Month: September 2018

Annual spending growth outpaced annual income growth for the 7th month in a row in August but month-over-month, incomes rose less than expected as The Fed’s favorite inflation indicator modestly disappointed MoM.

Against expectations of a 0.4% rise MoM, income rose 0.3$, and while spending growth MoM rose 0.3% as expected, growth has been slowing for 6 months…

And while growth YoY continues in both, August saw it notably slowing… This is the 7th straight month that spending growth has been at or above income growth…

Wages and salaries rose 0.5% MoM, the most since January, the August report showed. Real disposable income, or earnings adjusted for taxes and inflation, increased 0.2% for a second month. 

Private worker wages rose at 5.3% YoY in August, up from +5.1% in July.

Which held the savings rate at its lowest since Dec 2017…

And finally, The Fed’s favorite inflation indicator – Core PCE – slowed modestly back below the mandated 2.0% YoY

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Tesla shares have continued their plunge this morning, down nearly 13% from the Thursday close in the aftermath of the SEC securities fraud lawsuit aimed at Elon Musk directly, as investors realize that in addition to seeking unspecified monetary penalties, the regulator will ask a judge to bar Musk from serving as an officer or director of a public company.

Predictably, the Tesla Board doubled down in its defense of the embattled CEO, saying that it is “fully confident in Elon, his integrity, and his leadership of the company”, however doubt is creeping that Musk may soon no longer be part of the company that made him a household name, and with it come estimates of just what Musk’s value is to Tesla.

In a note titled “Lawsuit Secured”, Barclays tries to calculate precisely what the Musk “premium” is, which it calculates at $130, and writes that “should the SEC be successful in barring Mr. Musk from serving as an officer or director, investors would focus back on the value of Tesla as a niche automaker, rather than a founder-led likely disrupter of multiple industries.“

In the sarcastically-titled note from analyst Brian Johnson, Barclays first breaks down the key aspects of the the lengthy SEC complaint, which appears to have been based on Tesla emails, texts, and perhaps interviews with Mr. Musk and board members, and which alleges that Mr. Musk’s tweets on Aug. 7 were “false and misleading.”

Explaining how the lawsuit will likely play out, Barclays writes that Musk, who reportedly declined a settlement with the SEC, is entitled to a jury trial, plans a vigorous defense around his claim that he acted, as his statement later on Thursday noted “in the best interests of truth, transparency and investors”. As such, and based on Musk’s comments before and after the notice, a defense along the lines that he didn’t intend to deceive investors as he ‘believed” that his contacts with the unnamed sovereign wealth fund meant that funding was indeed likely to be secured. Indeed, Musk issued a statement Thursday that:

“This unjustified action by the SEC leaves me deeply saddened and disappointed,” he said in the statement. “I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way.”

And on August 13 Mr. Musk posted on the Tesla blog:

I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving. This is why I referred to “funding secured” in the August 7th announcement

However, SEC will likely argue the civil standard for ‘scienter’ for 10(b) violations is one of recklessness, not intent to deceive. Barclays explains:

Last week, we hosted a conference call with Daniel Walfish, a lawyer at Walfish & Fissell with 5 years experience at the SEC’s Enforcement Division. During the call, Mr. Walfish laid out the key elements of a 10(b)(5) violation include that the statement was material (which the go private tweets were) and were made with “scienter” – which is not just full blown intent but includes recklessness. Recklessness was described by Mr. Walfish as behaviour that departed from the standard of ordinary care in such an extreme way that the conduct represented a danger to the market.

This likely explains why throughout the SEC complaint, the SEC claims that “Musk Knew or Was Reckless in not Knowing that His Statements were False and Misleading.

Furthermore, as Johnson notes, by choosing to take its case to the SDNY, as opposed to pursuing a negotiated settlement, the SEC is “unlikely to settle for less than a offer/director bar for some extended period of time (as opposed to just modest monetary penalties). As such, while Tesla may still have value as a niche automaker, the premium the shareholders have been willing to pay for future founder-driven business optionality is likely to dissipate.”

But what is the Musk premium? In attempting to calculate this key intangible to the Tesla stock price, Barclays writes that one of the key tenets of confidence of Tesla bulls is that the Model 3 and its successors will be the iPhones of cars.

We have consistently maintained that the bull case around Tesla is more faith-based than fundamental valuation, and two key elements of the faith are that:

• Tesla will be a dominant market share player in the mass market auto industry, similar to the iPhone in the cell phone business. And this was supposed to become clear to us non-believers with the Model 3, with its over 400k reservations for a “$35,000” car propelling Tesla into the heart of the global auto market (call it a “Camry killer”).
• Tesla will disrupt other industries, including trucking/transport, mobility, energy generation/ storage, and even insurance – not to mention whatever the company sets its sights on in the future.

What does that mean in monetary terms? As Johnson explains, his below-market valuation of $210 gives credit to Tesla for becoming a large niche player (840k units), “but even that discounted back gets us to only $143 in current value – meaning even we accord some small probability to becoming a far larger automaker and beyond. Inherent in even a $276 stock price is thus over $130 of value for what the market clearly continues to ascribe higher probabilities to the ‘blue pill’ outcomes.“

Translated: while the 12% overnight drop is bad, should Musk be barred from operating at Tesla, the downside is at least another 50%, with the stock eventually settling around $140.

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Despite the staggering revelations regarding his pre-Mueller probe conduct that came to light a week ago, Rod Rosenstein looks set to keep his job – for now, at least. But while President Trump has insisted that he doesn’t believe the report – which alleges that Rosenstein tried to recruit cabinet members for a palace coup and even suggested surreptitiously taping Trump in the Oval Office – the truth of the matter may soon be exposed thanks to House Oversight Committee Chairman Bob Goodlatte, who on Thursday formally subpoenaed the DOJ to obtain copies of the incriminating memos, and other related materials, purportedly penned by former Deputy FBI Director Andrew McCabe. The NYT and other news outlets cited the memos as the original source for their story, though none of them actually obtained physical copies of the document – instead, they relied on “descriptions” of the memos’ content conveyed by third parties who had reportedly seen them.

According to Fox News, Goodlatte sent a letter to Attorney General Jeff Sessions Thursday notifying him of the subpoena, which was issued as part of a joint investigation with House Oversight Committee Chairman Trey Gowdy. Goodlatte is giving the DOJ – which has been notoriously reluctant to comply with Congressional subpoenas during the Trump era – a deadline of Oct. 4 to comply. The initial Times report claimed that McCabe had left copies of his memos at the FBI after he was fired earlier this year.

“Given the Department’s ongoing delays and/or refusal to produce these documents, I am left with no choice but to issue the enclosed subpoena to compel their production,” Goodlatte wrote to Sessions.

In addition to requesting all documents and communications pertaining to the memos, Goodlatte also subpoenaed the file  on the first FISA Court application requesting a wiretapping warrant on Trump Campaign advisor Carter Page, a warrant that was at the heart of the Obama Administration’s suspected conspiracy to wiretap and investigate the presidential nominee of its rival party, according to the Washington Examiner. 

Rosenstein has denounced the NYT report as “factually incorrect” while insisting that he never said or did the things he was accused of doing. Other anonymous sources who were reportedly in the room during a meeting between Rosenstein and McCabe where these issues were discussed were quoted saying Rosenstein made the comment about wiretapping the president in jest.

McCabe’s lawyer, Mark Bromwich (who notably made an appearance during Thursday’s Kavanaugh hearing) acknowledged the existence of the memos in a statement last week.

“Andrew McCabe drafted memos to memorialize significant discussions he had with high level officials and preserved them so he would have an accurate, contemporaneous record of those discussions,” McCabe’s attorney Michael Bromwich said in a statement. “When he was interviewed by the Special Counsel more than a year ago, he gave all of his memos – classified and unclassified – to the Special Counsel’s office. A set of those memos remained at the FBI at the time of his departure in late January 2018. He has no knowledge of how any member of the media obtained those memos.”

The memos, which were taken by McCabe, reportedly include details from debriefing sessions with former FBI Director James Comey about his meetings with Trump. They were intended to preserve details that may have been used in an obstruction case against the president.

Fox News reported that the meeting where Rosenstein purportedly made his comments took place on May 16, 2017. The meeting was attended by several DOJ officials, including McCabe and former FBI counsel Lisa Page, who was famously fired from the bureau after her anti-Trump text messages with former lover Peter Strzok were exposed. Notably, Rosenstein appointed Special Counsel Robert Mueller the day after the meeting. The New York Times reported at the time that it had confirmed the details of the memos – the contents of which had been shared with the paper through an intermediary – with multiple people who had been briefed on their content.

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Authored by Maria Yavuz via CoinTelegraph.com,

Gold-based monetary system Kinesis aims to bring price stability to the world of cryptocurrency and to prevent the decrease of its value. The company says it has already attracted interest from key players in the gold industry, which is estimated at $6.8 trillion only on London’s gold market (70 percent of the global trading volume).

image courtesy of CoinTelegraph

After the gold standard that once defined the value of currencies was abandoned in the 20th century, the monetary system became dependent on central banking policies. The Kinesis team decided to create its own “efficient, secure and fair monetary system” based on two of the most stable commodities in the world — gold and silver.

“There is [approximately] $15 trillion in gold traded every year, creating exceptional but untapped potential for investment and exchange if gold can be remonetized. Adding a yield to this exchange multiplies this potential exponentially,” says Thomas Coughlin, CEO of Kinesis.

Kinesis offers digital currencies based 1:1 on allocated physical gold (KAU coins) and silver (KAG coins). When users purchase Kinesis currencies, they actually purchase real metal. The ownership of the gold is digitized with blockchain technology, which allows the user to hold or transfer currency from their Kinesis e-Wallet.

The Kinesis debit card allows the owner to make the instant conversion of KAU and KAG into fiat currency and spend cryptocurrency all around the world. The company states that, unlike other cryptocurrencies, the transactions through the Kinesis system will take just two to three seconds as a result of their bespoke fork of the Stellar network, which is able to withstand over 3,000 transactions per second. Kinesis believes KAU and KAG currencies could be used in day-to-day purchases  like buying a cup of coffee or even buying a car. Besides paying the bills, the Kinesis Monetary System can be used for managing international payments with lower transfer rates offered by banks and other international payment services.

Another option offered by the network is the ability to trade holdings on the Kinesis Blockchain Exchange. The cryptocurrencies can be transferred back to physical gold or silver as the system generates a 0.45 percent fee when these are transferred between the holders, accumulating in a pool to be distributed back to users of the system in the form of a yield.

Kinesis was founded by the Allocated Bullion Exchange (ABX), the world’s first electronic, institutional bullion exchange for physical precious metal. Which gave the new blockchain-based fintech company an exceptional start: extensive infrastructure and a fully operational exchange built for the trade and storage of physical bullion in seven locations around the world. The new — but experienced — startup is able to “bring back a truly decentralized, [digitized] stable asset, based on blockchain technology,” Kinesis says.

ITO Launch

Kinesis is currently in the public sale phase of their Initial Token Offering (ITO) of its Velocity Token (KVT), which will be the first cryptocurrency made available by the startup’s team. KVT is a utility token and is not backed by a physical asset but rather a whole monetary system.

With KVT, investors can get a share of the transaction fees generated by the system (maximum 20 percent). This income is distributed to holders of 300,000 KVT, and company promises there will be no future dilution.

According to Kinesis, there is a high demand of its first tokens. Kinesis says it raised over  $50 million just in their presale period by selling over 55,000 KVT.

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Brett Kavanaugh’s impassioned testimony to the Senate Judiciary Committee transfixed a nation on Thursday as Wall Street traders turned away from their terminals to tune in, causing trading volumes to plummet.

The SCOTUS nominee’s staunch rebuttal of the allegations levied by Dr. Christine Blasey Ford that he sexually assaulted her 36 years ago when they were both teenagers apparently convinced the handful of wavering moderate Republicans to throw their support behind Kavanaugh, as reports emerged last night that the Senate has the votes to confirm Kavanaugh, and that Senate Judiciary Committee leaders intend to hold a vote to recommend Kavanaugh first thing Friday morning, with the Senate confirmation following “in the coming days” (according to Mitch McConnell) – just in time for lawmakers to embark on an October campaigning blitz ahead of the Nov. 6 midterm vote.

According to Bloomberg, all eyes are three senators who have been undecided: Susan Collins of Maine, Lisa Murkowski of Alaska and Jeff Flake of Arizona. Flake told reporters he was undecided and the other two have declined to say where they stand. Meanwhile, Bob Corker of Tennessee said yesterday that he has decided how to vote – though he has yet to reveal his intentions. Meanwhile, Democratic Sen. Joe Manchin has been meeting with Republicans about possibly voting for Kavanaugh. “We’re still talking,” Manchin said.

So, with Republicans reportedly on the cusp of confirming the long-awaited fifth vote that would cement a conservative majority on the nation’s highest court for the next generation, and with President Trump having voiced his unequivocal support for his nominee after wavering earlier in the week…

Judge Kavanaugh showed America exactly why I nominated him. His testimony was powerful, honest, and riveting. Democrats’ search and destroy strategy is disgraceful and this process has been a total sham and effort to delay, obstruct, and resist. The Senate must vote!

— Donald J. Trump (@realDonaldTrump) September 27, 2018

…Online betting odds that Kavanaugh will be confirmed – which had dropped during Ford’s testimony Thursday morning – rebounded sharply on Friday, showing that investors overwhelmingly expect Kavanaugh will fill the seat once held by retiring Justice Anthony Kennedy.

However, the American Bar Association (the US legal world’s largest organization) has continued to oppose Kavanaugh’s confirmation, and on Thursday evening, it issued a statement asking the GOP to delay the vote on Kavanaugh until the FBI could conduct a more thorough investigation, with ABA President Robert Carlson urging the Senate to abide by its duty to “advise and consent’.

“The basic principles that underscore the Senate’s constitutional duty of advice and consent on federal judicial nominees require nothing less than a careful examination of the accusations and facts by the FBI,” ABA President Robert Carlson wrote in a letter to Chairman Charles E. Grassley (R-Iowa) and ranking committee Democrat Dianne Feinstein (Calif).

The letter, which is unlikely to sway Republicans, said that an appointment to the Supreme court “is simply too important to rush to a vote.” “Deciding to proceed without conducting an additional investigation would not only have a lasting impact on the Senate’s reputation, but it will also negatively affect the great trust necessary for the American people to have in the Supreme Court,” Carlson wrote in the letter, obtained by The Washington Post.

Kavanaugh touted his good standing with the ABA during Thursday’s hearing, per the Washington Post.

As part of its review of Kavanaugh’s qualifications, the ABA’s Standing Committee on the Federal Judiciary found that Kavanaugh  “enjoys an excellent reputation for integrity and is a person of outstanding character,” contributing to its unanimous “well-qualified” rating. Kavanaugh and Graham together alluded to the ABA investigation at least three times Thursday.

Also calling for a delay to the vote was Harvard Law Professor Alan Dershowitz, who has often appeared on cable news networks to defend Trump, per Fox News.

Also calling for an FBI probe was Harvard Law School scholar Alan Dershowitz, often lauded by President Trump for his criticisms of the the probe into Russian meddling in the 2016 election.  “Maybe we can get closer to the truth, although that is not certain,” Dershowitz wrote in a Fox News opinion piece. “But right now there are too many unanswered question[s] to bring the confirmation of Kavanaugh” to “a vote of the Judiciary Committee as scheduled on Friday, much less to a vote of the full Senate.” It is “possible that one of them is deliberately lying. Right now, there is no way of knowing for certain, which is why the FBI needs to talk to the judge’s accusers and others.”

Though even WaPo conceded that the ABA’s pleas were “unlikely to sway Republicans.”

Meanwhile protesters are already gathering on both sides of the aisle. Should Kavanaugh be confirmed, it could lead to another escalation in the extreme ideological anger – and violence – that has gripped the nation over the past two years.

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What started off as a sleepy session after a day in which US traders ignored the market and focused their attention on the Kavanaugh confirmation hearing, resulting in a 50% drop in trading volumes, quickly escalated with risk-off and a sea of red quickly dominating the board in reaction to Italy settling on a 2.4% deficit/GDP target, which in turn led to a bloodbath for Italian assets. 

​​

Amid the Italian budget chaos, reports initially suggested that President Mattarella had asked Economy Minister to not resign; Tria then followed up these reports by stating that he will stay in the position to avoid ‘chaos’. Italy’s new budget sees debt/GDP to fall in 2019 as according to League lawmaker Bagnai. Italian Deputy PM Di Maio said that the new budget includes €15BN in investments, and he is not worried about the market reaction and spread. When asked about the EU rejecting their budget Italian Deputy PM Salvini said that “they will press ahead”

Observing Italy’s defiance, Europe’s Stoxx 600 Index dropped, led lower by the Italian FTSE MIB which tumbled -3.8%, the biggest one day drop since June 2016, led by the Italian bank index which plunged by 6.8%.

Italian BTP futures gapped lower, with cash 10y yields higher by ~36bps, the biggest jump in 4 months, with the BTP curve bear flattening.

Italy’s planned fiscal deficit of 2.4% for 2019 is “a much more expansionary budget that not only risks some push-back by the European Commission, but also may risk seeing both ratings agencies and investors question the Italian government’s debt sustainability,” said ING Bank’s Viraj Patel.

While no sharp activity was observed in FRA/OIS to indicate acute risk, and no large widening of credit spreads either, the action in Italy today is certainly concerning and unless the ruling populist coalition finds a way to soothe markets, it will likely continue into October.

Safe haven bunds rallied from the open and accelerate higher after a surprisingly low core euro-zone CPI, while US Treasury futures dragged towards yesterday’s high.

Amid growing fears that Italy is now in full-blown collision course with Europe, once again threatening the common currency, the Euro accelerated its 2-day selloff, pushing below 1.16, a 3-week low.

Meanwhile in Asia, there was a brief spike higher in yuan due to activity in front-end of the forward curve, with quarter-end and upcoming week-long China market closure cited as drivers.

S&P futures fell to session lows as US traders walked in to their trading desks greeted by a sea of red, and observing the chaos in Italy and certainly the dramatic declines in Italian banks, such as the 7.3% beating Intesa Sanpaolo is taking.

Meanwhile, treasuries and the dollar jumped to the highest level since September 12. The Bloomberg Dollar Spot Index was set to post a second straight quarterly increase for the first time since 2015 as month-end flows supported the U.S. currency.

The pound touched a two-week low after U.K. yearly GDP data missed estimates and the current-account deficit widened more than economists forecast.

There was more cheer in Asia, where the yen’s slide to the weakest level this year amid quarter-end portfolio rebalancing weighed on the currency and helped stoke Japanese stocks as Asian equities advanced from Sydney to Shanghai; Mrs Watanabe was happy as the Nikkei hit a fresh 27 year high, if still 38% below its 38,916 all time high in 1989.

Japanese yields rose after the Bank of Japan paved the way to reduce purchases of super-long bonds. Oil remained on course for the longest run of weekly gains in four months as energy giants to Wall Street banks predicted the return of $100 crude on an impending supply crunch.

In Brexit news, former UK Foreign Minister Johnson called on PM May to scrap her Brexit proposals in which he stated it would leave UK “half in and half out” of the EU and proposed a six-part alternative plan for Brexit. Separately, teports in the Times suggests that Conservative policymakers are struggling to figure out how to counter Jeremy Corbyn’s populist message at their upcoming party conference.

In geopolitical news, a senior Iranian Cleric says US regional bases would not be safe if Washington does something wrong.

As Bloomberg summarizes, political risks have returned to the top of investors’ agenda at the end of a quarter dominated by central banks and emerging-market crises. In Italy, populists won their battle to fund costly campaign promises, while infighting over Brexit is embroiling the U.K.’s Conservative Party ahead of a conference next week. In the U.S., the confirmation of President Donald Trump’s Supreme Court pick, Brett Kavanaugh, has turned toxic amid allegations of sexual assault. Data on consumer spending, income and inflation may return the focus to the American economy later Friday.

Commodity markets were less exciting, with oil trading within a thin range heading into the week’s end, with Brent and WTI hanging just below the USD 82/bbl and USD 72.50/bbl areas. The gold market is also lacking any major catalysts, with the yellow metal languishing around the 6 week lows set in Thursday’s session. The most significant moves in commodities markets has been seen in steel and coke, where Shanghai rebar fell by over 2% and  both materials hit 2 month lows amid speculation that China has shelved blanket production cuts for winter, stoking the flame for more expected output.

Vail Resorts, BlackBerry are due to report earnings. Economic data include U. of Michigan survey, personal spending

Market Snapshot

• S&P 500 futures up 0.02% to 2,920.50
• STOXX Europe 600 down 0.3% to 385.31
• MXAP up 0.3% to 165.37
• MXAPJ down 0.02% to 525.73
• Nikkei up 1.4% to 24,120.04
• Topix up 1% to 1,817.25
• Hang Seng Index up 0.3% to 27,788.52
• Shanghai Composite up 1.1% to 2,821.35
• Sensex down 0.5% to 36,133.04
• Australia S&P/ASX 200 up 0.4% to 6,207.56
• Kospi down 0.5% to 2,343.07
• German 10Y yield fell 2.8 bps to 0.501%
• Euro down 0.2% to $1.1621
• Brent Futures up 0.2% to $81.87/bbl
• Italian 10Y yield rose 2.8 bps to 2.527%
• Spanish 10Y yield rose 1.4 bps to 1.519%
• Brent Futures up 0.2% to $81.87/bbl
• Gold spot up 0.08% to $1,183.81
• U.S. Dollar Index up 0.2% to 95.09

Top Overnight News

• China is preparing to issue a sovereign dollar-denominated bond next month, its first in almost a year, according to people familiar with the matter
• Italy’s bonds may fall at the start of Friday’s trading after the government set next year’s budget deficit target at 2.4 percent, wider than the market originally envisaged.
• Leading indicators for China’s economy show growth continued slowing in September amid the escalating trade war with the U.S. The data suggest the dispute was weighing on economic activity even before the latest round of tariffs, which took effect this week
• Nicky Morgan, who chairs Parliament’s Treasury Committee, threatens to explore new regulations for “market-sensitive polling” unless pollsters overhaul their own standards as lucrative polls conducted in secret for hedge funds, revealed by a Bloomberg investigation into the 2016 Brexit vote, “risk damaging the reputation of U.K. financial markets”
• The U.K. current-account deficit widened more than economists forecast in the second quarter, raising fresh questions about the sustainability of the shortfall as Britain prepares for Brexit
• Swiss asset manager and commodities trader Tiberius Group AG is stepping into the $215 billion digital coin market by offering a new token backed by seven metals in a sale set for Oct. 1

Asian stocks traded mostly higher following a spur in risk-appetite and an upbeat lead on Wall St where bourses ended the day in the green, and Nasdaq outperformed its peers amid the strength in the IT sector, after Apple rallied on the news that JP Morgan sees a 23% upside in their shares. ASX 200 (+0.4%) was lifted by resources and IT names, while Nikkei 225 (+1.4%) outperformed its peers and breached YTD highs to print levels last seen in 1991 amid currency effects and optimistic retail  sales. Elsewhere, Hang Seng (+0.3%) and Shanghai Comp. (+1.0%) also gained as trade concerns faded and the positive sentiment dominated the region ahead of next week’s National Day Golden Week holiday. Finally, 10yr JGBs were lower amid the heightened risk appetite although found support ahead of 150.00 while the 2yr JGB auction was uninspiring.

Top Asian News

• How Indian Credit Raters Missed an Epic Fail at a Financier
• BOJ Paves Way to Cut Purchases of Super-Long Bonds in October
• China Prepares for $3 Billion Dollar Bond Sale in October
• Hong Kong Property Shares Decline on Sales Slowdown Concerns

European equities are once again being guided by updates from Italy, where the Government agreed to a 2.4% debt/GDP ratio. Italian stocks are leading the losses, with Italian bank stocks (Ubi Banca -6.0%, UniCredit -6.3%, Intesa Sanpaolo -6.3% and BPER Banca -8.0%) dominating the bottom of the Stoxx 600, as Italian 10 year bond yields continue rising above 3%. This weakness is spreading to banking names in Europe with all of Commerzbank, Credit Agricole and SocGen shares trading at a loss of over 3%, and the financial sector the marked sector underperformer. RSA (-10%) is at the foot of the index as the insurer provided poor Q3 underwriting results. the FTSE is the index outperformer for the second straight session, and is being aided by a weaker GBP.

Top European News

• U.K. Current-Account Deficit Widens; Business Investment Falls
• Knorr-Bremse Plans IPO Valuing Brake Maker Up to $16 Billion
• Buy Europe Value Stocks as Italy Concerns Will Subside, MS Says
• Germany: U.S. Sanctions on Nord Stream May Come in Early Nov.

In FX, the USD index has extended post-FOMC gains to just over 95.000, but the Greenback is not bid across the board by any means even though some rebalancing models for the end of September are pointing to a mild bid.  EUR/GBP/JPY/NZD – The major laggards, as the single currency continues to bear the brunt of Italian budget concerns that have intensified following the coalitions Government’s decision to test the EU boundaries with a 2.4% deficit for 2019. Eur/Usd is only just  holding around 1.1600 having breached a series of chart supports and the 30 DMA at 1.1646. Cable is also looking precarious close to its 21 DMA and double bottoms all around 1.3055 following a brief dip below on the back of weaker than forecast UK GDP data. Usd/Jpy has broken higher again, and more convincingly through a tech level at 113.24, which could be pivotal on a closing basis given month, quarter and Japanese half year end. The Kiwi looks hampered by ongoing RBNZ policy neutrality and also anchored by a big option expiry at the 0.6600 strike.

In commodities, the oil market is uneventful and trading within a thin range heading in to the week’s end, with Brent and WTI hanging just below the USD 82/bbl and USD 72.50/bbl areas. The gold market is also lacking any major catalysts, with the yellow metal languishing around the 6 week lows set in Thursday’s session. The most significant moves in commodities markets has been seen in steel and coke, where Shanghai rebar fell by over 2% and  both materials hit 2 month lows amid speculation that China has shelved blanket production cuts for winter, stoking the flame for more expected output.

US Event Calendar

• 8:30am: Personal Income, est. 0.4%, prior 0.3%; Personal Spending, est. 0.3%, prior 0.4%
• 8:30am: PCE Deflator MoM, est. 0.1%, prior 0.1%; PCE Deflator YoY, est. 2.2%, prior 2.3%
• 8:30am: PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 2.0%, prior 2.0%
• 9:45am: Chicago Purchasing Manager, est. 62, prior 63.6
• 10am: U. of Mich. Sentiment, est. 100.6, prior 100.8; Current Conditions, prior 116.1; Expectations, prior 91.1

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A massive magnitude 7.7 earthquake struck off the Indonesia island of Sumatra, prompting tsunami warnings across the Pacific ring of fire, according to USGS. The quake followed a smaller quake killed one person and damaged some homes.

#BREAKING: A magnitude 7.5 earthquake struck just minutes ago 48 miles North of Palu, Indonesia. A tsunami alert, meaning watch for updates and be ready to evacuate, is in effect for the island chain. No Tsunami Warning is in effect for the United States. pic.twitter.com/HgMmdVVEqS

— Zach Covey (@ZachWPDE) September 28, 2018

The comes after a series of earthquakes in July and August killed nearly 500 people on the island of Lombok, a popular vacation spot southwest of Sulawesi. Back in February, Mt. Sinabung erupted on the island of Sumatra, triggering mass evacuations.

Prelim M7.5 Earthquake Minahasa, Sulawesi, Indonesia Sep-28 10:02 UTC, updates https://t.co/PJqcklbxow

— USGS Big Quakes (@USGSBigQuakes) September 28, 2018

The quake dredges up memories of the massive 2004 tsunami that killed 226,000 people in 13 countries, including more than 120,000 in Indonesia. Reports of the damage from Friday’s quake have not yet emerged. Tsunami warnings following the quake do not extent to the US.

 

 

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After yesterday’s last minute decision by Italy’s ruling coalition to boost the country’s 2019 deficit to 2.4% of GDP, a number that challenged Brussels and its demands for a deficit no greater than 2.0% and made a mockery of the finance minister’s insistence on a funding hole no greater than 1.6% of GDP, we said that it was only a matter of time before the market freaked out as Italy is now on collision course with Europe, and that time came this morning when traders dumped Italian assets with the bathwater, as Italian equities, bank stocks and bonds all tumbled in unison after deputy premier Matteo Salvini vowed to “press ahead” with the controversial budget plan including a deficit that would be three times larger than the deficit under the previous administration.

Italy’s FTSE MIB stock index tumbled to session lows, down 3.7%, after opening sharply lower and failing to find a floor so far; this was the biggest intraday drop for Italian stocks since June 2016, with several banking stocks halted limit down.

The worst performing sector were Italian banks, with the FTSE Italia All-Share Banks Index falling as much as 5.3%, most since May; the biggest decliners were Banco BPM -6%, UBI -4.7%, UniCredit -3.9%, Intesa -3.5%, with most of them being halted, limit down amid the selling chaos.

The bond market was not spared, and Italy’s 10Y bond was taken to the cleaners as the relentless selling sent the yield some 36bps higher to 3.25%…

… surpassing the peaks hit during the recent two Italian liquidation panics.

Italian debt had been volatile in recent days, but rallied for much of September in anticipation economy minister Giovanni Tria would reel in the government’s spending plans. That failed to happen last night when Tria capitulated to demands by Salvini and Di Maio to boost the deficit to support populist promises for basic income which would cost some €10 billion.

Aberdeen Investments’ James Athey said he did not believe the Italian sell-off would necessarily start to “feed on itself” just yet. Nonetheless, he said investors would need greater compensation for holding Italian debt given the higher borrowing levels implied by the new budget, adding that the mood has clearly changed.

“It’s interesting that the first couple of pieces I read from the sell side today are from people who were bullish Italy and are now looking for bearish Italian trades,” he said. “The next three to six months are clearly going to be challenging. We are short and we’re staying short.”

Alternatively, the next 3 to 6 hours may be just as challenger, because the accelerating Italian selloff sent shockwaves around Europe, and led to an acceleration in the selling of the Euro which hit session lows, down over 200 pips in the past two days.

The key driver behind the market’s panicked response is the unknown of how a furious Europe will respond to the Italian defiance, in which the newly elected populist government is now in open confrontation that could ultimately threaten the existence of the euro.

With the Continent still reeling from a debt crisis that saw the collapse of the Cypriot banking system and nearly led to rebellious Greeks to abandon the Euro, the European Commission fears that an explosion of debt ushered in by Italy’s ruling coalition – which includes the far-right, anti-immigrant League and anti-establishment Five Star Movement – could lead to international investors losing confidence in the eurozone and – more importantly – its debt.

Meanwhile, far from expressing concern, the budget agreement was celebrated by leaders in the coalition Italian government. Luigi Di Maio, the 32-year-old leader of the anti-establishment Five Star Movement, the largest party in the populist coalition, was greeted by a crowd of cheering party members waving flags after emerging from a cabinet meeting on Thursday night.

Di Maio hailed the agreement as a “historic day”. “We made it!” he said, as he emerged from a balcony at Rome’s Palazzo Chigi, where the meeting took place.

“Today we have changed Italy! For the first time the state is on the side of the citizens,” he added, as ministers and members of parliament from his party hugged each other on the square outside.

Matteo Salvini, leader of the hard-right League, part of the coalition and deputy prime minister alongside Mr Di Maio, also welcomed the agreement on spending, saying he was “fully satisfied with the objectives achieved”, which would include his party’s pledges for tax cuts and a reversal of unpopular pension reforms dating back to 2011.

All eyes were on technocratic finmin Giovanni Tria, who had been pressing for a deficit number as low as 1.6% of GDP going into the meeting. On Thursday night, Tria said that he would not resign, and instead would stay according to newspaper la Repubblica reports: “I won’t quit, just for the good of the country, I will do it for patriotism. Otherwise there would be the risk of a financial storm. We would throw the country into chaos,” Tria said.

Still, “the fact that the final agreement sees spending plans three times the initial projections for 2019 . . . very much suggests that Tria does not command the level of influence he was thought to have had,” wrote analysts at Rabobank.

At the same time, strategists at Commerzbank cautioned that while a 2.4% budget deficit need not trigger a new “escalation” for Italian bonds, the reality is that Tria, a former academic who is widely seen as a moderating force in the government, has been weakened and that the “risk and reward” has shifted for investors.

For now the Italian contagion has been limited, and while yields on Spanish and Portuguese government debt also rose on Friday, the moves were far more muted. The yield on 10-year Spanish bonds edged up 2 basis points to 1.52 per cent as that on the equivalent Portuguese bond rose 2bp to 1.87 per cent. However, should the Italian selling accelerate, it is unlikely that the selling panic will remain within Italy’s borders.

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Authored by David Stolinsky via The Gatestone Institute,

• Europe did not invent racism and religious bigotry, but it surely perfected them.

• Europeans lived for centuries under kings and emperors. They came to believe that power flowed from the top down. The “elite” decide what is best for the “common people” — the “masses” — and then cram it down their throats.

• The “elite” send their children to the best schools and universities, and relegate the children of the “common people” to lousy schools, where they get lousy educations, which prepare them for lousy jobs, which pay lousy salaries, which leave them dependent on the government for a lifetime of “assistance.” But they expect the “common people” to be grateful for the “universal education” — andfor the “assistance.”

• The American idea of individuals being responsible and taking responsibility is utterly foreign to the “elite,” who seem much more comfortable with the European idea of infantilizing subjects to make them dependent on a parentified government to protect them, care for them, dole out money to them, and in general control their lives. If people cannot even choose their own light bulbs, toilets, or dishwasher detergent, in what sense are they free?

The Normandy American Cemetery is the burial place of thousands of American soldiers who fought and died to liberate Europe during World War II, many of them on D-Day, June 6, 1944. (U.S. Army photo by Sgt. 1st Class Daniel Wallace)

If Europeanize were not a word, we would have to invent it, because that is what many are doing to America. Remember when candidate Obama was asked if he believed America is exceptional? He answered yes, but only in the sense that Britain, Greece, and other nations are exceptional.

As Gilbert and Sullivan said, “When everyone is somebody, then no one is anybody.”

If every nation is exceptional, none is.

It is not that Obama and his friends really think America is unexceptional. They may well believe it is exceptional, but that it should not be. So they do everything they can to end its exceptional nature, and to make it resemble other nations. They are Europeanizing America.

Do not get me wrong. I love Europe. That is, I love to visit it:

• I love to see the towers in Ireland, where monks hid from Viking raiders while preserving knowledge for the West. But now, Ireland’s church is scandal-ridden.

• I love to see the changing of the guard at Buckingham Palace, a reminder of the time when Britain controlled one-fifth of the Earth. But now the British army is a shadow of its former self. In 2013, a British soldier was murderedand almost beheaded on a London street.

• I love to see the unsurpassed beauty of Paris. But now France is undergoing a demographic transformation.

• I love to see beautiful cathedrals, where Christianity inspired great works of art. But now they have few worshippers.

And there are other things in Europe that I do not love, but I feel obligated to see:

• I feel obligated to visit Clifford’s Tower in York, England, where in the year 1190, Jews were massacred because of their faith. Europe did not invent racism and religious bigotry, but it surely perfected them. Europe invented the blood libel as far back as 1144, falsely accusing Jews of using the blood of children for Jewish rituals.

• I feel obligated to remember (because it no longer exists) the Vélodrome d’Hiver, the Paris bicycle-racing stadium where in 1942 the French police rounded up thousands of Jews for shipment to Auschwitz. And today in France, Jews are targeted for assault or murder.

• I feel obligated to visit Belleau Wood, where U.S. Marines fought and died to liberate Europe in World War I.

• I feel obligated to visit Omaha Beach, where U.S. soldiers fought and died to liberate Europe in World War II.

• I feel obligated to read (insofar as I can) European newspapers, to remind myself of ingrates who condemn “American militarism.”

• I feel obligated to visit the reading room at the British Museum, where many people say Karl Marx sat and fantasized an ideal communist society — as a result of which about 100 million died.

• I feel obligated to visit the site of the Munich beer hall where Hitler launched his first attempt to overthrow the Weimar Republic.

Thanks a lot, Europe, for giving us two world wars, socialism, communism, fascism, Nazism, and for perfecting racism as exemplified by the Holocaust.

You have done so much for the world in the last century. No wonder “progressives” think Americans should be more like you.

Europeans lived for centuries under kings and emperors. They came to believe that power flowed from the top down. So they felt comfortable when their new rulers called themselves Führer, the Central Committee of the Communist Party, the Council of the European Union, or whatever. The idea was similar:

• The “elite” decide what is best for the “common people” — the “masses” — and then cram it down their throats.

• The “elite” dream up notions of the “ideal” state, and leave the “common people” to deal with the inevitable mess that results.

• The “elite” are cared for in the best hospitals and clinics, and relegate the “common people” to the tender mercies of “gatekeepers” who may — or may not — allow you to see imported doctors from who-knows-where. But they expect the “common people” to be grateful for “universal coverage.” Government-run health care is a major step in the demolition process. If bureaucrats can tell people what care they and their loved ones can receive — and what care they cannot receive — in what sense are those people free citizens, and not subjects of a domineering government that imposes life-and-death decisions on them?

• The “elite” send their children to the best schools and universities, and relegate the children of the “common people” to lousy schools, where they get lousy educations, which prepare them for lousy jobs, which pay lousy salaries, which leave them dependent on the government for a lifetime of “assistance.” But they expect the “common people” to be grateful for the “universal education” — and for the “assistance.”

• The “elite” view schools and universities as a source of indoctrination, not education. They require students to regurgitate the “correct” doctrine, whether it is Nazi, communist, socialist, or environmentalist. Original thought is punished with lower grades.

• The “elite” view our children as wards of the state, for whom we have only limited responsibility. They view home-schooling with alarm, and they want to imprison parents who home-school their children, as is already done in (surprise!) Germany.

• The “elite” view the government as the source of help for those in need. So they vote the “correct” way, but like Europeans, they give little to charity, and they actually discourage giving to charity.

• The “elite” see nothing wrong with the fact that 52% of American childrennow live in households receiving means-tested government assistance. In fact, the “elite” would like 100% of children to depend on government assistance ‒ that is, on them, the “elite.”

• The “elite” care little for foreigners who suffer and die, so like Europeans, they want to shrink the military until it is too weak to intervene to stop tyranny or mass murder. They run up huge debts and push new social programs, leaving less money for defense. Europeans could let their defenses atrophy, because America defended them. But if we weaken ourselves, who will defend us? Belgium? Who will fight global terrorism? Liechtenstein? Yes, war is terrible; is surrender better? Is what China is engineering now — total spying, grading and controlling all of its citizens — what the West really wants for its children and grandchildren?

Americans, on the contrary, believe that power flows from the bottom up. We believe in trying something, and if it doesn’t work, trying something else. We do not believe in allowing the “elite” to impose their unworkable notions of the “ideal” state. We view our children as gifts, for whom we have ultimate responsibility to bring up to be self-reliant, ethical citizens.

Americans, in fact, do not believe in the “elite” in the first place.

So, predictably, the self-anointed “elite” do not like American ideas, and they seem to be doing their best to demolish the American system.

And now, with the unaffordable Affordable Care Act (“ObamaCare”), we can look forward to increasingly severe doctor shortages. Many young people are willing to spend the best years of their lives training to be independent professionals, but not to be government underlings. And waiting times are growing progressively longer. I wish you good luck and good health — you will need both.

The American idea of rights is utterly foreign to the “elite,” who are much more comfortable with the European idea of privileges granted — or withdrawn — at the whim of the government.

The American idea of individuals being responsible and taking responsibility is utterly foreign to the “elite,” who seem much more comfortable with the European idea of infantilizing subjects to make them dependent on a parentified government to protect them, care for them, dole out money to them, and in general control their lives. If people cannot even choose their own light bulbs, toilets, or dishwasher detergent, in what sense are they free?

Yes, the “elite” want to Europeanize America. But in view of what has happened in Europe in the last century, and what is happening there now, this seems like a really abysmal idea. And I’ll keep that in mind when I vote.

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