Month: August 2018

Authored by Lance Roberts via RealInvestmentAdvice.com,

“Only those that risk going too far can possibly find out how far one can go.” – T.S. Eliot

I was reminded of that quote recently as I was reading a great piece by Tim Duy:

“Federal Reserve Chairman Jerome Powell took to the podium at the annual Jackson Hole monetary conference, delivering a message of support for the central bank’s policy of ongoing gradual interest-rate increases. This policy stance is less about commitment to estimates of key policy variables such as the natural rate of interest and more about data dependence. Unfortunately, Powell left the unsettling feeling that monetary policy can be summarized as ‘We plan to keep hiking until something breaks.’”

Tim makes a great point.

I have spilled a lot of digital ink discussing the problems with monetary policy in the past, and in particular, with the Fed’s rate hiking campaigns. The results have always been, without exception, either poor or disastrous.

“In the U.S., the Federal Reserve has been the catalyst behind every preceding financial event since they became ‘active,’ monetarily policy-wise, in the late 70’s. As shown in the chart below, when the Fed has lifted the short-term lending rates to a level higher than the 10-year rate, bad ‘stuff’ has historically followed.”

The same applies to stock market investors as well. As I wrote previously,

“First, “record levels” of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.”

In the “rush to be bullish” this a point often missed. When markets are hitting “record levels” it is when investors get “the most bullish.” Conversely, they are the most “bearish” at the lows.

It is just human nature.

“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” – T.S. Eliot

Despite the best of intentions, a vast majority of the “bullish” crowd today have never lived through a real bear market. You know such is true when you read a comment like this:

“What all equity investors need to do — is to be mentally prepared for a temporary (maximum 2 year) 33-50% drop. 90% drops like the Great Depression aren’t going to happen ever again. You may have a 50% drop but it will come back in two years max.”

Two charts show the ignorance in that statement.

Bull markets, with regularity, are almost entirely wiped out by the subsequent bear market.

Another comment showed equal ignorance of market dynamics.

“A common fallacy is that ‘every bullish trend results in an equally bearish trend,’ or that bull and bear market seesaw EQUALLY, like yin and yang. But nothing is further from the truth. Bull Markets last 6 TIMES LONGER and rise 10 TIMES HIGHER than bear markets do.”

Yes, they do seesaw and, for the most part, are almost always equal in nature. (a 100% gain and 50% loss are the same thing) For every bull market, there will be a bear market. But, as shown above, it is clearly not the case that bull markets rise 10x higher than bear markets fall. 

Market participants never act rationally. Neither do consumers.

The Instability Of Stability

This is the problem facing the Fed.

Currently, there is a very high level of complacency with a strong belief in the motto “The Fed can do no wrong.”  Or should I say, there seems to be a very large consensus the markets have entered into a “permanently high plateau,”or an era in which price corrections in asset prices have been effectively eliminated through monetary policy.

Interestingly, it is that very belief on which the Fed is dependent. With the entirety of the financial ecosystem now more heavily levered than ever, due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, the “instability of stability” is now the biggest risk.

The “stability/instability paradox” assumes that all players are rational and such rationality implies avoidance of complete destruction. In other words, all players will act rationally and no one will push “the big red button.”

Again, the Fed is highly dependent on this assumption as it provides the “room” needed, after more than 9-years of the most unprecedented monetary policy program in U.S. history, to try and extricate themselves from it. The Fed is dependent on “everyone acting rationally.”

As I noted in last week’s newsletter, Fed Chairman J. Powell is depending upon the everyone buying into the current narrative he provided:

“There is good reason to expect that this strong performance will continue. I believe that this gradual process of normalization remains appropriate.“

However, there are concerns about the durability of that backdrop as “everything is as good as it can get.” 

To understand this we can look at our own RIA Economic Output Composite Index (EOCI) which is an extremely broad indicator of the U.S. economy. It is comprised of:

• Chicago Fed National Activity Index (an index comprised of 85 subcomponents)
• Chicago Purchasing Managers Index
• ISM Composite Index (composite of the manufacturing and non-manufacturing surveys)
• Richmond Fed Manufacturing Survey
• New York (Empire) Manufacturing Survey
• Philadelphia Fed Manufacturing Survey
• Dallas Fed Manufacturing Survey
• Markit Composite Manufacturing Survey
• PMI Composite Survey
• Economic Confidence Survey
• NFIB Small Business Index 
• Leading Economic Index (LEI)

All of these surveys (both soft and hard data) are blended into one composite index which, when compared to U.S. economic activity, has provided a good indication of turning points in economic activity.

Currently, the index has peaked from it’s second highest level on record. In every previous period where the index achieved current levels, it had been near the peak of that economic cycle.

It is also worth noting the 6-month average of the Leading Economic Index (LEI) has recently turned down and this index reliably leads the EOCI by a couple of months.

The Citi and Bloomberg Economic Surprise indices, which also tend to lead our EOCI have turned sharply lower following the recent “natural disaster recovery” surge from late last year. This was the point I made recently:

“But the cracks are already starting to appear as underlying economic data is beginning to show weakness. While the economy grinds higher over the last few quarters, it was more of the residual effects from the series of natural disasters in 2017 than “Trumponomics” at work. The “pull forward” of demand is already beginning to fade as the frenzy of activity culminated in Q2 of 2018.”

It is here we find the biggest potential risk for the Fed.

There are already signs that forward economic activity may be significantly weaker than currently expected. Yet the Fed is making policy decisions based on the current trend of activity. As Tim notes:

“This raises the bar for a pause. Powell and his fellow policy-makers need to see a definite change in the numbers that leads them to believe that economic activity has moderated and financial conditions have sufficiently tightened to justify the pause. In other words, they are not inclined to take a leap of faith and pause as they hit neutral to assess the impact of past tightening. They need to see a reason to stop tightening.”

The Fed operates on current economic data as it comes in. However, all economic data is revised in the future, and when those revisions become sharply negative, the results aren’t good. For example, in December of 2007, no one believed the U.S. economy was in a recession. However, after a near 50% plunge in asset prices and the worst economy since the “Great Depression,” the NBER officially stated in December of 2008 the recession had started a year earlier. Such was not an outlier event, but rather the norm for NBER recession dating.

As Tim notes:

“The worst-case scenario is that something actually needs to break before the Fed stops tightening. This is a possibility because of the long and variable lags in the policy process. The Fed could keep on hiking well past when it should stop, or fail to reverse course quickly enough, because the data has yet to catch up with a slowdown already occurring under the surface. This is arguably how expansions end.”

I would disagree with Tim on the last sentence.

It should have read: “This is how expansions end.”

As shown below, when you overlay our EOCI index with the Fed funds rate, we see that every rate hiking campaign denoted the “beginning of the end” of every expansion period. Unfortunately, as Tim notes, by the time the data is revised, it will be well after the point at which the Federal Reserve should have stopped their rate hike campaign.

Unsurprisingly, when the Fed eventually “breaks something,” the downturns in the EOCI index also coincide with a stock market contraction as well.

The Single Biggest Risk To Your Money

All of this underscores the single biggest risk to your investment portfolio.

In extremely long bull market cycles, investors become “willfully blind,” to the underlying inherent risks. Or rather, it is the “hubris” of investors they are now “smarter than the market.” As Doug Kass recently noted:

“In reality, if one listens to the business media (presumably one of the guiding sources of investor opinion) there is little recognition of any negatives these days. There is, to most of the media, no ‘wall of worry’ at all. Here are a few of my concerns – not one of which was the subject of discussion in the business media today:

• Growing economic ambiguities in the U.S. and abroad: peak autos, peak housing, peak GDP.
• Political instability and a crucial midterm election.
• The failure of fiscal policy to ‘trickle down.’
• An important pivot towards restraint in global monetary policy.
• An unprecedented lack of coordination between super-powers.
• Short-term note yields now eclipse the S&P dividend yield.
• A record levels of private and public debt.
•  Near $3 trillion of covenant light and/or sub-prime corporate debt. (eerily reminiscent of the size of the subprime mortgages outstanding in 2007)

What, me, worry?”

At the moment, there certainly seems to be no need to worry.

The more the market rises, the more reinforced the belief “this time is different” becomes.

Yes, everything certainly is “as good as it can get.”

But therein lies the single biggest risk to the Fed and your portfolio.

“Bull markets” don’t die of pessimism – they die from excess optimism.

Unfortunately, by the time the Fed realizes what they have done, it will be too late.

via RSS https://ift.tt/2PkDekx Tyler Durden

It was already an ugly day for the Turkish Lira, which earlier in the day accelerated its drop for the 4th consecutive session, sending the USDTRY to the highest level since August 14 when the currency crashed over the weekend to the lowest level on record.

Today’s drop was initially precipitated after Erdogan said on Thursday that Turkey “is not without alternatives” and warning that it won’t “back down over threats.”

In his latest attack on the US, Erdogan said that “some do not hesitate openly stating the fact that they are trying to drive us into a corner through the economy. There are surely structural issues in the Turkish economy. We know these issues and are working to fix them.”

Alas, as we noted earlier, judging by the plunge in the lira, the market did not seem convinced by Erdogan’s latest rant, and proceeded to slide further after closing last night down 3.0% at 6.469 which was weaker than where it was on the Friday 3 weeks ago (6.4323) when the panic spread across the market. The only softer closing level was on the following Monday (6.884) but that actually included a big intra-day rally back from the Asian wides. Yesterday was the third day in a row the Lira has weakened (post domestic holidays) while Turkey’s 5yr CDS was also +14.4bps wider and touched 500bps again (recent high was 535.0 on Aug 13).

Then, pouring gas on the fire, the Turkish currency plunged even more, following a Reuters headline that the Turkish central bank deputy Klimici had resigned, and was set to join the Turkish Development Bank. From Reuters:

Turkish central bank’s deputy governor and Monetary Policy Committee member Erkan Kilimci is set to resign from the bank, two sources familiar with the matter told Reuters.

Kilimci is to become a board member for the Development Bank of Turkey, the sources said. No one was immediately available at either bank for comment on Thursday, a public holiday in Turkey.

Turkey’s Central Bank has been under pressure from President Tayyip Erdogan not to increase interest rates, despite the lira’s depreciation against the U.S. dollar by more than 40 percent this year.

The market promptly saw this unexpected departure as an indication that Erdogan’s influence over the central bank is growing, making the much needed rate hikes unlikely, potentially leaving hyperinflation in its wake. In kneejerk reaction, the USDTRY spiked as high as 6.8427 before recovering some losses and last trading at 6.7570, a level which will hardly give emerging markets confidence that capital outflows from Turkey (or Argentina, or elsewhere) are about to stabilize.

 

via RSS https://ift.tt/2LGHmZN Tyler Durden

In a now traditional daily spectacle, President Trump ripped CNN President Jeff Zucker on Twitter Thursday morning, saying that network’s ratings “suck” and Zucker should be fired, amid the growing feud between the president and the news channel.

“The hatred and extreme bias of me by @CNN has clouded their thinking and made them unable to function. But actually, as I have always said, this has been going on for a long time,” the president tweeted adding that “Little Jeff Z has done a terrible job, his ratings suck, & AT&T should fire him to save credibility!”

The hatred and extreme bias of me by @CNN has clouded their thinking and made them unable to function. But actually, as I have always said, this has been going on for a long time. Little Jeff Z has done a terrible job, his ratings suck, & AT&T should fire him to save credibility!

— Donald J. Trump (@realDonaldTrump) August 30, 2018

Trump and CNN have been clashing all week after the president tweeted that CNN was being ripped apart for “being caught in a major lie and refusing to admit the mistake,” pointing specifically to veteran journalist Carl Bernstein. Bernstein wrote an article in July that accused the president of having prior knowledge of the Trump Tower meeting between Trump campaign personnel and Russians. However, subsequently Lanny Davis, the attorney for former Trump lawyer Michael Cohen, told The Washington Post over the weekend that he was an anonymous source behind said story.

Davis then told NBC News that acting as that source was “a major mistake for which I am 100 percent sorry. I never should have done it unless I was certain and could prove it.”

Other news outlets took down their versions of the CNN report following Davis’s latest comments, however CNN has kept it up, even though it specifically said that “contacted by CNN, one of Cohen’s attorneys, Lanny Davis, declined to comment.”

And now that he is commenting, CNN refuses to publish a retraction. Instead, CNN tweeted Wednesday that CNN does not lie, defending Bernstein

Trump then shifted his focus and targeted NBC Chairman Andrew Lack in a subsequent tweet.

“What’s going on at @CNN is happening, to different degrees, at other networks – with @NBCNews being the worst. The good news is that Andy Lack(y) is about to be fired(?) for incompetence, and much worse. When Lester Holt got caught fudging my tape on Russia, they were hurt badly!”

What’s going on at @CNN is happening, to different degrees, at other networks – with @NBCNews being the worst. The good news is that Andy Lack(y) is about to be fired(?) for incompetence, and much worse. When Lester Holt got caught fudging my tape on Russia, they were hurt badly!

— Donald J. Trump (@realDonaldTrump) August 30, 2018

Finally, Trump lashed out at the media in general, which he again called the “enemy of the people”, and tweeted that he just “cannot state strongly enough how totally dishonest much of the Media is” adding that “truth doesn’t matter to them, they only have their hatred & agenda. This includes fake books, which come out about me all the time, always anonymous sources, and are pure fiction. Enemy of the People!”

The news from the Financial Markets is even better than anticipated. For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!

— Donald J. Trump (@realDonaldTrump) August 30, 2018

In this context, Trump also appeared to clarify that the departure of White House lawyer Don McGahn had little to do with Ivanka and Jared, tweeting that “Ivanka Trump & Jared Kushner had NOTHING to do with the so called “pushing out” of Don McGahn.The Fake News Media has it, purposely,so wrong! They love to portray chaos in the White House when they know that chaos doesn’t exist-just a “smooth running machine” with changing parts!”

Trump concluded on a positive note, urging his followers to look at the market which hit 4 consecutive days of all time highs, and tweeted that “the news from the Financial Markets is even better than anticipated. For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!” It is not clear how many of Trump’s supporters actually have 401k’s.

The news from the Financial Markets is even better than anticipated. For all of you that have made a fortune in the markets, or seen your 401k’s rise beyond your wildest expectations, more good news is coming!

— Donald J. Trump (@realDonaldTrump) August 30, 2018

 

via RSS https://ift.tt/2C89OUO Tyler Durden

Trump’s hard ball negotiating tactics appear to be bearing some fruit, with Politico reporting that Brussels is willing to scrap tariffs on all industrial products, including cars, in trade talks with the United States, EU trade chief Cecilia Malmström said Thursday.

“We said that we are ready from the EU side to go to zero tariffs on all industrial goods, of course if the U.S. does the same, so it would be on a reciprocal basis,” Malmström told the European Parliament’s trade committee. Sending the ball in the Trump’s court, she said that “we are willing to bring down even our car tariffs down to zero … if the U.S. does the same,” adding that “it would be good for us economically, and for them.”

While the EU’s car tariff of 10% is higher than the general U.S. auto tariff of 2.5%, America imposes a 25% duty on light trucks and pick-ups.

The European gambit may be a non-starter, as during a first meeting in Washington last week, an EU proposal for including cars in the discussions was rejected by the U.S. Brussels and Washington are holding preparatory trade talks to define the scope of a potential future agreement.

Malmström’s comment goes beyond what was agreed in July in the joint statement between European Commission President Jean-Claude Juncker and U.S. President Donald Trump, which only mentioned eliminating tariffs, non-tariff barriers and subsidies for “non-auto industrial goods.”

Malmström insisted that the discussions were not about “restarting TTIP” but aiming for “a more limited trade agreement.” Furthermore, Agriculture would not be in the agreement, nor public procurement as it looks to today, she said.

Following the report, European automakers jumped to the top of the Stoxx 600, which pared declines along with the DAX pared some declines amid hope of improving trade tensions with the U.S., with most names rising over a percent: Ferrari +1.5%, Fiat Chrysler +1.6%, BMW +1.6%, Volkswagen +1.4%, Daimler +1%.

Other assets mirrored the improvement in risk sentiment – bund and Treasury futures pulled further back from day highs, and EUR and CNH trimmed declines.

But as Bloomberg notes, any trade progress depends on a positive response from the U.S. And with frictions remaining on Nafta and China talks, any trade pact will continue to be shrouded in uncertainty. The conclusion: “fon’t expect a sustainable uplift from this news.”

via RSS https://ift.tt/2N27Lpz Tyler Durden

The rally that saw US stocks hit a record high for 4 consecutive sessions took a breather overnight as S&P futures and European stocks followed Asian shares lower on Thursday, as trade and geopolitical concerned re-emerged, hurting bullish sentiment.

Stock markets and major government bond yields rose in recent weeks on hopes that a global trade war could be averted, particularly with the leaders of the United States and Canada optimistic they could reach new North American Trade Agreement by Friday. Trump said earlier talks with Canada on overhauling Nafta are going well, while Canadian PM Trudeau said his government his trying to reach an agreement with the U.S. this week but won’t sacrifice its goal of getting the right deal

But with tariffs beginning to hurt the Chinese economy, Asian stocks lost some of their gains and European shares followed suit on Thursday on concerns over trade relations between the world’s two largest economies.

“In all honestly, the NAFTA situation probably reflects a desire to get the agreement over the line before elections in Mexico and the mid-term vote in the U.S.,”said OANDA analyst Craig Erlam. “It doesn’t mean the U.S. will look for a quick solution with China. There’s still a long way to run with these trade situations, and I wouldn’t be surprised if we see more tariffs on more goods before it gets better.”

Indeed, while NAFTA may be resolved as soon as Friday, the US-China trade is only set to worsen as US tariffs on another $200 billion of Chinese goods are expected to take effect next month.

Geopolitical fears also creeped back in, with the Korean Peninsula once again back in the headlines after President Trump accused  China of undermining U.S. efforts to pressure North Korea into giving up its nuclear weapons, indicating his trade war with Beijing is starting to exacerbate geopolitical tensions.

As a result, the mood turned sour in Asia first, where the MSCI index of Asia-Pacific shares ex-Japan dropped 0.3%, with broad gains across the region offset by losses in China which dropped the most in nearly 2 weeks. The Shanghai Composite Index slid 0.9%, closing at session lows and set for its biggest fall since Aug. 17, as tech shares slide and the National Team was clearly absent; The ChiNext Index of small-cap and tech stocks -1.3%, while shares in Hong Kong also fall, with Hang Seng Index -0.9%; Tencent lost 1.3% as biggest drag on the measure.

Earlier, a Reuters poll showed activity among China’s manufacturers probably slowed for the third straight month in August.

“Investors are relatively pessimistic and cautious for now amid low levels of trading volume, as there are still concerns over the development of the Sino-U.S. trade spat,” said Yan Kaiwen, an analyst with China Fortune Securities.

After a serious of aggressive interventions last week by the PBOC halted the Yuan slide, the offshore Yuan has resumed its slide in recent days. The CNH slid even though the PBOC strengthened the yuan fixing by 0.06% to 6.8113 per dollar, stronger than average estimate; central banks skips open-market operations. As Bloomberg reports, offshore yuan turnover jumped to a record in July on the CBOE global markets platform, spurred by President Trump’s attack on Chinese currency practices and the trade war

In Europe equity markets open lower and sell off further, real estate stocks lag after negative comments on the sector by Morgan Stanley; the Europe Stoxx 600 index dropped 0.4 percent on Thursday, dragging the MSCI world equity index off a five-month high. Miners led the retreat as most sectors fell on. Treasuries and most European bonds edged higher.

Today’s profit taking is not unexpected: equities have rallied as August draws to a close, with an index of world stocks heading for a second weekly gain. Central-bank support in China has gone some way to stabilizing the currency and stemming a rout in Shanghai stocks, though worries remain concerning the U.S.-China trade spat and the pace of monetary tightening in the U.S. Looking at the future, sellside analysts are increasingly seeing only upside.

Back to the overnight market, Asia was also the center of some of the biggest overnight currency volatility after the Australian dollar slumped after second-quarter business investment and building approvals were much worse than expectations, while New Zealand’s currency tumbled as business confidence hit a 10-year low. Australia’s currency may fall to 71.6 U.S. cents over next few months as investment conditions in the nation deteriorate, according to Kyle Rodda, market analyst at IG Group in Melbourne

It wasn’t just Asia, however, with broad risk-off sentiment emerging across all markets before tentative stabilization into the North American crossover. While there was no real catalyst cited for the moves, EM weakness was prominent again especially in currencies, as the USDZAR spiked higher through 14.50, driven partly by weakness in local stock market as MTN falls 18% due to Nigeria demanding a $8.1b refund.

The British pound extended its gains against the euro after recording its biggest gain in seven months on Wednesday. The gains came as European Union negotiator Michel Barnier signaled an more accommodative stance toward London in ongoing talks. “It is a slight change in tone from Barnier and a sign that the EU is very aware of the Brexit deadline and they don’t want a no-deal Brexit any more than we do,” said OANDA’s Erlam.

The euro struggled to sustain an early advance as German regional inflation data for August showed slowing price growth in some areas compared with the previous month, as noted. German Regional CPIs y/y (National Est. 2.0%): Saxony 2.0%, Brandenburg 2.0%, Bavaria 2.2%, Baden Wuert. 2.1%, Hesse 1.7%, NRW 2.0%; additionally Saxony Core CPI 1.4% vs 1.5% prev. The common currency failed for a second day to overcome supply above $1.1700 that comes both on a take-profit basis and on fresh positioning, according to two traders in London and Europe

The dollar pared its weekly loss as month-end pressure subsided.

The Turkish Lira accelerated its drop for the 4th day, sending the USDTRY higher by 2.7% and bringing this week’s decline to 9%. Today’s drop was precipitated after Erdogan said that Turkey ” is not without alternatives” and warning that “It’s not possible to make us back down with threats.” Taking another hit at the US, Erdogan said that “some do not hesitate openly stating the fact that they are trying to drive us into a corner through the economy. There are surely structural issues in the Turkish economy. We know these issues and are working to fix them.”

Judging by the plunge in the lira, the market does not seem convinced:  the Lira closed last night -3.0% at 6.469 which is now weaker than where it was on the Friday 3 weeks ago (6.4323) when the panic spread across the market. The only softer closing level was on the following Monday (6.884) but that actually included a big intra-day rally back from the Asian wides. Yesterday was the third day in a row the Lira has weakened (post domestic holidays) while Turkey’s 5yr CDS was also +14.4bps wider and touched 500bps again (recent high was 535.0 on Aug 13).

Meanwhile, yet another emerging market currency is under scrutiny, this time Argentina’s, after the country asked the International Monetary Fund for early assistance, alarming investors and hurting the peso and the country’s bond prices. The IMF said it was studying the request from Argentina to speed up disbursement of the $50 billion loan. The Argentinian peso dropped more than 7 percent on Wednesday, its biggest one-day decline since the currency was allowed to float in December 2015. Yields on Argentina’s 100-year bond issued last year rose to its highest level yet at 9.859 percent overnight.

Elsewhere, WTI and Brent futures trade higher following the larger than expected draw in DoE crude inventories while concern looms of tightening supply by year-end. According to the WSJ, Iran’s oil exports are expected to drop from 2.7mln BPD in June to 1.5mln BPD in September ahead of US sanctions (coming into effect on November 5th). Otherwise, news flow for the complex has remained light thus far. Elsewhere, gold is lower on the day, having tested USD 1200/oz to the downside and currently close to the lower end of the range, while copper is on the backfoot amid underperformance in its largest consumer, China.

Expected data include personal income and spending, and jobless claims. Campbell Soup, Dollar General, and Lululemon are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.2% to 2,909.00
• STOXX Europe 600 down 0.4% to 384.92
• MXAP down 0.3% to 166.05
• MXAPJ down 0.4% to 538.60
• Nikkei up 0.09% to 22,869.50
• Topix down 0.03% to 1,739.14
• Hang Seng Index down 0.9% to 28,164.05
• Shanghai Composite down 1.1% to 2,737.74
• Sensex down 0.2% to 38,648.80
• Australia S&P/ASX 200 down 0.01% to 6,351.76
• Kospi down 0.07% to 2,307.35
• German 10Y yield fell 1.4 bps to 0.39%
• Euro down 0.2% to $1.1681
• Italian 10Y yield fell 6.1 bps to 2.852%
• Spanish 10Y yield fell 1.2 bps to 1.452%
• Brent futures up 0.4% to $77.45/bbl
• Gold spot down 0.4% to $1,202.35
• U.S. Dollar Index up 0.1% to 94.69

Top Overnight News

President Trump said talks with Canada to overhaul the North American Free Trade Agreement are going well, expressing optimism the two countries could reach a deal this week

Trump: “necessary and appropriate” to maintain a 25% tariff on steel imports and 10% on aluminum; allowing some product exclusions for South Korea, Argentina and Brazil

New Zealand business confidence extended its decline with sentiment about the general economy sinking to the lowest in a decade. Australian business investment unexpectedly dropped last quarter despite the broader economy showing solid growth and hiring

German Regional CPIs y/y (National Est. 2.0%): Saxony 2.0%, Brandenburg 2.0%, Bavaria 2.2%, Baden Wuert. 2.1%, Hesse 1.7%, NRW 2.0%; additionally Saxony Core CPI 1.4% vs 1.5% prev.

Euro-area economic confidence continued its slide in August as risks from trade tensions to politics weigh on momentum. The European Commission’s index of household and business sentiment fell for an eighth month to the lowest in a year

The IMF said it will consider Argentina’s request to speed up disbursements from a $50 billion credit line as the government seeks to restore investor confidence

Barclays Plc has moved its head of Asia Pacific fixed income syndicate to Hong Kong, as China gains more prominence in the region’s dollar-bond market

August has historically been a cruel month for emerging markets. A Bloomberg currency index that tracks carry-trade returns from eight emerging markets, funded by short positions in the dollar, suggests this year has been the worst on record

Sweden is increasingly under attack by forces trying to influence and disrupt the election in 10 days, Swedish Radio reported

The International Monetary Fund said it will consider Argentina’s request to speed up disbursements from a $50 billion credit line as the government seeks to restore investor confidence as peso tumbles

The U.K. government said the European Union should compromise or risk a “no deal” Brexit, as the timeline for reaching an agreement slipped back. Michel Barnier, the EU’s chief negotiator, said the EU was prepared to offer Britain an unprecedented partnership

The U.S. exempted South Korea, Brazil and Argentina from metal tariffs

Asian equity markets traded mixed as the initial impetus from Wall St where the S&P 500 and Nasdaq posted a 4th consecutive day of records and where sentiment was underpinned by better than expected US GDP data as well as NAFTA optimism, was eventually clouded by weakness in China. ASX 200 (flat) was initially led by outperformance in telecoms on confirmation of the TPG Telecom-Vodafone Hutchison M&A deal although upside in the index was capped by weakness in financials and following disappointing capex data, while Nikkei 225 (+0.1%) gapped above the 23k level at the open which it then failed to sustain. Elsewhere, Shanghai Comp. (-1.1%) and Hang Seng (-0.9%) were subdued amid continued PBoC liquidity inaction and the ongoing US-China trade dispute, while President Trump also blamed China for the difficulties related to North Korea. Finally, 10yr JGBs were lower amid the mild gains in Japan and after the 2yr JGB auction failed to spur demand despite stronger results. PBoC skipped open market operations for a net neutral daily position.

Top Asian News

• Erdogan Says Turkey Won’t Back Down, Has Alternatives: Anadolu
• Downloads of Chinese Ride App Didi Tank After Passenger’s Death
• Varde, Birla Group Create $1 Billion Venture for Stressed Assets
• Vodafone Shackled Down Under as Unprofitable Venture Joins TPG

European equities are largely on the backfoot (Eurostoxx 50 -0.7%). Germany’s DAX 30 (-1.0%) is underperforming its peers with the likes of German auto names, Deutsche Bank, Commerzbank and heavyweight Bayer pressuring the index. Sector wise, telecom names underperform despite Bouygues (+3.16%) taking a spot at the top of the Stoxx 600 following earnings, with the likes of Vodafone and Telecom Italia weighing on the sector. Material names are also a laggard, in-fitting with price action in the base metal complex, while Elekta (-8.8%) shares plummeted on disappointed figures.

Top European News

• Panasonic Plans Post Brexit Move From London to Amsterdam
• Astaldi Bonds Fall After Report Lenders Seeking Restructuring
• German Unemployment Drops Further as Companies Signal Optimism
• French Minister Calls for Patience on Impact of Macron Reforms

In Currencies, the GBP saw some loss of momentum on less positive Brexit talk from Germany’s Finance Minister who is unsure whether there will be a withdrawal agreement and doesn’t rule out a disorderly UK departure from the EU, but Sterling remains supported and not too discouraged by weaker than expected mortgage and consumer credit data. Cable is holding around the 1.3000 level vs just shy of 1.3050 at best, while Eur/Gbp has continued its retreat from close to 0.9100 peaks on Wednesday through 0.9000 and testing the 21 DMA around 0.8977. CAD – The Loonie continues to benefit from NAFTA deal prospects and a possible Friday accord along the lines of the US-Mexico agreement, while firm crude prices are also supportive as Usd/Cad trades within a 1.2935-00 range ahead of Canadian GDP data for Q2. EUR – The single currency has retreated after another rally above 1.1700 vs the Greenback on broadly benign German state CPI and Spanish inflation data, but remains underpinned at the top of a daily cloud formation between 1.1655-81. EM – Another day, but more misery for the region’s 2 whipping boys as the Lira and Rand  depreciate further – Usd/Try now over 6.6000 and Usd/Zar around 14.6500. Elsewhere, the Peso has pared some of its NAFTA-related gains to trade below 19.0000 vs the Buck, but its Argentine counterpart is sharply underperforming even though several forms of intervention were deployed on Wednesday to try and stop the rot – Usd/Ars closed almost 8% higher yesterday just under 33.8980.

In commodities, WTI and Brent futures trade higher following the larger than expected draw in DoE crude inventories while concern looms of tightening supply by year-end. According to the WSJ, Iran’s oil exports are expected to drop from 2.7mln BPD in June to 1.5mln BPD in September ahead of US sanctions (coming into effect on November 5th). Otherwise, news flow for the complex has remained light thus far. Elsewhere, gold is lower on the day, having tested USD 1200/oz to the downside and currently close to the lower end of the range, while copper is on the backfoot amid underperformance in its largest consumer, China.

Looking ahead to today we’ve got arguably the most significant data release of the week with the July personal income and spending reports. As part of that, we’ll get the core PCE reading where the market expects a +0.2% mom outturn to result in the first +2.0% yoy (+1.99% unrounded) reading since April 2012. For previously dovish-leaning policymakers such as Chicago Fed President Evans, hitting the Fed’s official inflation target would be an important milestone and add to their confidence that the Fed can continue on its gradual course of rate increases. So worth watching out for.

US Event Calendar

• 8:30am: Personal Income, est. 0.4%, prior 0.4%; Personal Spending, est. 0.4%, prior 0.4%
  • Real Personal Spending, est. 0.2%, prior 0.3%
  • PCE Deflator MoM, est. 0.13%, prior 0.1%; PCE Deflator YoY, est. 2.3%, prior 2.2%
  • PCE Core MoM, est. 0.2%, prior 0.1%; PCE Core YoY, est. 2.0%, prior 1.9%
• 8:30am: Initial Jobless Claims, est. 212,000, prior 210,000; Continuing Claims, est. 1.73m, prior 1.73m
• 9:45am: Bloomberg Consumer Comfort, prior 58.6

DB’s Jim Reid concludes the overnight wrap

The US equity market continues to devour all that’s put in front of it and hatching new records on a regular basis. This week it seems no news continues to be good news with the S&P 500 (+0.57%) and NASDAQ (+0.99%) climbing to fresh new highs last night and the DOW (+0.23%) cutting the gap to the all-time highs to less than 2%. It’s hard to know if this is just liquidity slowly coming back to markets post the holidays or something else completely but there’s hardly  been a plethora of newsflow for markets to feed off this week aside from the few bits and bobs we’ve touched on below. In fact the moves are coming despite a weak session for EM and specifically Turkey and Argentina with the Lira and Peso both depreciating sharply again.

Indeed the Lira closed last night -3.0% at 6.469 which is now weaker than where it was on the Friday 3 weeks ago (6.4323) when the panic spread across the market. The only softer closing level was on the following Monday (6.884 but that actually included a big intra-day rally back from the Asian wides. Yesterday was the third day in a row the Lira has weakened (post domestic holidays) while Turkey’s 5yr CDS was also +14.4bps wider and touched 500bps again (recent high was 535.0 on Aug 13). In fairness there didn’t appear to be one obvious catalyst for yesterday’s move, although the weakest economic confidence reading since 2009 didn’t help, and likewise the CBT’s move to reinstate borrowing limits on overnight transactions failed to inspire confidence.  Instead of addressing its fundamental imbalances by executing orthodox policies like conventional rate hikes and/or going to the IMF, the CBT continues to tweak its other, unconventional policy tools. The move to tighten interbank liquidity comes only two weeks after the central bank took the exact opposite step.

However, the tough day for the Lira was overshadowed by the steep depreciation in the Argentine Peso, which dropped 7.55% versus the dollar to a new all-time low of 33.97. The currency traded at 18.6 at the end of last year – a 45.3% depreciation to now. The immediate catalyst was President Macri’s request for the IMF to speed up disbursements under its current bailout program. Argentina had received $15bn in June and is due for another $3bn next month, but it is now unclear if that will be enough to stabilize the government’s finances amid persistent reserve drain. Policy interest rates are at 40.0%, but, with inflation rising to 31.2% in July, real rates are not tight enough to encourage capital inflows.  The economy is likely to contract this year, and the benchmark Merval stock index is down 27.6% since its January peak in local currency terms, and over 56% in USD terms.

This morning in Asia, equities are trading mixed after paring back earlier gains. Across the region, the Nikkei (+0.16%) and Kospi (+0.05%) are modestly up while the Hang Seng (-0.61%) and Shanghai Comp. (-0.81%) are down as we  type. Futures on the S&P and treasuries are little changed. Meanwhile the US / Canada NAFTA talks seems to be tracking relatively well, with Canadian Foreign Minister Freeland indicating she had productive discussions with US trade representative Lighthizer and there was “a lot of goodwill” from both sides. She added that officials from both sides “will be meeting until very late tonight”. Earlier on, the Canadian PM Trudeau was also cautiously upbeat as he noted “…there is a possibility of getting (a deal) by Friday”, while adding the caveat that “…it’ll hinge on whether or not there is ultimately a good deal for Canada”. As for data, Japan’s July retail sales rose for the ninth straight month and was above market at 1.5% yoy (vs. 1.2% expected).

Looking ahead to today we’ve got arguably the most significant data release of the week with the July personal income and spending reports. As part of that, we’ll get the core PCE reading where the market and our US economists expect a +0.2% mom outturn to result in the first +2.0% yoy (+1.99% unrounded) reading since April 2012. As our colleagues noted, for previously dovish-leaning policymakers such as Chicago Fed President Evans, hitting the Fed’s official inflation target would be an important milestone and add to their confidence that the Fed can continue on its gradual course of rate increases. So worth watching out for.

It would be nice if that data wakes bond markets up as we stumbled upon a fairly interesting stat yesterday about Treasuries. The 10y yield has traded in a remarkably low 21bps intraday range so far this quarter which is tracking to be the lowest for a quarter since 1965 when we only had closing level data. For some perspective the average quarterly range since 2010 is 62bps. This is slightly biased by yields being as low as they are and us only being 2/3rds of the way through the quarter but the MOVE index, which should adjust for low yields, backs up the point somewhat with the index only a few points off the YTD low at 49.9 (low was 45.3 last month in this quarter) compared to the average of 53.8 in 2018 and all-time low of 44.0 made in November last year.

To be fair, Treasuries and wider bond markets were a bit weaker yesterday. The 10y Treasury closed 0.4bps higher at 2.884% while yields in Europe – with the exception of Italy (more on that shortly) – were 2 to 3bps higher.

Coming back to Italy, the relative outperformance for BTPs (-6.2bps) and the FTSE MIB (+0.68%) yesterday appeared to be down to a flurry of headlines initially reported in Italian press La Stampa suggesting that the Italian government  was reaching out to the ECB for a new round of QE designed to defend Italy’s debt from financial speculation (according to Bloomberg) and also avoid a downgrade. The story was later downplayed by Deputy PM Di Maio although this does follow the recent Bloomberg story about Conte winning a pledge from US President Trump about also buying up Italian debt. To be fair these stories feel like a distraction and noise with the much bigger near term issue for markets being the budget proposal next month.

Elsewhere, the other relatively big mover in FX yesterday was Sterling which rallied as much as +1.39% from the lows before closing +1.19% higher. This followed comments from EU Brexit negotiator Michal Barnier that “we are ready… to propose a partnership like there has never been before with any other third country.” This is consistent with the existing EU offer from March and the readout from Barnier’s meeting last week with UK Brexit Minister Raab. It isn’t new news as the EU still has red lines that haven’t changed. Nevertheless, the market took the news as a positive signal that it lowers the odds of a no-deal Brexit scenario. UK rates sold off as well, as the positive rhetoric raised the odds of further BoE action. The market moved up its pricing for the next rate hike to May from August 2019. Meanwhile the German Finance Minister Scholz seems to have maintained his conciliatory tone as he hopes “we can proceed fast” in negotiating a “manageable exit”.

Meanwhile, the main data print yesterday came in the US with the Q2 GDP revised up 0.1 pp to 4.2% qoq saar. Capital expenditures and net exports both improved slightly, more than outweighing a slight downward revision to consumer spending. This confirms the strong trend in the first half of the year, and our economists maintain their forecast for 3.1% qoq growth this quarter. Separately, pending home sales declined 0.7% mom in July and MBA mortgage applications fell last week. Both are noisy series and shouldn’t detract from the economy’s strong underlying trends.

Looking at the day ahead, apart from the aforementioned US core PCE print, we’ll also get flash August CPI for Germany at 13:00 London today (2.1% yoy expected). That will be preceded by German regional CPI data and the official August unemployment rate. At 10:00 London time, the final Eurozone consumer confidence reading for August will be released by the European Commission.

In the UK, we’ll get mortgage, money supply, and consumer credit numbers for July. Second quarter Canadian GDP growth will print later this afternoon, and is expected to show healthy growth of 3.1% qoq saar. Away from the economic data, EU foreign affairs ministers are due to meet at a conference (continuing into Friday) to discuss topics including the Middle East, trans-Atlantic relations, the Iran nuclear deal and North Korea.

 

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Russian Foreign Minister Sergei Lavrov Lavrov has warned the West not to interfere in Syrian and Russian forces engaged in antiterror actions in the northwest province of Idlib: “I hope our Western partners will not give in to [rebel] provocations and will not obstruct an antiterror operation,” he said.

This as Reuters reports that a planned “phased offensive” is imminent and as massive Syrian Army reinforcements and military convoys have been filmed this week heading toward the last major anti-Assad holdout. 

Reuters reports based on Syrian pro-government allied sources:

The offensive would initially target southern and western parts of the insurgent territory, but not yet Idlib city, said the source, an official in the regional alliance backing Assad.

“The final touches for the first stage will be completed in the coming hours,” the official added, without saying when it would start.

Lavrov called Idlib a “festering abscess” that needed to be “liquidated” of terrorists and jihadists, according to reports. 

“I hope our Western partners will not give in to [rebel] provocations and will not obstruct an antiterror operation,” he said in comments made Wednesday.

Mention of “provocations” is a reference to Russian assertions this week that the al-Qaeda group that controls Idlib, Hay’at Tahrir al-Sham, is planning to stage a “chemical attack” incident in order to blame Syrian and Russian forces, in the hopes that the West will intervene militarily against Damascus. 

Russia now says it has staged its largest naval build-up in the Mediterranean since its entry into the war at the invitation of Damascus in 2015. 

Lavrov further mentioned Turkey in his Wednesday statements, saying Moscow was in contact with Turkey and the U.S. on the situation in Idlib, noting there is a “full political understanding” between Moscow and Ankara, though the Russian FM didn’t provide details. 

Meanwhile, NATO has confirmed the large Russian battleship and naval presence off Syria’s coast, and has called on all external powers to exercise “restraint”; and a United Nations spokesman has warned that “up to 800,000 people could be displaced and that the number of people who are in need of humanitarian assistance.”

In statements made on Tuesday the US State Department reiterated to reporters the United States “will respond to any verified chemical weapons use in Idlib or elsewhere in Syria … in a swift and appropriate manner.”

Spokeswoman Heather Nauert said further that senior U.S. officials have engaged with their Russian counterparts “to make this point very clear to Damascus” — that chemical weapons “will not be tolerated” — and could meet with massive military response. She also repeated that Assad would be held responsible.

Russian state sources on Wednesday cited the Russian Defense Ministry to say it has detailed intelligence confirming militants in Idlib are planning a chemical “provocation”. Per RT News:

The Russian military has received information from several sources in Idlib Province that “a large supply of poisonous agents has been brought to the city of Saraqib on two trucks from the village of Afs,” Major-General Aleksey Tsygankov, head of the Russian Center for Reconciliation of the opposing sides in Syria, said in a statement.

The chemicals were delivered to an arms depot, used by the militant group Ahrar al-Sham, “accompanied by the eight members of the White Helmets organization,” Tsygankov said, adding that the cargo was met by two high-ranked Ahrar al-Sham commanders.

Russia says that as Idlib’s al-Qaeda groups face imminent defeat, they plan to stage an event to gain the attention of the West, which has already promised it will hit back at Syrian government positions. 

Analysts have predicted the Idlib campaign will be the bloodiest and longest grinding final battle of the war. 

But what should by now be obvious to all is this: Assad, on the verge of total victory, has absolutely no incentive whatsoever to commit the one act that would ensure his own demise after emerging victorious after seven years of war.

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Authored by Marco Carnelos via Middle Easat Eye,

A recent editorial in the Washington Post, written by columnist David Ignatius, offers a shining example of the United States’ difficulty in understanding today’s world and, most of all, the Arab world.

Ignatius conveys a genuine concern for “The Unintended Consequences of US Disengagement in the Middle East”, quoting worried comments made by a member of the Arab elite allied with the US.

The journalist expresses uneasiness about the fact that “American power and values won’t matter the way they once did”. His position is steeped in the typical intellectual milieu of American exceptionalism, a position based on the hardwired assumption that the condition for an ideal existence and a stable world order are ensured only when American power and values are strong and shared.

Binary Thinking

The article emphasises that, at the moment, there would be “…no constituency in the US for…doing more in the Middle East”. This alleged disengagement apparently began with the Obama administration, but now is strongly attributed, and blamed on, Trump. Leaving aside the fact that, based on recent history, a significant part of Middle Eastern population would object to the “United States doing more in the Middle East”, it is what follows that is really astonishing.

Quoting the same Arab source, Ignatius affirms that US disengagement could imply that Arab nations will need to do things on their own. So far nothing wrong, except that, for Ignatius and his source, Arab nations going it alone has only one meaning: “closer relations with Russia and China”. Another depressing and frustrating example of Western binary thinking.

It could be argued that the columnist’s conclusion is neo-colonial, orientalist, or too patronising; but what appears incontrovertible is that it does not put an inch of trust in Arab will and capabilities to find their own way in managing their own foreign policy in their own region and in the rest of the world. Its inescapable geopolitical corollary seems to be that distancing yourself from the United States has only one possible implication, getting closer to Russia and/or China. There is no alternative, no middle way.

Hold fast, the beauty has yet to come.

So Absurd

The American columnist adds:

“Maybe I’m a foreign policy dinosaur. But I still want a modernizing Middle East that shares America’s value, and I regret our loss of influence – and even more, the way that decent people and ideas suffer when the umbrella of US hegemony is withdrawn and discarded…. I’ve seen new examples of bad decisions when leaders decide that Uncle Sam doesn’t matter.”

This set of statements is so absurd that it deserves to be analysed, sentence by sentence: “Maybe I’m a foreign policy dinosaur.” At least, Ignatius seems assaulted by some doubt. This is probably the most truthful sentence in his whole article.

“I still want a modernizing Middle East that shares America’s value…”. Again, in accordance with the principle of US exceptionalism, the author conveys the impression that only if it will embrace American values will the Middle East be able to modernise itself.

“…I regret our loss of influence – and even more, the way that decent people and ideas suffer when the umbrella of U.S. hegemony is withdrawn and discarded…” . 

Losing influence is part of an historical cycle that has occurred to every great nation. This process could be accelerated when this influence is badly and unwisely used, as appear to be have been the case for the United States in the last 25 years.

The concept that decent people and ideas suffer when there is no American umbrella is affirmed as a scientific principle, a dogma; it is, again, a manifestation of US exceptionalism that deserves no further comment. Nonetheless, Ignatius’ candour must be recognised. He uses the concept of US hegemony; he does not even try to deploy the over-abused term, “US leadership”, that in such cases provides the much-needed politically correct cover for US imperial policymaking around the world.

“I’ve seen new examples of bad decisions when leaders decide that Uncle Sam doesn’t matter.” This is extraordinary. Its corollary seems to be that when Uncle Sam is not around only bad decisions are taken. But what is even more extraordinary is one of the examples Ignatius uses to justify his preposterous statement: the sequence of mistakes made ultimately by Saudi Crown Prince Mohammed bin Salman (MbS).

He mentions specifically the crisis MbS has triggered with Canada, following the crackdown on female activists after having formally allowed women to drive in the kingdom. The bloody misadventure in Yemen or the detention last year of many Saudi businessmen who were released only after their payment of a billionaire’s ransom, could be added to the list.

The Inconvenient Truth

The inconvenient truth is that these bad decisions by MbS were not taken because Uncle Sam does not matter, but precisely for the opposite reason. It was the unconditional support that the Saudi crown prince has felt coming from Washington that has been pushing him to act so recklessly.

US administrations, under Obama and now Trump, have been, and still are, providing logistical and intelligence support for the Saudi Air Force in Yemen, ignoring the devastating effects of its bombing campaign; Riyadh was the first foreign capital visited by Donald Trump whose administration has maintained a deafening silence during the jailing of Saudi businessmen and the crackdown on women activists.

The evidence points to such bad decisions being taken not because the Russian or Chinese presidents are being emulated as behaviour models, as Ignatius’ article seems to imply, but simply because Uncle Sam appears to matter, or matters too much.

If a sober, experienced, widely read and moderate mainstream American columnist like David Ignatius is able to misread and misinterpret in such a fundamental way events in the Middle East, what hope is left for a different US attitude in the region and in the rest of the world?

However, it is the arrogant conclusion to which Ignatius arrives that best mirrors the increasing American problem in understanding and dealing with almost anybody beyond its own border: “But guess what? Even in a world where the United States’ military and diplomatic power seems to be in retreat, there is an element of the US-led order that’s as strong as ever – our dominance of the global economy…In the still-global economy, going it alone really isn’t an option, folks.”

In other words, if you don’t agree with us, we will simply impose draconian sanctions to bring down your economy.

The American Problem

What’s wrong in Ignatius’ and, more worringly, in Washington’s approach to the world, is that it is precisely this more and more unacceptable “imperial” feature of bullying dominance that is pushing some nations to search for an alternative to the US-led order.

The problem is not just joining Russia or China in a sort of unlikely alliance, but that any attempt to go it alone appears to be intolerable. This mistaken view is not just held by Trump and some of his supporters, but shared widely among the mainstream US establishment.

It is the American propensity to apply sanctions to anybody disagreeing with its view of the world, and the willingness to use its financial leverage based on the dollar as reserve currency, which is stimulating others (including some Europeans) to reflect seriously on the cost of maintaining – on current terms – their relationship with the United States of America.

It is, ultimately, America’s stubborn refusal to accept that not all the inhabitants of this planet love to shape their life to the American model that is triggering these increasing misunderstandings and widening the current divide.

Although US and Western values are probably the best available to mankind, maybe the time has arrived for a halt in US manifest destiny aimed at transforming all the people inhabiting planet Earth into Americans. It could be discovered, for example, that if America pauses for a while in trying to impose its own way of life to the whole planet, nothing catastrophic will occur.

On the contrary, nations that are challenging or abandoning the US-led order are too quickly labelled a threat, too dismissively portrayed as a national security problem; any event is too easily framed as a conspiracy against the West and its liberal order by the usual suspects: Russia, China and Iran.

Sober discussion and objective analysis of any fact has become almost impossible. There is a clear risk if such a negative spiral is not stopped soon, a fatal miscalculation and a subsequent conflict with unpredictable consequences could follow.

The sooner the US turns away from this neo-McCarthyite mind-frame, and tempers its own sense of exceptionalism, the better, for the sake of the American people, and for the rest of humankind.

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For the first time, FX traders are grappling with wilder swings from China than Europe.

As Bloomberg notes, the offshore yuan has been more volatile than the euro all month after first overtaking the shared currency in July, according to 30-day realized data. And while euro uncertainty remains relatively bracketed between 6 and 8 for the last two years, yuan volatility has soared from 2 to almost 9 – the highest since 2015’s devaluation.

The narrow spread (lower pane) shows China is moving to a more “flexible arrangement” when it comes to managing its currency, Bank of America analysts wrote in a note, predicting the yuan will weaken more this year.

For now it appears the temporary respite from Yuan’s freefall, that ‘mysteriously’ occurred right before the US-China trade talks, has begun to lose momentum.

But while Yuan has become increasingly volatile, the realized volatility of gold (when priced in yuan) has collapsed to record lows…

Perhaps supporting the idea that the Chinese care more about the ‘stability’ of the yuan relative to gold then to the arbitrary US dollar fiat money.

So is China losing control? Or is this just as they planned?

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