir Arthur Conan Doyle warned us through his most famous creation, Sherlock Holmes:

“It is a capital mistake to theorise before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”

But what of her actual claims? The statement that Russia has a record of conducting state-sponsored assassinations is entirely irrelevant to establishing guilt in this case. Past behaviour can be useful evidence to support a case, but guilt must always be proved on the basis of the facts and evidence in the case at hand, and on them alone. Anything else is simply dangerous and wrong.

Which means that the Government’s case essentially relies on just two parts:

1. That Mr Skripal and his daughter, Yulia, along with Detective Sergeant Nick Bailey, were poisoned by the military grade nerve agent, A-234 (one of the so-called “Novichok” nerve agents).

2. That because this substance was developed in Russia (actually the Soviet Union), it therefore must have originated from that country.

However, both of these apparent facts are demonstrably untrue.

To take the second point first, it has now been proven beyond any doubt whatsoever that a number of other countries have either produced the substance, or know how to produce it. The Czech Government has admitted producing a small quantity of the closely related substance, A-230; Iran has produced Novichok, which it registered with the OPCW; The German Intelligence Agency, BND, was given the formula back in the 1990s, and they shared it with a number of other NATO countries, including the US and UK. The Edgewood Chemical and Biological Defense Command in Maryland, USA, recorded the formula back in 1998.

What is more, as the Moon of Alabama website points out, David Collum, Professor of Organic Chemistry at Cornell University has not only stated that his students could create the substance, but he actually got them to do an experiment to make it. According to the results, 15 out of 16 students did so successfully!

All of which means that the claim that the poison must have come from Russia is demonstrably untrue.

But if analysis of that second claim shows the British Government’s theory to be somewhat dodgy, scrutiny of the first shows it to be entirely false. Given the toxicity of A-234, being around 5-8 times more toxic than VX (some reports state it as being 10 times more toxic), had the Skripals come into contact with it on the door handle of Mr Skripal’s house, as is alleged, one of two things would have occurred:

a) They would either have died within a few minutes of coming into contact with it or

b) In the remote possibility that they had survived, they would have suffered for the rest of their short lives from irreparable damage to their central nervous system, with a number of chronic health issues, such as cirrhosis, toxic hepatitis, and epilepsy (see here for details of what I understand to be the only known survivor of poisoning by this substance, Andrei Zheleznyakov).

What they would not have done is spent the next four hours swanning around Salisbury, going for a drink and then for a meal in a restaurant. What they would not have done is to exhibit symptoms closer to having been poisoned by a hallucinogenic than a military grade nerve agent. And they most certainly would not have collapsed at exactly the same time as each other, four hours later, after showing no previous signs of illness in the restaurant.

Yet as it is, not only are the Skripals and D.S. Bailey still alive, but none have suffered irreparable damage to their nervous system. In fact, in her conversation with her cousin, Viktoria, on 5th April, Yulia Skripal specifically made mention that “everyone’s health is fine, there are no irreparable things“.

Given that this is so, it is entirely rational to come to the following conclusion:

The claim that Sergei Skripal, Yulia Skripal and D.S. Bailey were poisoned by A-234, which is one of the most deadly nerve agents known to man, and which either kills or leaves its victims with irreparable damage, is demonstrably untrue.

Having dealt with the official story, I want in Part 2 to deal with what I believe to be some of the most interesting clues in this case, each of which is being ignored or swept under the carpet.

*  *  *

Some of my previous pieces on the Skripal Case:

♦  30 Questions That Journalists Should be Asking About the Skripal Case
♦  20 More Questions That Journalists Should be Asking About the Skripal Case
♦  The Skripal Case: 20 New Questions That Journalists Might Like to Start Asking
♦  The Lady and the Curiously Absent Suspect — Yet Another 20 Questions on the Skripal Case
♦  The Slowly Building Anger in the UK at the Government’s Handling of the Skripal Case
♦  The Three Most Important Aspects of the Skripal Case so Far … and Where They Might be Pointing
♦  A Bucketful of Novichok
♦  What Would Sherlock Holmes Have Made of the Government’s Explanation of the Case of Sergei and Yulia Skripal?

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Italy’s new interior minister Matteo Salvini said in a Saturday rally that “the good times for illegals is over – get ready to pack your bags,” adding “Countries need to start doing their job and no more smugglers should be docking in Italian ports,” a not-so veiled jab at NGOs organizing rescues at sea. 

“The free ride is over”

Salvini, the leader of the conservative League party, assumed his role as Deputy Prime Minister and Minister of the Interior on Friday. He is currently on the road to rally support for his party’s candidates in the south of Italy, attending a Sunday rally in Sicily – a prime destination for most of the hundreds of thousands of migrants which have poured into Italy in recent years, mostly from Libya. 

A controversial agreement between Italy’s former centre left government and authorities and militias in Libya has triggered a fall in overall arrivals of some 75 percent since the summer of 2017. But since the start of this year, Italian authorities have registered more than 13,500 arrivals.

The latest came late Friday, just hours after Salvini took his oath of office, with some 158 people, including nine children, landing in Pozzallo after being rescued by a humanitarian boat in an operation coordinated by the Italian coast guard. –France24

After being sworn in, Salvini said that he would ask experts within his ministry “how to reduce the number of arriving migrants and increase the number of expulsions.” 

In order to boost deportations – of which there were only 6,500 in 2017, Salvini will need to increase the number of detention centers while signing agreements with countries which migrants originate from – most of which are not excited to have their citizens returned. 

And in order to pay for his plan, Salvini is eyeing the billions of euros earmarked every year to help deal with the demands of the asylum seekers. 

In 2017, the former government announced a budget of some 4.2 billion euros for migrants, of which 18 percent is for rescues at sea, 13 percent for health care, and 65 percent for migrant reception centres, which host some 170,000 people. –France24

Salvini is no fan of the migrant reception centers – which are run by cooperatives or NGO’s who are paid 25-35 euros per day for each migrant they provide lodging, clothes and other services – including psychological support and legal aid. 

On Tuesday, Salvini will meet with EU interior ministers in Luxembourg to discuss the EU’s controversial “Dublin” rule, which requires that would-be refugees file for asylum in the first bloc member-state they arrive at. The rule heavily penalizes Italy, which has accepted over 700,000 refugees since 2013. 

While the vast majority of migrants used to continue to northern Europe, the introduction of EU-backed processing centers in order to ensure proper identification, along with tighter border controls from France, Austria and Switzerland, have forced the migrants to remain in southern EU nations such as Greece and Italy. 

But, as we tweeted prophetically last week – given Salvini’s comments – those refugees may soon find themselves “displaced” once again…

Salvini will be Italy’s new interior minister, means a lot of Italian refugees will soon be “displaced”

— zerohedge (@zerohedge) May 31, 2018

All of which prompted the messiah of migrants – billionaire George Soros – to play his ‘blame the Russians card once again, this time accusing Salvini of being a puppet of Putin.

Corriere Della Sera reports that the financier took to the stage of the Trento Festival of Economics to launch a strong message of criticism to the new government.

Soros said he was “very worried” about the proximity of the new government to Russia, for which the two parties that support the new executive have called for the abolition of sanctions.

Putin, “seeks to dominate Europe: it does not want to destroy it but exploit it because it has production capacity, while the Russian economy under Putin can only exploit raw materials and people”.

Then Soros doubled-down:

In a passage destined to cause controversy, Soros also asked himself whether “Putin actually finances” the League: “Italian public opinion has the right to know whether Salvini is in Putin’s paycheck”.

The Northern League member Claudio Borghi, one of the creators of the economic program of the Carroccio, replied saying that “the wind has changed for [Soros] and for all those who have earned on the death of hundreds of people.”

BUt of course, could not resist taking a swing at President Trump…calling him “a threat to the world, including America”, and arguing that the US president “does not understand the basic elements of the economy.“

The fact that Trump “got rid of all the consultants who could have prevented him from making mistakes in economics is very dangerous for the world and Europe will be the biggest victim”: it would be good that Trump “would not last long”.

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Authored by Andrew Korybko via Oriental Review,

Poland is proposing to host a permanent US military base on its territory.

Poland wants to replace Germany as the US’ preferred partner in Europe, taking advantage of American distrust with Berlin over Nord Stream II and trade disagreements while capitalizing on the Pentagon’s desire to “contain” Russia, thus satisfying multiple strategic objectives at once.

The Polish leadership believes that the region-wide “Three Seas Initiative” of 11 other Central and Eastern European states that it wants to lead is ideologically compatible with the Trump Administration’s anti-liberal populism and represents another strategic convergence with the US.

Paradoxically, however, while Poland is striving to advance its national sovereignty, it’s nevertheless sacrificing it by wanting to host an American military base, which is why a deeper explanation of this proposal is necessary.

Poland isn’t just strategically important to Germany, Russia, and the US, but also to China, being Beijing’s top partner in the 16+1 collection of Central and Eastern European states and correspondingly one of its top Silk Road nodes.

China is constructing a high-speed railway between the Hungarian and Serbian capitals that’s expected to travel further southwards through the Balkans in connecting to the Chinese-owned Greek port of Piraeus, one of the largest in Europe and the envisioned terminal of what can be called the Balkan Silk Road. This project, however, could also expand northwards through Slovakia and thus to Poland, the largest country in the region and the heart of the “Three Seas Initiative”, which would be a game-changing geopolitical development if it ever happened.

The US would clearly oppose the unrestricted expansion of a Chinese-built multipolar transnational connective infrastructure project into the EU via the “Balkan backdoor”, but any potential Hybrid Wardisruption that it could cause in the Balkans in order to offset this outcome could be avoided if America gains control of this Silk Road corridor through a military base in its most important Polish node. Although appearing at first glance to nullify the strategic utility of this project, it might nevertheless be the only way that the US would allow it to be built, which if successful, would enable Poland to “balance” between the US & China as it seeks to undermine its German & Russian Great Power neighbors.

Curiously, Polish and American interests converge through the Balkan Silk Road because this Chinese project could reroute Western European-East Asian trade from the Russian-transiting Eurasian Land Bridge and correspondingly strengthen the “Three Seas Initiative” to the point where it could challenge German control of the EU and make a bid for decentralizing the bloc back to a national sovereignty-focused collection of states from its current status as a bunch of German neo-imperial colonies. Assessing the grand strategic implications of a US base in Poland leads to Washington accepting the Chinese-built Balkan Silk Road’s possible expansion to Warsaw one day, this would clearly result in serious long-term losses for Germany and Russia while being a major victory for the US and China.

As for Poland, its benefits will entirely depend on how well the government can maintain a “balance” between the US’ growing military influence and China’s future economic one.

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Rumor has it that Germans are the most disciplined workers in the world.

The statistics, however, as Statista’s Patrick Wagner points out, give that accolade to the Indians – especially those living in Mumbai – who are apparently working much more than their German counterparts.

To be exact almost double the time of a Frankfurtian as a study by UBS found.

And even though people in Mumbai are working like machines, they only have an average of 10.4 days of paid vacation to enjoy.

You will find more infographics at Statista

Well, at least one cliché seems to be true: Romans rather enjoy life than work extensive amounts of time over the year.

Of course, the Italians, we suspect, will suggest they “work smart” but as a reminder, other than wartime, the last few years in Italy have been the worst for growth since Italian unification in 1861.

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