Month: July 2018

Having stabilized modestly after its mid-June rout, which sent the Turkish Lira to a record low of 4.74 – on the re-election of president Erdogan of all things – overnight the TRY tumbled as much as 1.4% to 4.6813 after Turkey reported that headline inflation soared from +12.1%y/y in May to +15.4%y/y in June, significantly above the 13.9% y/y consensus expectations.

This was the worst inflation print since the runaway inflation days at the start of the century, and the highest since October 2003.

The monthly jump in inflation of 2.61%, was more than double the median Bloomberg estimate and higher than the highest est. of 1.8%.

As Goldman details, prices rose across the board: Food and nonalcoholic beverages inflation increased by 7.9pp to +18.9%yoy, on the back of a sharp rise in vegetable prices, and accounted for 1.8pp of the overall 3.3pp rise in the headline figure.

Core inflation also increased sharply, from +12.6%yoy in May to +14.6%yoy in June, above consensus expectations of +13.4%yoy. The rise in core inflation was broad-based with all major categories except education registering increases. Nevertheless, the sharp rises in the purchase of vehicle and telecommunication services categories were notable.

Understandable, currency traders were shocked at the print, which if anything is an underestimation of real price tendencies, and sent the Lira sliding to the lowest level against the USD since June 26.

In light of Erdogan’s recent comments, some of which have gone so far as suggesting the president may soon take over the rate-setting process himself making the Turkish Central Bank redundant, commentators were horrified at today’s data: commenting on the number, Medley Global EMEA analyst Nigel Rendell warned that “if policymakers react with only half-hearted measures, President Erdogan’s new term in office will quickly morph into a financial crisis”, quoted by Bloomberg.

Not mincing his words, Rendell said that “these are truly awful numbers, which came in much higher than anyone expected” and in case there was any doubt, he added that “the inflation genie has escaped in Turkey and is running wild!”

He also said that June inflation data piles “huge pressure on the central bank to raise rates again – and to hike significantly at their July 24 meeting – if they want to reverse this trend.”

That may be a problem as Erdogan has repeatedly stated that he will push back against further rate hikes; in fact, some speculate that the recent rise in Turkish rates was as much of a concession as the central bank could extract from the president who now has full executive powers.

To be sure, Goldman was far less convinced that an emergency rate hike is coming, saying after the inflation data that the bank’s forecast “is for rates to be on hold well into 2019.”

On the one hand, a more elevated inflation trajectory will imply that real rates will be lower and less restrictive.

On the other hand, various activity-related data (including our CAI, PMIs and real loan growth) are showing some signs of slowdown. Moreover, we think that both political and economic costs of raising rates are rising and we highlighted the risks of a harder than desirable landing before.

Therefore, we continue to forecast that rates will be kept on hold, assuming that the economy will slow down. Given the large external deficit, we think that the TCMB is unlikely to react to TRY weakness by itself as long as the weakness does not undermine financial stability.

This suggests that TRY longs may be on their own now, especially if Erdogan bars any aggressive tightening in financial conditions, and as long as there is no outright economic crisis, Turkey will gladly take the surging inflation and Lira weakness, especially if it helps the country inflate away its debt.

 

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More than three years after the Wall Street Journal blew the lid off the 1MDB scandal when it reported a suspicious payment of $681 million into a bank account controlled by then-Malaysian Prime Minister Najib Razak, the hammer has finally come down on the former head of state and scion of one of the country’s most influential political families.

According to the Financial Times, Razak has been arrested and will be charged Wednesday morning with misuse of the funds after some $4.5 billion allegedly disappeared from 1MDB’s coffers. The charges are related to SRC International, the former subsidiary of 1MDB that Razak and his family used as a personal piggybank of sorts.

Mr Najib was arrested at his personal residence in Malaysia’s capital and will be charged at the Kuala Lumpur Court at 8:30am on Wednesday. He will be spending the night at the Malaysian Anti-Corruption Commission headquarters, said a Malaysian Anti-Corruption Commission spokesperson.

After Najib initially claimed that the suspicious payment was a “gift” from Saudi royals, the full extent of his family’s graft was laid bare in the following months, prompting US officials to seize more than $1 billion in embezzled Malaysian assets, which Goldman Sachs – the same bank that helped Razak set up the slush fund – helped buy.

The other conspirators in this scheme include Riza Aziz, Razak’s stepson, “party boy” Jho Low and former Abu Dhabi sovereign wealth fund director Khadem Al Qubaisi.

The arrest could also be bad news for Goldman, which, under the guidance of former Southeast Asia head Tim Leissner (who was barred from the US securities industry late last year) helped finance 1MDB with three separate bond issues that netted the bank some $600 million. Those bond issues are now being investigated by prosecutors in Singapore, regulators in New York and the FBI after 1MDB defaulted back in 2016, as it is rumored that Razak directly pocketed some of the gross proceeds.

The arrest marks the peak in Razak’s change in fortune. He initially looked set to weather the storm when he resisted calls to resign. But after his shocking electoral defeat at the hands of former leader Mahathir Mohamed last month, it appeared that Razak would finally face consequences for the immense graft that was apparently carried out by him and his family. Mahathir promised to hold his former rival “accountable.” Ironically, it appears that it is Razak that will now be accounting to the people, and a long prison sentence could be waiting on the other side unless Razak throws some even bigger names under the bus.

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Global commodity miner and trader Glencore saw its shares plunge 13% on Tuesday – their largest drop since 2015 when the company barely survived the downturn in commodity prices – after the company revealed that it has been subpoenaed by the Department of Justice, and must hand over documents and records pertaining to its operations in Nigeria, the Democratic Republic of Congo and Venezuela dating as far back as 2007.

The documents pertain to the company’s compliance (or non-compliance) with the Foreign Corrupt Practices Act and US money laundering statutes.

“Glencore is reviewing the subpoena and will provide further information in due course as appropriate,” the company said in a tersely worded press release.

Tyler Broda, analyst at RBC Capital Markets, told the Financial Times that “there is not enough detail in the release to understand exactly what the investigation holds, however with the subpoena covering multiple countries, this would indicate that there is a relatively thorough investigation at hand.”

“The Foreign Corrupt Practices Act appears at first investigation to provide subject to sanctions, fines and penalties up to $25m or twice the gain or loss caused by the violation and imprisonment for up to 5 years per occurrence.”

Meanwhile, an analyst from AlphaValue pointed out that “given the near perpetual political and economic woes in these countries, it has been a well-known fact for years that business irregularities existed”, however, Glencore’s “opaque business practices” are well known and have been “reflected in its lower multiples, despite ample cash flow cushion from the trading division.

As Bloomberg reminds us, Glencore and its billionaire CEO Ivan Glasenberg has faced some challenges this year as it completed its turnaround from the worst of the selloff in late 2015. Its giant copper and cobalt mines in the Congo. Glencore alone account for 25% of the world’s supply of cobalt, a metal that’s essential for the manufacture of electric cars and mobile phones. The company has also faced legal disputes with the Congolese government.

The DOJ subpoena comes after the company settled a dispute with former business partner, Israeli billionaire Dan Gertler, a former business partner in its DRC operations. In a decision that may have attracted scrutiny, the company offered to pay Gertler in euros to skirt US sanctions placed on the businessman for his “opaque and corrupt mining deals” in the DRC. The Swiss company said it had discussed its royalty payments with US and Swiss authorities.

The company also recently agreed to write off $5.6 billion in debt from a joint venture with Gecamines, the DRC’s state mining firm, ending another legal dispute. Glencore is also facing a bribery probe by the UK’s Serious Fraud Office over its relationship with Gertler, the FT reports.

Glencore shares were trading at their lowest level in a year after the drop:

It won’t be Glencore’s first interaction with the DOJ: as is well known, Glencore late founder Marc Rich received a pardon from Bill Clinton on the last day of the former president’s office in 2001 after Rich was indicted in the United States on federal charges of tax evasion and making controversial oil deals with Iran during the Iran hostage crisis. He was in Switzerland at the time of the indictment and never returned to the United States.

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Once again, the overnight session was all about China.

Shortly after the PBOC fixed the Yuan weaker by 340 pips to 6.6497, the weakest since August 25, 2017, a wave of selling hit the Chinese currency, sending the yuan past 6.7 to the dollar for the first time in a year, with the offshore CNH dropping as low as 6.7332, at which point the verbal interventions began.

Shortly after the rout sent the Yuan plunging, PBOC deputy governor and SAFE head, Pan Gongsheng, said that China has ample foreign reserves and many foreign exchange tools. He also said that Chinese policymakers are “confident” that the yuan can be kept basically steady, and that the PBOC has “rich experience and plenty of policy tools” to keep the currency stable.

His commentary however was not sufficient and he was followed by PBOC Governor Yi Gang himself, who using standard language to describe Beijing’s stance on the currency said China will “keep the yuan exchange rate basically stable at reasonable and balanced level.” According to Bloomberg, the two sets of comments were the first clear statement on the currency from the authorities since the yuan started weakening in mid-June.

“Recently the foreign exchange market has shown some volatility and we’re paying close attention to that,” Yi said in a statement posted on the central bank’s website, which was a response to questions from the China Securities Journal. He added that the fluctuation is “mainly due to factors such as a stronger dollar and external uncertainties, and there’s been some pro-cyclical behavior.” Said otherwise: don’t blame us.

Like Pan, Yi said that “China’s economic fundamentals are sound and financial risks are controllable” adding that the nation must stick with its foreign-exchange policy of “managing a floating currency exchange rate mechanism, which is based on market supply and demand and with reference to the basket of currencies.” The central bank will maintain a prudent, neutral policy stance, he assured markets.

In other words, the PBOC made it clear that the recent collapse in the Yuan was due to market forces, and not as a result of central bank intervention, a stance which would have very negative repercussions just days before the US is set to launch tariffs on $34BN worth of Chinese imports.

More importantly, Pan and Yi succeeded in arresting the Yuan’s collapse, which staged a dramatic turnaround, as the CNH rose by nearly 800 pips in the span of 4 hours, and the USDCNH dropped from a session high above 6.733 to just above 6.65. A failure to contain the tumble would have fed speculation that officials are effectively depreciating the currency to defend against the effects of trade tariffs.

While there were no clearly visible, heavy-handed actions in the market, there were some signs of mild, suspected intervention during morning trading on Tuesday. Some major Chinese banks sold the dollar after the yuan slid past 6.7 per greenback, a move that strengthened the currency above that level, according to four traders who asked not to be named.

Furthermore, in addition to purely verbal jawboning, there were also indications of “mild”, direct intervention during morning trading on Tuesday, when some major Chinese banks sold the dollar after the yuan slid past the 6.7 per greenback “redline” – which has traditionally market the central bank’s intervention threshold – a move that strengthened the currency above that level, Bloomberg reported citing four traders. Separate media reports noted that major state-owned Chinese banks were seen to be exchanging CNY for USD in forwards and then immediately offloading them into the spot market to support the domestic currency.

The FX intervention quickly funneled through to Chinese stocks, which after tumbling earlier in the morning session, not only recovered all losses, but closed modestly in the green.

Commenting on the sharp overnight reversal, Commerzbank analyst Zhou Hao told Bloomberg that “the PBOC is sending a verbal warning and intervention that the recent slump in the yuan was too quick” adding that “in the short term, the yuan could strengthen as traders take profit from the recent slide. But if the market ignores the PBOC and keeps pushing the yuan weaker quickly, the central bank may conduct heavy intervention to send a stronger signal.”

Not everyone was convinced that the yuan weakness is over: “while it does seem that PBOC is looking to smooth the move lower in the RMB, it doesn’t look like its ready to call time on the downtrend just yet,” said Stephen Gallo, head of European FX strategy at BMO. “My preference here is to continue looking for opportunities to get long of the 3M USDCNH forward in expectation of a move toward the 6.80 area heading further into the summer”

China’s fireworks affected the rest of global markets, with US futures initially sliding, dragged lower alongside the Yuan on concerns currency war had broken out in parallel with trade war, but then also recouping all losses as China’s verbal interventions kicked in.

Emerging-market shares also pared declines after the PBOC’s Gang said the country aimed to keep its currency at a stable and reasonable level.

After opening soft, Europe also posted a strong rebound, continuing its second day of gains, boosted by last night’s CDU/CSU agreement in immigration, also aided by China’s yuantrevention, with Telecom companies leading an advance in the Stoxx Europe 600 Index. As a reminder, on Monday, German Interior Minister/CSU leader Seehofer said he’ll stay on in the role and that he has a clear agreement on migration with Chancellor Merkel.

There were some fireworks, however, after miner Glencore Plc plunges, headed for its biggest decline in two years, after saying it has been subpoenaed by the U.S. DOJ, sending the stock lower by double digits..

In FX, the Bloomberg dollar index started off the session at the highs, only to fade as the Yuan rebounded from its own lows.

The dollar fell against all of its G-10 peers, with the biggest advance observed against the Swedish krona after the Riksbank’s hawkish rhetoric suggested a rate hike may be coming before the end of the year; the euro strengthened as political worries in Germany ebbed.

Treasuries were little changed after a three-day decline; benchmark yield reached a one-week high of 2.88%, while 10-year German bund yields rose 2bps to 0.32%.

In other overnight news, the Swedish Riksbank kept its rate unchanged at -0.50% as expected. Riksbank’s repo rate path is unchanged and slow repo rate rises will be initiated towards end of year. Ohlsson advocated for a rate hike, Floden and Ohlsson wanted a higher rate path. The executive board has decided to extend the mandate that facilitates rapid intervention on the foreign exchange market. Floden and Ohlsson had some reservations on this position.

In commodities, WTI broke above yesterday’s highs amid a softer USD and ongoing supply disruptions. WTI is currently trading at USD 74.61 and Brent is currently at USD 77.82. In a news thin morning the most significant news came from UAE’s ADNOC who said they have the ability to increase oil production by several hundred thousand barrels per day in coordination with OPEC and non-OPEC monitoring committee. This had no effect on oil prices, however. Gold is up 0.2% on the day as a weaker USD leads the yellow metal into positive territory. Copper has rebounded from a seven month low as trade tensions are pushing the construction material higher on supply concerns. Platinum is languishing around a near 10 year low as demand is sliding for the metal on Auto tariff concerns.

Looking ahead, highlights include, US factory orders, APIs and ECB’s Praet. US carmakers are expected to record another good sales month for June, while Facebook will be in focus as more federal agencies probe the company’s disclosures about user-data sharing.

Market Snapshot

• S&P 500 futures up 0.4% to 2,739.00
• STOXX Europe 600 up 0.7% to 379.21
• MXAP down 0.2% to 163.70
• MXAPJ down 0.2% to 533.79
• Nikkei down 0.1% to 21,785.54
• Topix down 0.2% to 1,692.80
• Hang Seng Index down 1.4% to 28,545.57
• Shanghai Composite up 0.4% to 2,786.89
• Sensex up 0.3% to 35,381.68
• Australia S&P/ASX 200 up 0.5% to 6,210.21
• Kospi up 0.05% to 2,272.76
• Brent Futures up 1.1% to $78.11/bbl
• Gold spot up 0.4% to $1,246.96
• U.S. Dollar Index down 0.2% to 94.67
• German 10Y yield rose 2.1 bps to 0.325%
• Euro up 0.2% to $1.1662
• Brent Futures up 0.4% to $77.59/bbl
• Italian 10Y yield fell 2.8 bps to 2.385%
• Spanish 10Y yield rose 0.4 bps to 1.302%

Top Overnight News from Bloomberg

• China will keep the currency stable at an equilibrium level, and the central bank will maintain a prudent, neutral policy stance, according to People’s Bank of China Governor Yi Gang
• Glencore Plc, the world’s biggest commodity trader, tumbled the most in two years as its African troubles escalated dramatically after U.S. authorities demanded documents relating to possible corruption and money laundering.
• President Donald Trump’s global trade war is posing a growing risk to the kind of robust job gains that the U.S. probably enjoyed again in June — labor data due Friday cover the first weeks since the U.S. imposed steel and aluminum tariffs on some of its largest trading partners
• U.K. companies are at “breaking point” over the lack of clarity on Brexit, and are slowing down their investments as they await answers to key questions, one of the country’s main business lobby groups said
• Global foreign-exchange reserve managers cut yen holdings by the most since 2008 in 1Q as the incentive for holding Japan’s currency decreased
• German Chancellor Angela Merkel halted the immediate threat of a government breakup in Europe’s biggest economy, crafting a plan to tighten migration and keep her Bavarian sister party in the fold
• Sweden’s central bank stuck to a plan to start lifting interest rates toward the end of the year as it nears victory in an all-out effort over the past four years to stabilize inflation around its target

Asian stocks traded mixed as the region failed to take full advantage of the tail wind from the tech-led recovery on Wall St and early bargain hunting following the prior day’s hefty declines. ASX 200 (+0.5%) and Nikkei 225 (-0.1%) both  opened higher with defensive sectors leading the upside in Australia, although sentiment in Tokyo later deteriorated alongside flows into JPY as markets were startled by a continued currency devaluation by the PBoC. Shanghai Comp. (+0.4%) was initially negative after PBoC inaction resulted to a CNY 150bln drain from the interbank market, but went positive after the PBoC chief said they are to keep the Yuan basically stable. The Hang Seng (-1.4%) was the worst performer with intraday losses of over 3%, as it reacted to the prior day’s declines during its market closure in which the benchmark indices in Japan, mainland China and South Korea all slumped over 2%. In addition, money market rates in Hong Kong continued to surge and China Mobile was another fall-out from the ongoing US-China trade tensions with the Co. slipping after the US Commerce Department and NTIA recommended to deny the telco’s licence request to enter the US the market. Finally, 10yr JGBs were choppy alongside the flimsy risk sentiment in Japan, but with prices kept within a tight range amid a mixed 10yr auction.

Top Asian News

• PBOC Pushes Back Against Yuan Slide, Reissues Stability Pledge
• Xi Faces Hurdles Bashing American Brands in a Trump Trade War
• As $55 Billion Rout Hits Manila Stocks, Locals Step In
• China’s Stocks Stabilize With Yuan Amid Signs of Intervention

Europe bourses are higher across the board (Euro Stoxx 50 +1.2%), following on from Wall St. with the risk tone also improved following Germany’s CSU/CDU policy agreement over immigration reduces worries of political upheaval in the country. FTSE 100 (+0.3%) underperforms amid a firmer GBP and weight being placed on Glencore (-10%) shares after being subpoena by the DoJ over their operations as of 2007 in Nigeria, DR Congo and Venezuela. UK banking names are also underperforming following FT reports that PPI expenditures could increase by “billions” after legislation passed overnight. Commerzbank (+2.2%) has reached an agreement with SocGen to sell its Equity & Commodities business (EMC) to them. Terms were undisclosed, however, this division created a revenue of ~ EUR 380mln in 2017. Allianz (+2.9%) are up after the co. has announced a 41.5mln share buyback with a value of up to USD 1.16bln.

Top European News

• Riksbank Sticks to Stimulus Exit Plan as Inflation Lends Support
• U.K. Construction Growth Unexpectedly Climbs to Seven- Month High
• Deutsche Bank Managing Directors Thomson, Lie Are Said to Leave
• Equinor Greenlights $958 Million Project to Boost Troll Gas

In FX,it was all about the Chinese Yuan, and to a lesser extent the Swedish Krona:  Firm rebounds for the CNY and CNH after further depreciation following another soft fix on a combination of support from Chinese banks and PBoC comments downplaying official devaluation speculation. The onshore unit still closed at multi-month lows vs the Usd, but offshore Yuan managed to reverse earlier losses back above 6.7000. Elsewhere, the Sek has strengthened across the board on hawkish dissent against rate guidance reiterating tightening around the end of 2018, as Floden and Ohlsson both preferred earlier hikes (and registered objections vs extending the direct FX intervention mandate as well). Eur/Sek has retreated to almost 10.3100 levels from close to 10.4400 at one stage. EUR – Firmer vs the Dollar having dipped below 1.1600 yesterday, as Germany’s CSU-CDU parties reach a compromise agreement on migration, but now encountering some technical headwinds around the 30 DMA (1.1666). CAD/MXN – Both benefiting from the latest Usd downturn (DXY back under 95.000 and eyeing support above 94.500 again), with the Loonie rallying off 1.3200 lows and Peso recovering even more lost ground (Usd/Mxn retreating through 20.000) on positive initial exchanges between AMLO and US President Trump plus an advisor to the former suggesting renewed impetus for NAFTA talks.

In commodities, WTI has broken above yesterday’s highs amid a softer USD and ongoing supply disruptions. WTI is currently trading at USD 74.61 and Brent is currently at USD 77.82. In a news thin morning the most significant news came from UAE’s ADNOC who said they have the ability to increase oil production by several hundred thousand barrels per day in coordination with OPEC and non-OPEC monitoring committee. This had no effect on oil prices, however. Gold is up 0.2% on the day as a weaker USD leads the yellow metal into positive territory. Copper has rebounded from a seven month low as trade tensions are pushing the construction material higher on supply concerns. Platinum is languishing around a near 10 year low as demand is sliding for the metal on Auto tariff concerns.

Looking at the day ahead, we will get May factory orders and also final reads for May durable goods and consumer goods orders. Later in the evening June vehicle sales data will be released. Aside from the data, the ECB’s Peter Praet will speak at a Romanian Central Bank conference in Bucharest while the European Council President Donald Tusk and European Commission President Jean-Claude Juncker will address the European Parliament.

US Event Calendar

• 10am: Factory Orders, est. 0.0%, prior -0.8%; Factory Orders Ex Trans, prior 0.4%
• 10am: Durable Goods Orders, est. -0.5%, prior -0.6%; Durables Ex Transportation, prior -0.3%
• 10am: Cap Goods Orders Nondef Ex Air, prior -0.2%; Cap Goods Ship Nondef Ex Air, prior -0.1%
• Wards Total Vehicle Sales, est. 17m, prior 16.8m

DB’s Jim Reid concludes the overnight wrap

There was an article on Bloomberg yesterday suggesting that with all the regulatory changes in research there was a risk of analysts sensationalising reports unnecessarily to try stand out. No danger of that here. In other news ahead of their last 16 game tonight there is absolutely no doubt in our minds now that England will definitely win the World Cup.

Ahead of the big game for us here in England, and the half day close in the US today ahead of Wednesday’s holiday, Q3 didn’t get off to an auspicious start in global markets as a notable late day sell-off in Asia rocked the European session. However the US clawed back early losses to see the S&P 500 close +0.31% higher and +1.03% above the morning lows.

Given the sell-off accelerated in the last hour of trading in Asia (and in China in particular) yesterday morning it seems prudent to start there this morning. As a reminder, the Chinese Yuan weakened (-0.71%) for the 10th day out of 12 sessions yesterday to the lowest in 11 months and has been one of the worst performers in the EM space since 14 June (-4.2%). This morning, the Yuan has fallen c0.5% and past the psychological barrier of 6.70, having traded as low as 6.73. There’s lots of market chatter about policy intervention so it’s worth watching for spikes. Meanwhile, markets in Asia are trading lower even with the turnaround in the US with the Nikkei (-0.85%), Kospi (-0.58%), Shanghai Comp. (-1.27%) and Hang Seng (-2.73%) all down, with the latter partly playing catch up as trading resumed post a holiday Monday. Datawise, Reuters noted that Chinese customs said China’s exports to the US rose 5.4% yoy for the six months YTD vs.  19.3% for the same period in 2017, but did not provide more details for the month of June.

The tone in Europe may be improved this morning though by news last night that Mrs Merkel has defused the potential destabilisation to her governing coalition. The CSU Party leader Seehofer will stay on as Germany’s Interior Minister after reaching “an agreement on how we can prevent illegal immigration….” with Merkel, which involves setting holding centers for refugees at the German border. Notably the deal does require the approval of Merkel’s third coalition partner – the SPD, where they’ve rejected a similar proposal back in 2015. The euro is trading c0.1% lower this morning but did spike slightly higher late last night.

Although markets were jittery for most of yesterday because of trade fears, there were not much material news flow. In fact on the potential of the US leaving the WTO, both President Trump and Commerce Secretary Ross have downplayed this possibility, while Mr Ross noted the “WTO knows some reforms are needed….but I think it’s a little premature to talk about simply withdrawing from it”. Meanwhile DB’s Peter Hooper and team noted the recent intensification of global trade tensions imply that the probability of trade conflict has risen to levels that could result in significant pain in financial markets and a sizable drop in output and employment. They noted that higher tariffs on $250bn worth of Chinese goods and $350bn worth of automotive products could reduce imports and lift the US GDP by c0.5ppt. However, this gain is likely to be swamped by various negative effects if the tariffs are actually implemented. These include: i) -0.4ppt hit to US GDP from higher prices and lower consumer spending, ii) -0.55ppt on US GDP from retaliatory tariffs from China and the EU as it depresses exports and iii) -1ppt hit to GDP from the confidence hit to businesses and households, particularly the flow on drags on investments and consumption spending. Refer to their note for a breakdown of how trade actions could impact the macro economy.

As for markets yesterday. European equities were all lower, weighed down by materials stocks, a negative lead from Asia as well as ongoing trade tensions as the EU warned if the US imposes import tariffs on its cars, it could lead to counter-measures by its trading partners on $294bn worth of US exports. Across the region, the Stoxx 600 (-0.84%), DAX (-0.55%) and FTSE (-1.17%) all closed down. Over in the US, the S&P reversed losses to close +0.31% higher on lower than normal trading volumes, partly boosted by stronger tech stocks and ISM/ PMI readings. Notably, DB’s Alan Ruskin flagged the US/China equity ratio ‘pain trade’ – the Shanghai comp/SPX has now broken the 2014 low. He believes that as long as this ratio is heading down, it will likely encourage views that China is under more duress than the US to compromise on trade issues.

Meanwhile government bonds remain fairly muted with 10y bond yields for peripherals down c3bp while Gilts (-2.5bp) and OATs (-0.8%) also closed firmer Notably, 10y yields on Italian BTPs rallied back c13bp intraday while Bunds (+0.2bp) and treasuries (+1.1bp) slightly underperformed with the latter weighed down by the stronger ISM print. In commodities, LME base metals tumbled c2% (Nickel -2.35%; Aluminium -1.65%; Copper -1.55%) while Gold also retreated -0.84%.  Elsewhere, oil prices fell for the first time in five days, although Brent (-2.44%) did weakened more than WTI (-0.28%).

The main highlight datawise yesterday was the confirmation of the final June manufacturing PMI/ISM readings around the world. The biggest surprise came from the US where the ISM manufacturing printed at a stronger than expected 60.2 (vs. 58.5 expected), with the reading also up 1.5pts from May. It is also now back to testing that 60.8 high mark made back in February which still remains the highest reading since 2004. The supplier deliveries component (68.2 from 62.0) rose to the highest since May 2004 and is evidence of the strain on the supply side from tariffs and could be slightly elevating the headline number artificially. However most of the report was strong and also featured another bumper and stronger than expected prices paid reading at 76.8 (vs. 75.0 expected), albeit moderating slightly from the 79.5 in May. Notably the attached commentary for the survey data featured an unsurprising amount of chatter about tariffs. Indeed the text highlighted that “Demand remains robust, but the nation’s employment and resources and supply chains continue to struggle.  Respondents are overwhelmingly concerned about how tariff related activity is and will continue to affect their business”. US treasuries went on a round trip from around 2.86% to 2.82% and then back to 2.87% after the ISM.

Meanwhile there wasn’t much in the way of surprises from the final PMIs in Europe. The final Eurozone manufacturing reading was confirmed at 54.9 compared to the 55.0 flash print. As a reminder May was 55.5 and this still means we’ve seen six consecutive monthly declines, or one for every month this year, after the PMI rose in 11 out of 12 months in 2017. Germany was confirmed at 55.9 (unchanged versus the flash) although France was revised down 0.6pts to 52.5. More interestingly, Italy printed at a stronger than expected 53.3 (vs. 52.5) compared to 52.7 in May, with the sector showing reasonable resilience in the face of domestic political woes. Spain on the other hand was a touch softer than expected (53.4 vs. 53.6 expected) while in the UK the reading was slightly above market at 54.4 (vs. 54.0 expected), albeit relatively unchanged from last month.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. The Euro area’s May unemployment rate was lower than expected at 8.4% (vs. 8.5% expected), which is the lowest print since December 2008. Meanwhile, Italy’s May unemployment reading was also below consensus at 10.7% (vs. 11.1% expected).

Looking at the day ahead, the May YTD budget balance in France, June construction PMI in the UK and May retail sales data for the Eurozone are due this morning. In the US we will get May factory orders and also final reads for May durable goods and consumer goods orders. Later in the evening June vehicle sales data will be released. Aside from the data, the ECB’s Peter Praet will speak at a Romanian Central Bank conference in Bucharest while the European Council President Donald Tusk and European Commission President Jean-Claude Juncker will address the European Parliament.

 

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Authored by Brian Cloughley via The Strategic Culture Foundation,

News that a meeting has been arranged between Presidents Trump and Putin on 16 July was greeted with displeasure in many sectors of the western world, and especially by the military-industrial complex, the cabal of war-profiteering US and European oligarchs whose interests lie solely in maintaining their lucrative arms manufacturing empires. Trade is most important to them — but peace and friendship come way down their page of priorities, because it is enmity and distrust that lead to lucrative sales of weapons.

UK newspapers reacted predictably to the news, with the right wing Daily Mail stating “Fears are mounting that Donald Trump wants a ‘peace deal’ with Vladimir Putin that could fatally undermine NATO. Ministers are becoming increasingly alarmed that the US president could offer the Russian president deep concessions such as withdrawing forces from Europe.”

The Times of London recorded that “One [UK government] minister told the Times: ‘What we’re nervous of is some kind of Putin-Trump ‘peace deal’ suddenly being announced. We could see Trump and Putin saying, Why do we have all this military hardware in Europe? and agreeing to jointly remove that. ‘It’s hard to be against peace, but would it be real peace?’”

Yes, it would be real peace, because what Russia wants is amicable relations and trade. Trade with the US and the EU and China and every country that wants to trade — including, most importantly, the Baltic States that have been encouraged by the Pentagon-Brussels NATO High Command to imagine that Russia is poised to invade them.

The US defence secretary, General James Mattis, told Estonia’s minister of defence that “Russia is trying to change international borders by force” and at meetings in May with Lithuania’s president and Baltic defence ministers “reassured US allies in the Baltic states of Lithuania, Latvia and Estonia of American solidarity with them and of US determination to defend Baltic and other NATO territory against any aggression.”

Of all the absurd concoctions swinging round the Western propaganda world at the moment, the notion that Russia wants to invade Estonia, Latvia or Lithuania is probably the least believable and most laughable. The Russian government fully realises that such action would inevitably result in wider conflict; and that there could be escalation to a shattering nuclear war. Even if it didn’t result in global catastrophe, the occupation of any one of these countries by Russian forces would be cripplingly costly in every way and simply doesn’t make sense.

In the context of the impending US-Russia presidential talks, not a single Western media outlet mentioned that, as detailed in the 2018 World Report of the Stockholm International Peace Research Institute (SIPRI), “In 2017 the USA spent more on its military [$610 billion] than the next seven highest-spending countries combined… at $66.3 billion, Russia’s military spending in 2017 was 20 per cent lower than in 2016.”

It would be awkward and indeed embarrassing for the Western media to give prominence to SIPRI’s indisputable statement that in 2016 “NATO’s collective military expenditure rose to $881 billion” while “European NATO members spent $254 billion in 2016 — over 3 times more than Russia.”

Russia is reducing its expenditure on defence while the US-NATO military alliance, as noted by Radio Free Europe, agreed on 7 June to “reinforce NATO’s presence in a potential European crisis with the deployment of 30 troop battalions, 30 squadrons of aircraft, and 30 warships within 30 days — the so-called ‘Four 30s’ plan.” This, said the Secretary General of the US-NATO military alliance, Jens Stoltenberg, presumably with a straight face, is not “about setting up or deploying new forces — it is about boosting the readiness of existing forces across each and every ally.”

Then the BBC reported that Stoltenberg had put the best face he could on the unwelcome news of reduced tension and possible friendship. He said that “dialogue is a sign of strength… We don’t want a new Cold War, we don’t want to isolate Russia, we want to strive for a better relationship with Russia.” This is the man who declared in March 2018 that the US-NATO military grouping is increasing its numbers of confrontational deployments. He is proud of the fact that at the end of 2017 there were more than 23,000 troops involved in NATO operations, an increase of over 5,000 since 2014. This is a most peculiar way of striving for a “better relationship” with Russia, whose borders and shores are constantly menaced by NATO’s attack and electronic warfare aircraft, missile-equipped ships and tank-heavy troop manoeuvres.

In June, immediately before the start of the World Cup football tournament in Russia the US-NATO alliance (plus Israel) conducted a two-week military exercise in Estonia, Latvia, Lithuania and Poland. 18,000 troops took part in the manoeuvres which, according to the Pentagon’s HQ in Europe, were “not a provocation of Russia.” At the very time that citizens of countless countries were preparing to travel to Russia to enjoy a major sporting jamboree, the Pentagon-Brussels pressure group did its best to confront the country whose defence budget is one third of Europe’s and a tenth of America’s and whose President declared that his overwhelming priority is reduction of poverty and “the well-being of the people and the prosperity of Russian families.”

It is deeply ironical that while the US-NATO military fandangos were in full swing in the Baltic States, it was reported that “Russia on Wednesday [6 June] successfully launched its Soyuz MS-09 spacecraft carrying three crew members to the International Space Station (ISS)…”

The spacecraft carried three astronauts : Serena Aunon-Chancellor of the US, Germany’s Alexander Gerst and Russia’s Sergei Prokopyev,

The spacecraft zoomed away in international harmony two days before US Senator Ben Sasse grouched that “Putin is not our friend and he is not the president’s buddy. He is a thug using Soviet-style aggression to wage a shadow war against America, and our leaders should act like it.” With that sort of attitude, widespread in the Congress, it’s going to be difficult to realise Trump’s desire to “get along with Russia” which he observes would be “good for the world, it’s good for us, it’s good for everybody.”

Trump is the most erratic president the US has ever known. He ricochets from malevolent tweeting to spiteful speeches, and is now distrusted by almost every foreign leader of stature. It is difficult to disagree with the opinion of Iran’s foreign minister that he is “impulsive and illogical” but — and it is a very big ‘but’ — at the moment he presents the best chance for rapprochement and amity with Russia.

The fact that Washington’s warmongers so violently oppose his forthcoming talks with President Putin is evidence enough that he is on the right track. Let’s hope that President Putin can keep him on the rails that lead to peace, trade and friendship.

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On July 6th, President Donald Trump’s tariffs on $34 billion worth of Chinese goods are set to take effect. And, as Bloomberg’s Chief Asia Economist, Tom Orlik, notes, with an additional $16 billion coming close behind, and China threatening retaliation, it looks like the opening shots of a trade war are about to be fired.

We map out four scenarios:

Scenario One: $50 billion and done. The U.S. imposes tariffs, China retaliates. Financial markets shudder. Fearing panic, both sides send reassuring messages and hold fire on further measures. In this scenario there would be a negligible impact on the U.S. economy and a maximum drag on China’s growth of just 0.2 ppt next year. A broadening of tariffs to affect $250 billion of Chinese exports could drag on China’s economic growth by up to 0.5 ppt, we estimate.

Scenario Two: $50 billion, plus a slump in financial markets. The U.S. imposes tariffs, China retaliates, equity prices fall sharply, creating a second-round effect from falling wealth and tighter financing conditions. Fearing worse, both sides hold fire. In this scenario, growth in the U.S. weakens by 0.4 ppt next year, China is mostly unscathed by the decline in equities, thanks to insulation from global markets, but the 0.2 ppt drag from tariffs remains. And the world economy experiences a roughly 0.2 ppt drag to growth as well.

Scenario Three: The U.S. imposes 10% tariffs on all imports and the rest of world retaliates. In other words — we find ourselves in a global trade war. It would take time for the biggest impacts to be felt, but in 2020 the drag on annual GDP growth might be 0.4 ppt for the U.S., 0.2 ppt for China and 0.2 ppt for the world.

Scenario Four: The U.S. imposes 10% tariffs on all imports, the rest of the world retaliates, and financial markets slump. Layering on a tightening of financial conditions might raise the peak GDP growth impact to 0.8 ppt in the U.S. and 0.4 ppt for the world. China, being insulated from world equity shocks, might escape the additional burden of tighter financial conditions.

A global trade war combined with the interconnectedness of global financial markets means a shock to U.S. equities would be felt in most corners of the world.

Source: Bloomberg

To be sure, a trade war could unfold in myriad ways not captured in these scenarios. Tariffs could be set at different levels, on different products, and in different countries. The reaction of financial markets is also impossible to predict. U.S. investors could continue to focus on benefits from tax cuts rather than costs from tariffs. China’s “national team” could put a floor under the Shanghai Composite Index. Other policy instruments might provide an offsetting influence. China may opt to restart infrastructure spending to offset a drag from weaker exports, for example.

And, as Orlik notes, there is, of course, also a possibility the U.S, and China pull back from the brink. Trump threatened to wipe North Korea off the map but ended up sitting down for a summit with its leader. The wall along the Mexican border has not been built, let alone paid for by Mexico. If we see U.S. markets sliding ahead of the July 6 deadline, or more businesses lining up to criticize the impending tariffs, the chances of the White House seeking some kind of face-saving compromise would go up.

At this point though, that’s not the base case.

At least one round of tariffs looks highly likely. If China retaliates – and it surely will – and financial markets don’t provide a clear ‘stop’ signal, a second could follow.

In other words, the only way this stops is if markets crash… and if markets don’t crash – anticipating Trump folding – then he will double-down on his trade tariff attacks until it does.

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Via GEFIRA,

The new Italian government will increase public spending and public debt. It promised to reduce taxes, introduce basic security and reform pensions. Italy’s Northern League’s leader Mateo Salvini surged in the polls and the party is now the strongest in Italy.

A couple of years ago it was inconceivable that this regional group could become Italy’s leading political party. We should expect more to come. As the saying goes, it just could not happen till it happened. The financial establishments in North European countries like Germany and the Netherlands assume that the politicians of M5S and Lega Nord will follow the Greek script and will backtrack on their promises.

But Mateo Salvini and Prime Minister Giuseppe Conte know that if they do not live up to the expectation of the voters, they will be voted out of office. They are also aware of it that the Italian voter has still another alternative called “CasaPound”, a much more radical, if for the time being insignificant, social and anti-migration movement.

The planned reforms could burden the state budget with an additional 125 billion euros per year. Can the Italian government afford such a thing?

The question is rhetorical when you look at Italy’s growing debt mountain.

It amounts to €2300 billion, of which 1900 billion are government bonds. What should worry investors, however, is the structure of this debt. Ten years ago, when the last financial crisis broke out, 51% of these government bonds were hold by foreign investors. When the climate for investment in a country deteriorates, they sell these bonds immediately. When in 2011 the Berlusconi government threatened to withdraw from the eurozone budget rules because of the huge budget deficit, German and French banks sold Italian government bonds BTP (Buoni del Tesoro Poliennali) worth a total of €150 billion. In the following years, foreigners bought Italian debt instruments again for around €100 billion, but their share is now very low at 36%.

Most of the packages currently are owned by Italian banks and insurance companies, and their financial condition is already weak: last year the Italian government rescued, Banca Monte dei Paschi di Siena at the expense of the Italian tax payer, against the wish of the Frankfurt banking establishment. The Italian financial situation became more sensitive when there was turbulence around the new Italian government in May this year: the Italian BTPs (Buoni del Tesoro Poliennali Italian Government Bonds) lost 8% in value. If prices remain under pressure, Italian banks will have to sell off these bonds at a lower price and with huge losses to ensure that their solvency will not be further endangered. To comply with the European debt-to-capital ratios, they have to raise new capital or increase interest rates and grant fewer loans.

Also the ECB is responsible for the rising yield on Italian government bonds. When in May the Five-Star Movement and the Lega merged to form a government coalition, the ECB suddenly reduced purchases of Italy’s national debt, which exacerbated speculation against the BTPs. In this way Brussels wanted to punish the Eurosceptic “populists”. This was confirmed by Günther Oettinger himself, who always considered Italy ungovernable. In an interview for Deutsche Welle, he called the turmoil on the financial market “a signal to Italian voters not to vote for populists from left and right”. In plain language – if they had elected corrupt democrats who were not breaking ranks with Brussels, the Italian debt could have continued to be financed by the ECB.

The introduction of a parallel (or fiscal as the Italian like to call it) currency is one of the promises that the new Italian government has given to make “Italy Great Again”. The central bankers from Northern Europe we talked to are appalled by the idea and are convinced that Italians will not even consider such a plan. Its author – Paolo Savona – the current Minister for Europe – already claimed in 2015 that the denomination of euro national debt into new fiscal currency “nova-lira” national debt was neutral for domestic investors.

This claim is not true, however, because since January 2013 all government bonds in the euro zone have been issued with a so-called collective action clause. CAC means that the issuing state may not change the bond terms on its own: any change requires the consent of the majority of creditors. The share of BTPs with CAC compared to that without CAC has been rising continuously for years. In 2017 it was 48%, this year it will already reach 60%, so that Savona’s plan is hardly feasible.

Italy’s national bankruptcy is imminent and the next financial crisis can soon be triggered off by problems of the Italian banks, which the ECB and Brussels’ technocrats are unwilling to rescue, all the more so since Lega and Movimiento 5 Stelle are in power.

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With populist movements currently resurgent across Europe, refugees remain the single most discussed topic in the Union’s political discourse.

However,  as Statista’s Patrick Wagner notes, countries with the most prominent xenophobic political movements do not tend to host the largest share of asylum seekers.

You will find more infographics at Statista

Our chart shows that even though Germany tops the ranking when it comes to the total number of people seeking refuge in the respective country, it does not come first when looking at the share of refugees in comparison to a country’s total inhabitants.

In Italy – ranked fourth when it comes to GDP in the EU – only 0.5 percent of all inhabitants are seeking refuge.

Even though Data suggests that in Latvia, almost 12 percent of the population may count as refugees, almost all of them are stateless persons who did not flee from conflict.

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