Month: September 2018

In what will be the latest in a string of tech-giant mea culpas, Google is planning to admit that it has made “mistakes” when it comes to privacy issues when a company executive delivers testimony to the Senate Commerce Committee on Wednesday, according to Reuters. “We acknowledge that we have made mistakes in the past, from which we have learned, and improved our robust privacy program,” Google chief privacy officer Keith Enright is planning to say, according to a draft of his written testimony. 

However, the testimony didn’t identify specific mistakes, and – what’s worse – Google’s behavior has been anything but contrite. And the company disappointed many privacy advocates earlier this week when it said it would continue to allow third-party apps to scan the contents of users’ Gmail accounts.

The company was roundly criticized for the practice over the summer when it first came to light.

According to CNET, Wednesday’s hearing will focus on the efforts of tech companies and ISPs to protect user privacy. Executives from Apple, Amazon, AT&T and Twitter.will also testify at the hearing, which is the latest in a string of tech-firm interrogations to take place since Facebook CEO Mark Zuckerberg testified before a joint session of the Senate Commerce and Judiciary Committees in the immediate aftermath of the Cambridge Analytica scandal.

Google’s CEO is also expected to meet privately with some Republican lawmakers.

Google on Monday released a data privacy framework, suggesting companies limit data collection, be required to protect that data and give people control of and easy access to information collected about them.

Google CEO Sundar Pichai will also meet privately with top Republican members of Congress on Friday.

Google parent Alphabet has a checkered history of safeguarding privacy concerns, as Reuters points out:

n 2012, Google agreed to pay a then record $22.5 million civil penalty to settle Federal Trade Commission charges that it misrepresented to Apple Safari Internet browser users that it would not place tracking “cookies” or serve them targeted ads.

A year earlier, Google agreed to an FTC privacy settlement and regular privacy audits for 20 years after the government charged it used deceptive tactics and violating consumer privacy promises when it launched its social network, Google Buzz.

In August, Alphabet was sued and accused of illegally tracking movements of millions of iPhone and Android phone users even when they use a privacy setting to prevent it.

Senate Commerce committee chairman John Thune said this week that Congress must work on a law that would enshrine consumer protections at the federal level. Tech firms have acquiesced to lawmakers’ demands as they hope that any federal legislation will be less restrictive than a California data privacy law that has become the de facto law of the land.

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The Wall Street Journal has confirmed something that many suspected all along: that last week’s bombshell New York Times story detailing a purported coup attempt by Deputy AG Rod Rosenstein, as well as subsequent reports that Rosie’s firing/resignation was imminent, were planted to distract from the ongoing Kavanaugh confirmation saga – if only for a little while.

The WSJ reported roughly around the same time as WaPo, that Trump has told several advisers that he is open to keeping Rosenstein on the job, while Rosenstein has given several DOJ employees the impression that he doesn’t plan on quitting.

… by Monday afternoon, the succession plan had been scrapped. Rosenstein, who told the White House he was willing to quit if President Trump wouldn’t disparage him, would remain the deputy attorney general in advance of a high-stakes meeting on Thursday to discuss the future of his employment. The other officials, too, would go back to work, facing the prospect that in just days they could be leading the department through a historic crisis. – WaPo

In any case, before he makes a final decision, the president would like to hear Rosenstein’s side of the story directly.

Earlier this week, the White House said the two would meet on Thursday once Trump had returned from Washington following the UN General Assembly meeting. According to his advisors, Trump’s cautious approach to the story shows that he harbors doubts about the story’s veracity (and also that he is listening to media figures and Congressional allies who have warned him to proceed with caution).

That raised at least the possibility that a roller coaster of a week could end with no major shake-up in the top ranks of the Justice Department, even as White House and Justice officials cautioned that it was impossible to know for sure what Mr. Trump would do. Mr. Rosenstein oversees special counsel Robert Mueller’s investigation into Russian meddling in the 2016 election and any links to Trump campaign officials. Mr. Trump has dismissed the probe as “a witch hunt.”

The president has told advisers that he wants to hear directly from Mr. Rosenstein about reports that he discussed secretly recording the president and recruiting cabinet members to remove him from office, according to people who have spoken to the president. That meeting is scheduled for Thursday afternoon.

The president’s willingness to hear out Mr. Rosenstein signaled to advisers that he harbors doubts about whether the top official in fact sought to have him ousted him from the Oval Office, these people said. The issue arose after the New York Times reported that Mr. Rosenstein floated the idea in early 2017, something he has strongly denied.

As the president prepares to question Rosenstein, Republicans in the House are preparing a subpoena for memos allegedly detailing Rosenstein’s comments on surreptitiously recording the president. They are also reportedly pushing for him to come and testify.

While the two men haven’t exactly seen eye to eye in the past, WSJ reported that tensions between Trump and Rosenstein have eased in recent months (for context, Republicans in Congress tried to forcibly remove Rosie from his post for the second time back in April following the FBI’s raids on former Trump lawyer Michael Cohen’s home, hotel and office)>

Mr. Rosenstein has been a target of the president’s ire as part of his disdain for Mr. Mueller’s investigation, but those tensions eased in recent months, White House officials said. According to people familiar with the matter, aides have counseled the president that Mr. Rosenstein is cut from a different cloth than James Comey or Andrew McCabe, two former FBI officials who have been sharply criticized by Mr. Trump.

“The president is genuinely conflicted,” said one person who has spoken to the president. “He’s got an open mind about whether Rod really tried to orchestrate this.”

The should-he-stay-or-should-he-go speculation over Mr. Rosenstein has gripped Washington because of the implications of ousting the man overseeing the Mueller investigation probe.

Meanwhile, following Monday’s botched news fiasco, according to several anonymous friends of Rosenstein the Deputy AG’s tone over the weekend suggested that he had no intention of stepping down.

White House officials said Thursday’s meeting between the two men could focus on terms of a resignation, which they said Mr. Rosenstein offered to White House chief of staff John Kelly last week. During a meeting with Mr. Kelly on Monday, Mr. Rosenstein said he wanted to speak with the president about why he would step down and discuss how his exit would be publicly described, according to people familiar with the matter.

People close to Mr. Rosenstein took issue with this depiction of Thursday’s agenda, however. And as Mr. Rosenstein talked to White House officials over the weekend about his possible departure, he spoke to friends who came away with the impression he had no immediate plans to step down.

White House officials said there was a real possibility that the president would decide to keep Mr. Rosenstein in his job after the meeting. “We’re ready for any and all possibilities,” one official said.

Even Trump lawyer Rudy Giuliani said he believed Rosenstein should stay on.

Rudy Giuliani, a lawyer for Mr. Trump, said regardless of whether Mr. Rosenstein stays in his job, the Mueller probe should be paused and examined “in the interest of fairness.”

“I’m not sure they should get rid of him,” Mr. Giuliani said of Mr. Rosenstein. “But I do think they should take a serious look at whether he should be the decision maker.” Among other factors, he said, Mr. Rosenstein was a witness in the investigation, given his role in the president’s May 2017 decision to fire Mr. Comey as FBI director.

Then again, in a slightly different twist, the WaPo, also late on Tuesday, reported that some officials said that Matt Whitaker, Attorney General Jeff Sessions’s chief of staff, had told people he would be taking over for Rosenstein — an indication that the deputy attorney general’s departure was all but certain — and were surprised when it was announced that Rosenstein would remain in his job.

Sessions began telling people on Sunday that Rosenstein might be in trouble, according to people familiar with the matter. Others said they learned all the developments from news reports that evolved throughout the day.

What happens next? While it remained possible that Rosenstein could still resign or be fired imminently, people told WaPo that it was more likely that Rosenstein would stay in the job until after November’s elections and then depart, probably along with the attorney general.

Two White House officials said Tuesday that Trump is unlikely to fire Rosenstein until after the midterms, “as forcing out the deputy attorney general in the next month could motivate Trump’s detractors to turn out for elections in which dozens of congressional seats are in play and Republicans are fearful they are at risk of losing control of the House. And those who have observed Trump and Rosenstein together or have been told of their interactions said the president seemed to hold Rosenstein in somewhat higher regard than he did Sessions.”

“For all of the president’s bluster, I’m not sure he doesn’t have at least some grudging respect for Rod,” said James M. Trusty, a friend of Rosenstein and former Justice Department official who works in private practice at Ifrah Law.

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Despite President Recep Tayyip Erdogan’s promises that another economic boom is just around the corner, Turkey’s people have continued to struggle with the fallout from a rapidly deteriorating economy that has sent rates of inflation above 18% as international investors have scrambled to move their money out of the country.

And while investors have sent the lira higher this week following comments from US Secretary of State Mike Pompeo that Turkey might soon release an imprisoned US pastor, as well as assurances from Erdogan that the Turkish central bank would remain independent, the strongman insisted during an interview with Reuters published Thursday that a Turkish Court would decide the pastor’s fate, walking back his earlier comments.

“This is a judiciary matter. Brunson has been detained on terrorism charges…On Oct. 12 there will be another hearing and we don’t know what the court will decide and politicians will have no say on the verdict,” Erdogan said.

“As the president, I don’t have the right to order his release. Our judiciary is independent. Let’s wait and see what the court will decide.”

Evangelical Pastor Andrew Brunson, who was recently moved to house arrest after being jailed since July, is facing up to 35 years in a Turkish prison on charges that he was working on behalf of exiled cleric Fethullah Gulen. Erdogan has accused more than 100,000 Turks of having illicit ties to Gulen during a purge that has continued since a failed coup attempt more than two years ago.

President Trump helped accelerate Turkey’s economic decline in August when he doubled tariffs on aluminum and steel imports from Turkey, triggering a drop in the Turkish lira that has mostly persisted. Turkey, meanwhile, retaliated by hiking levies on US-made tobacco products, alcohol and cars. The two leaders shared an icy greeting at the UN General Assembly on Tuesday.

Still, Erdogan’s claim that he would abide by the CBRT’s decision to hike its benchmark interest rate by 625 basis points has helped ease investor anxieties that he would seek to intervene with the country’s monetary policy. This helped support the lira in early trade.

“This was a decision made by the central bank…I hope and pray that their expectations will be met because high rates lead to high inflation. I hope the other way around will happen this time.”

In another effort to bolster Turkey’s flagging economy, Erdogan said he would travel to Germany later this week to try and repair ties with the German government.

In an effort to boost the economy and attract investors, Erdogan will travel on Sept. 28 to Germany, a country that is home to millions of Turks.

“We want to completely leave behind all the problems and to create a warm environment between Turkey and Germany just like it used to be,” Erdogan said, adding that he will meet Chancellor Angela Merkel during his visit.

The two NATO members have differed over Turkey’s crackdown on suspected opponents of Erdogan after a failed coup in 2016 and over its detention of German citizens.

Moving on to other issues, Erdogan reiterated his view that Syrian President Bashar al-Assad must leave power if Syria ever wants to know peace. He said it would be impossible for Syrian peace efforts to continue with al-Assad in power.

Earlier this month, Turkey and Russia reached an agreement to enforce a new demilitarized zone in Syria’s Idlib region from which “radical” rebels will be required to withdraw by the middle of next month.

But Erdogan said the withdrawal of “radical groups” had already started.

“This part of Syria will be free of weapons which is the expectation of the people of Idlib…who welcomed this step,” he said. The demilitarized zone will be patrolled by Turkish and Russian forces.

Close to 3 million people live in Idlib, around half of them displaced by the war from other parts of Syria.

He also reiterated that Turkey would continue buying oil from Iran in defiance of US sanctions. “We need to be realistic…Am I supposed to let people freeze in winter?… Nobody should be offended. How can I heat my people’s homes if we stop purchasing Iran’s natural gas?.”

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China announced it would cut import tariffs on 1,585 items from November 1, China National Radio reports, citing a State Council meeting chaired by Premier Li Keqiang. The tariff cuts involve machinery, textile, building material, paper products and electromechanical device and would lower costs for consumers and companies as a trade war with the U.S. deepens.

The overall tariff rate will be lowered to 7.5% from last year’s 9.8%, and the cuts are expected to reduce tax burdens for companies and consumers. The move follows on from similar cuts announced in July, and is a step with China’s pledge to support more imports.

It’s not yet clear how the planned reduction would affect imports from the U.S., if at all, including Chinese retaliatory tariffs on American products amid the trade war. Those details may only emerge once the government outlines which products will enjoy lower tariffs. Any reduction of tariffs usually must be offered to all countries equally under World Trade Organization rules.

Commenting on the previous import tariff cut news, Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington said that “this is in line with China’s longstanding strategy of opening. It has the additional advantage that it will make U.S. firms complain more loudly that Trump’s strategy is blocking their access to the China market.”

“The timing of the cut would suggest the tariff tool is being used as a tactic in the trade war, taking into account both domestic and international considerations” said Bloomberg economist Chang Shu who adds that cuts across most trading partners, including the U.S., “would signal an effort by China to ease tensions.”

“By further cutting import taxes, China is sending a message that it will keep opening up and reform no matter how the trade war goes. It’s more like a commitment to both domestic and international audience. It’s a gesture,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp.

According to Bloomberg, China’s most-favored nation average tariff stands at 9.8%. The MFN rule requires all countries to be treated equally unless specific exceptions are agreed, and the U.S. is also covered by MFN status.

China still has a higher average tariff rate than many developed economies. The U.S.’ average applied MFN rate was 3.4 percent in 2017, and in general the Trump administration has accused China of being a protectionist economy. On Wednesday, Premier Li said that his government wouldn’t devalue the currency in order to boost its exports amid the trade war.

Cutting tariffs is just a start for China in addressing its unfair trading practices, said Dan DiMicco, the former Nucor Corp. chief executive officer who led Trump’s trade team during the transition.

“I see this as a result of Trump’s counter attack to China’s trade war of the last 24 years,” DiMicco said by phone. “Chinese tariffs have never been the crutch of the trade problem with them,” he said, citing China’s alleged theft of intellectual property and state-controls over the economy as deeper issues. “The world gets that and won’t be swayed by this tokenism.”

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With just hours left until the Fed announces its latest rate hike (and potentially tilts even more hawkish on 2019), US futures gained 0.2% alongside higher Asian shares while European bourses were mixed amid generally thin volumes as the dollar rebounded from overnight lows and Treasuries gained.

Asian shares inched up on Wednesday, rising 0.1% outside of Japan, as Chinese stocks extended their recovery to hit eight-week highs on receding fears about the trade war as well as hopes China’s weighting in the global benchmark will be increased. Other markets were more subdued as U.S. TSY yields rose near a seven-year peak of 3.113% ahead of a widely expected rate hike by the Federal Reserve and as international oil prices rose to four-year highs.

Japan’s Topix ended just below its highest point in almost eight months, while stocks rallied in Hong Kong as traders returned from a holiday. Shanghai shares rose 0.9% to 2806.81, after global index provider MSCI said it will consider quadrupling the weighting of Chinese big-caps in its global benchmarks from 5% to 20% and also proposed adding mid-caps and shares listed on Shenzhen’s start-up board ChiNext.

The news further improved the mood of the market, where fears about the trade war have been offset by hopes Beijing’s stimulus could help the economy weather the impact of U.S. tariffs.

In Europe, the Stoxx Europe 600 Index traded sideways, holding small gains while the DAX underperformed as the auto selloff continued after BMW slashed its outlook and following news of a new CEO at Daimler. Italian BTPs rallied as risk-off hedges related to Italian budget are removed, as Tria’s latest  comments appear to calm worst concerns. The Bund curve flattened, led by 5s30s.

Contracts on the S&P 500, Nasdaq and Dow all climbed ahead of the Fed. As previewed earlier, while markets have fully priced in another rate hike today, the outlook for future policy as signaled by the dot plot and any comments from Jerome Powell will be key to whether bond markets extend their recent selloff. Ten-year Treasury yields of 3.08% are just below their year-to-date peak, while two-year yields are at a decade high.

“The U.S. domestic economy is trotting along nicely; the rest of the world is not in the same place and there’s no doubt that global investor caution is continuing to increase as the trade war between the U.S. and China appears to be heating up,” wrote Nick Twidale, chief operating officer at Rakuten Securities Australia. “Analysts will be watching closely to see if the Fed acknowledges this and its potential impact on the U.S.”

Meanwhile, in a sleepy FX market, the Bloomberg Dollar Spot Index steadied ahead of a Federal Reserve decision at which investors anticipate the third interest-rate increase this year. Treasuries gained while emerging-market currencies stayed in relatively tight ranges. The yen recovered after touching its lowest in almost 10 weeks against the dollar as dealers positioned themselves ahead of the Fed meeting, while the yield curve steepened ahead of the Bank of Japan’s debt purchase operation on Thursday. The euro was also steady, while the pound snapped a two-day rally after Theresa May doubled down on her Brexit stance and as U.K. investors await Corbyn’s speech after Labour said it will vote against Prime Minister Theresa May’s Brexit proposals.

Riksbank’s Jansson said if the central bank moves too quickly ahead of the ECB, SEK would strengthen too quickly, while he
added the Riksbank may have to raise unemployment forecasts slightly in October.

In rates, Italy led gains among euro-area bonds ahead of the country’s coalition government announcing fiscal targets Thursday. The Bund curve flattened led by 5s30s. The yield on 10-year Treasuries fell 1bp to 3.08%.

In geopolitical news, US National Security Advisor Bolton said the enforcement of sanctions will be aggressive and unwavering and will not be undermined by Europe or anybody else. South Korean President Moon said North Korea’s Kim wants a second summit with US as soon as possible. EU Commissioner Hahn rejected financial aid to Turkey.

Elsewhere, Brent oil pulled back from a four-year high of $82.55 but remains on course for its fifth consecutive quarterly increase, the longest such stretch for the global benchmark since early 2007, when a six-quarter run led to a record-high of $147.50 a barrel. U.S. crude futures ticked down 0.2 percent to $72.16 per barrel after hitting an 11-week high of $72.78 the previous day.

In metals, Gold is once again finding magnetism to the USD 1,200/oz level, with the yellow metal down by a dollar ahead of the FOMC rate decision. Steel futures in China have dropped for the 2nd straight session as Chinese demand falls ahead of their week-long holiday.

In addition to the Fed’s decision, expected data include mortgage applications and new home sales. CarMax and HB Fuller are among companies reporting earnings.

Market Snapshot

• S&P 500 futures up 0.2% to 2,927.50
• STOXX Europe 600 down 0.03% to 383.76
• MXAP up 0.1% to 165.77
• MXAPJ up 0.2% to 525.74
• Nikkei up 0.4% to 24,033.79
• Topix down 0.04% to 1,821.67
• Hang Seng Index up 1.2% to 27,816.87
• Shanghai Composite up 0.9% to 2,806.81
• Sensex down 0.6% to 36,420.54
• Australia S&P/ASX 200 up 0.1% to 6,192.28
• Kospi up 0.7% to 2,339.17
• German 10Y yield fell 0.8 bps to 0.535%
• Euro up 0.03% to $1.1771
• Italian 10Y yield fell 7.0 bps to 2.517%
• Spanish 10Y yield fell 1.1 bps to 1.515%
• Brent futures down 0.4% to $81.58/bbl
• Gold spot down 0.2% to $1,198.80
• U.S. Dollar Index little changed at 94.15

Top Overnight News

• President Donald Trump reasserted his “America First” perspective in his address to the United Nations on Tuesday, chastising regimes in Iran and Venezuela and offering a blunt rejection of the multilateral underpinnings of the very body he addressed
• Theresa May said she’d prefer leaving the European Union without any deal at all to the Canada-style free trade arrangement proposed by so-called Brexiteers in her Conservative Party
• Blackstone Group LP, the soon-to-be owner of Thomson Reuters Corp’s financial-and-risk arm, is weighing a sale of FXall, a currency trading platform, according to people familiar with the matter
• Oil slipped after President Donald Trump resumed his attack on OPEC while Goldman Sachs Group Inc. poured cold water on forecasts for $100 crude
• Italy’s anti-establishment Five Star Movement said it will block the country’s 2019 budget unless it includes full funding for the party’s flagship plan to boost incomes for the poor. Investors shrugged off the threat, judging Five Star leader Luigi Di Maio doesn’t have the political weight to back it up
• A global tariff tit-for-tat could boost China’s $12 trillion economy and hurt the U.S. expansion, according to European Central Bank research published Wednesday
• French Finance Minister Bruno Le Maire said it would be “suicidal” to grant the U.K. a Brexit deal that seems better than remaining in the European Union, reinforcing the position that saw the bloc’s leaders reject May’s latest withdrawal proposal
• Japan’s Government Pension Investment Fund gave itself more flexibility on how much it invests in the nation’s bonds, raising the prospect that it’ll trim its $387 billion stash of domestic debt

Asian equities traded mostly higher despite a mixed lead from Wall St. where the Dow and S&P closed with losses amid cautiousness ahead of the FOMC. ASX 200 (+0.1%) gains were led by the strength in commodity names amid the bounce in base metals, while Nikkei 225 (+0.4%) initially lagged but remained in close proximity to test the 24,000 level to the upside. Elsewhere, Hang Seng (+1.2%) and Shanghai Comp (+0.9%) outperformed as trade tensions took a backseat amid reports that MSCI will consider increasing the weight of China A-shares in its indices to 20% from 5% and with bluechip energy names frontrunning the gains in Hong Kong. Finally, 10yr JGBs saw a slight rebound and printed fresh weekly highs as yields marginally declined across the curve but with gains capped amid weaker than previous 40yr auction results.

Top Asian News

• Ex-UBS Banker Starts $100 Million Fund for Share-Backed Loans
• MSCI Considers Boosting China A Share Weighting, Adding ChiNext
• SPH, Keppel Said to Mull Buyout of $1.1 Billion Carrier M1

European equities have started the day directionless, with trade choppy and newsflow light ahead of the FOMC’s rate decision later on in the day. The DAX is once again the major index underperformer with BMW still near the foot of the index after yesterday’s guidance cut.  The CAC is leading the gains in the equity space, with Bouygues lifting the index after an upgrade at JPM to overweight. M&A related news was the pre-market focus, with suggestions that Unicredit may tie-up with one of Lloyds or ABN Amro; and further reports saying Deutsche Bank was looking at a theoretical merger with UBS, as according to sources; something which their CEO later downplayed.

Top European News

• Deutsche Bank Sees Quarterly Profit Broadly Meeting Expectations
• Bankers Get $4,700 Car Parking Spaces as Ireland Roars Back
• GAM Names Juan Landazabal to Newly Created Head of Trading Role
• Record Czech Rate Hike ‘Done Deal’ With Koruna Back in Focus

In FX, amidst very rangy or cagy trade in Usd/majors ahead of the FOMC, the GBP and NZD are just standing out from the
crowd as outliers, with the former outperforming in wake of more encouraging NZ macro news overnight, as a marked improvement in the business outlook overshadowed a worse than expected trade deficit, on balance. Nzd/Usd rebounded towards 0.6700, but is now back down around 0.6650 vs Cable unable to reach 1.3200 and retreating towards 0.8950 again vs the EUR. AUD/JPY – The next best G10 currencies in terms of gains vs a still soggy Usd (DXY only just holding above 94.000), with the Aud maintaining 0.7250+ status and Jpy defending 113.00 again, even though month/quarter/Japanese half year end positioning is said to be net negative. Expiry interest may also be influential here with some decent layered run-offs from 112.95-113.00 down to 112.30-35 (1-2 bn). CAD/CHF – Marginal laggards as the Loonie continues to pivot 1.2950 amidst the ongoing NAFTA stalemate, but cushioned somewhat by elevated oil prices, while the Franc is anchored around 0.9650 and 1.1350 vs the Eur after a sharp deterioration in ZEW’s Swiss investor sentiment index that underscores SNB caution about risks to the economy. EM – The Try has taken over the mantle as main regional mover, albeit with the Zar not far behind and both firmer vs the Usd. The Lira appears to be encouraged by more assurances about CBRT independence from Turkey’s Finance Minister, while the Rand awaits an address from President Ramaphosa later today. Usd/Try at the lower end of a circa 6.2000-1000 band and Usd/Zar also nearer the base of 14.3800-2750 parameters

In commodities, oil is flat and has erased the slight losses seen following a surprise build in API crude inventories. This comes amid reports from India overnight saying they were set to cut oil imports from Iran to zero, that was later denied. Commentary on the fossil fuel came from Goldman who said the initial decline in Iran could bring prices to USD 82.50/bbl and that price risks are skewed to the upside given the elevated geopolitical tensions among oil producers and robust oil demand. The Iranian Oil Minister was also on the wires saying that if US President Trump wants oil to stop rising he should stop interfering in theMiddle  East.In the metals scope, Gold is once again finding magnetism to the USD 1,200/oz level, with the yellow metal down by a dollar ahead of the FOMC rate decision. Steel futures in China have dropped for the 2nd straight session as Chinese demand falls ahead of their week-long holiday.

US Event Calendar

• 7am: MBA Mortgage Applications, prior 1.6%;
• 10am: New Home Sales, est. 630,000, prior 627,000
• 2pm: FOMC Rate Decision (Upper Bound), est. 2.0-2.25%, prior 1.75%-2.0%
• 2pm: Interest Rate on Excess Reserves, prior 1.95%

DB’s Jim Reid concludes the overnight wrap

As we hit US rate hike day, bond markets continue to be the focus for now with the last 24 hours seeing another steady selloff across the majority of core markets. It is still a very controlled sell off though with bond vol measures staying much lower than the sell-offs in Jan/early Feb and in May.

Treasuries did rally back into the close last night at 3.093% (+0.4bps on the day) but earlier traded within a whisker of the YTD (and 7-year) closing high in May of 3.112% (they did hit 3.123% intraday on May 18th however). Before the late rally, Bunds also closed 3.4bps higher at 0.541% while the rest of Europe (ex. Italy – see below) saw yields up a similar amount. Equities on the other hand were a lot more muted. The Stoxx 600 closed +0.46% but the FTSE-MIB out-performed to
close +1.54% though as the up and down Italian newsflow of late was more on an “up” yesterday.

In the US the S&P 500, DOW and NASDAQ ended -0.13%, -0.26% and +0.18% respectively. Oil is quietly driving price action in both bonds and equities, pushing up inflation breakevens and boosting energy stocks. The energy sector paced gains on both sides of the Atlantic yesterday. Brent finished last night up another +0.83% and is at the highest level ($81.87/bbl) since November 2014. Mr Trump’s comments at the UN did create some volatility though as he said OPEC nations are “ripping off the world” with current oil prices. Brent spiked down a little around the comment but held gains into the close amid reports that India plans to cut its imports of Iranian oil to zero by November to comply with US sanction, from their end-August level of 375 million barrels per day. So the oil story is one to watch especially as breakevens start to respond.

How markets fare today will likely depend on what sort of message we get from the Fed and Mr Powell this evening. With a 25bp hike in the fed funds rate as good as done, the focus will instead be on the Committee’s signal about the prospects for rate hikes in the coming quarters. DB’s Peter Hooper believes that although the market may interpret a few elements of the meeting dovishly, namely the possible change to the description of the policy stance as “accommodative” and a decline in the long-run median dot in the Summary of Economic Projections, he and the team would caution against this interpretation.

Instead, Peter expects the overall message from the meeting to be that the current gradual (i.e. roughly quarterly) pace of rate hikes remains appropriate and that, with growth expected to continue to run well above potential, the labour market beyond full employment, inflation at target, and financial conditions still accommodative, the Committee has become more confident that rate hikes should continue at least to neutral. Moreover, as Chair Powell has recently indicated, as long as income and job gains remain strong, a restrictive monetary policy stance could be needed. Peter goes on to say that this signal should reinforce elevated market pricing for the next rate hike in December and support expectations for further hikes at least through the first half of 2019. As a reminder, DB expects another 4 rate hikes in 2019 in addition to another this December.

Back to yesterday and President Trump’s speech at the UN General Assembly. He stuck a lot closer to the prepared script than we’re used to seeing of late but there were still a couple of headlines which caught the market’s attention. Trump reiterated that the trade imbalance with China is “just not acceptable” and also that China’s trade distortions “cannot be tolerated”. He  confirmed that sanctions on North Korea will stay until denuclearization occurs and also pleaded with all nations to isolate Iran’s regime. Trump cited a “breakthrough” new trade deal with Mexico but also said issues remain outstanding with Canada – an issue also highlighted by US Trade Representative Lighthizer yesterday.

Meanwhile the Mexican Peso (-0.13%) was actually a shade weaker despite Trump and Lighthizer’s comments, slightly underperforming the rest of EM currencies which advanced +0.20%. The Argentinian Peso (-2.40%) was the big underperformer though, following the news that Central Bank President Luis Caputo had resigned just three months after taking office. His decision was supposedly due to personal decisions, though 10-year yields rallied 6.6bps and the country’s benchmark equity index advanced +2.68%, possibly on optimism that a new IMF deal will be finalized soon.

Overnight, the tone in Asia has been mostly positive. Leading the way are bourses in China (Shanghai Comp +1.27%, CSI 300 +1.58%) which have been boosted by the news that MSCI is considering lifting the weight of China’s mainland shares in its global indexes from next year by lifting the cap on free-float-adjusted market value to 20% from 5% for yuan-denominated stocks.

Chinese tech stocks are also being considered. The Hang Seng (+1.64%) has also been boosted by that news while the Nikkei (+0.20%) and ASX (+0.11%) have made smaller advances. Futures in the US are also up modestly while Treasuries have largely held onto yesterday’s move. There’s not been much notable newsflow overnight other than that although it was interesting to see that the new BIS figures show non-financial debt as a percentage of GDP in China increasing again in Q1 2018 with the ratio up to 164.1%, having declined in the four quarters prior to that, hitting 160.3% at the end of 2017.

In other news, bucking the trend in bond markets again yesterday were BTPs with 10y yields falling -7.0bps and 2y yields down -5.2bps. This followed a la Stampa article yesterday shortly after we went to print which suggested that the government was heading to a compromise on the budget deficit of 1.9% of GDP. Other major newspapers, Corriere and Il Messaggero, both reported similar values in the 1.8-1.9% range as well. That’s about 0.3% higher than what was previously reported as the upper limit for Tria, but illustrates that we might be getting closer to a deal. The article also made a reference to some measures to boost capital investment with the intention of accounting them as one-off and therefore out of the computation of the deficit for EU rules according to our Italian economist Clemente DeLucia. It is unclear if this potential one-off would be included into the 1.9% or if the aggregate deficit figure would be above that level but the market will no doubt be keeping an eye on this. As you’ll see in the day ahead Tria is due to speak this morning so we’ll be watching out for any more headlines.

Here in the UK, the latest Brexit development was confirmation from PM May that she would prefer a no-deal Brexit outcome to  a Canada-style outcome, which is pushback against the Brexiteers who have been urging May to revert  to a simple FTA. Separately, at the Labour party conference, Shadow Brexit Secretary Starmer said that the opposition would be willing to vote against PM May’s Brexit deal, with an eye toward a new general election or a second referendum if necessary. Labour does not really have an incentive to articulate a clear position for now, so their leaders will likely continue to keep the party’s position ambiguous. The pound shook off the Brexit noise to close +0.49% stronger yesterday.

Staying in Europe, following on from Draghi’s comments on Monday, Peter Praet said that “I don’t think there was anything new” in Draghi’s comments and that the market was right to downplay the ‘vigorous’ headline a little later. Praet instead said that “basically what we say is price pressure remain subdued and it will take a long time before we get close to two percent”.

In Germany, the CDU’s party whip, Volker Kauder, was surprisingly replaced in favor of Ralph Brinkhaus. Kauder was a Merkel loyalist tasked with ensuring parliamentary support for the Chancellor’s policies, and his loss reflects the growing tension within Merkel’s governing coalition. It slightly raises the odds that Merkel struggles to finish her term as party leader and Chancellor, and the DAX index dropped -0.24% after the story broke, but subsequently rallied to close +0.19% higher.

On the economic data front, UK inflation expectations ticked higher in August, up 0.2pp to 2.9% for short-term expectations and up 0.1pp to 3.4% for the long-term. In France, manufacturing confidence fell slightly to 107 from 110, mirroring last week’s slightly soft PMIs. In the US, data was strong, with the Richmond Fed Manufacturing Index up to a new cyclical high of 29 from 24. The Conference Board consumer confidence index also rose, to 138.4 and its highest level since 2000.

The day ahead will almost certainly revolve around the FOMC meeting this evening and Chair Powell’s press conference. Prior to that there’s only a few data releases due with September consumer confidence in France, September CBI retailing reported sales in the UK and August new home sales in the US. Away from that keep an eye on Italian Finance Minister Tria’s comments at 9.30am BST when he speaks at an event organized by the retailers’ association. German President Steinmeier is also due to visit the ECB this afternoon, EU27 government envoys are due to meet in Brussels to discuss Brexit, the UN summit continues for another day while here in the UK Labour leader Corbyn is due to speak at the Labour Party conference.

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Daimler AG has followed in the footsteps of Volkswagen AG and dumped its longtime CEO, promoting in his place a veteran member of the company’s senior management who will also serve as the German auto stalwart’s first non-German CEO.

According to Bloomberg and the Financial Times, Daimler has appointed board member and development head Ola Kallenius to replace Chief Executive Officer Dieter Zetsche two years ahead of schedule as the company struggles with the fallout of a widening emissions-cheating scandal. The news drove Daimler shares lower in European trading.

Swedish-born Kallenius will take the reins in 2019 while Zetsche will be appointed to the company’s supervisory board in 2021, setting him up to eventually take over as chairman. Indeed, it would be difficult for Stuttgart-based Daimler to sever ties with Zetsche entirely, considering the role he has played in turning around the company following its de-merger from Chrysler in 2007, as the Street explains. Daimler is the world’s largest luxury car maker and also ranks among the largest makers of commercial vehicles.

Dieter Zetsche

Supervisory Board Chief Manfred Bischoff (who will be replaced by Zetsche in 2021) lauded the appointment, per the Street:

Zetsche, 65, is one of the most respected names in the global auto industry and has led Daimler since it demerger from Chrysler in 2007, driving the group to record sales and reestablishing the Mercedes brand after years of concerns over quality and performance. However, a series of profit warnings, and spats with German labor unions, led to a shorter-than-expected extension of his term in 2015. Zetsche has also struggled to drag Daimler away from Germany’s ongoing ‘diselgate’ scandal, which has prompted a European Commission investigation into possible collusion between the country’s biggest carmakers that officials say may have denied customer access to less-polluting vehicles.

“In view of the challenges presented by the transformation of the automotive industry, the supervisory board intends to prepare a suitable succession at an early stage,” the company said in a statement. “The Chairman of the Supervisory Board, Manfred Bischoff, will recommend the election of Dieter Zetsche as his successor as the Chairman of the Supervisory Board, taking effect at the end of the Annual Shareholders’ Meeting in 2021.”

“In order to comply with the two-year cooling-off period, Dieter Zetsche will therefore step down from his positions in the Board of Management of Daimler AG and Head of Mercedes-Benz Cars, effective at the end of the Annual Shareholders’ Meeting in 2019,” Daimler added.

However, Daimler accelerated is management position as the company’s shares have shed nearly 25% of their value since the beginning of the year as Daimler has clashed with the Trump Administration over its trade war with China and Europe, which forced Daimler to slash its earnings outlook for the year as it has been drawn into the intensifying “Diesel-gate” scandal. The company earlier this year said it would recall some 774,000 vehicles over emissions-testing concerns. According to Bloomberg, 49-year-old Kallenius has been the heir apparent to Zetsche, 65, for several years, and indeed seems “like the logical solution” to replace the legendary CEO.

With Kallenius, Daimler is promoting a long-serving employee who has risen through the ranks. Kallenius previously served as the sales lead for the company’s key Mercedes-Benz division while also leading its AMG performance car division. Kallenius’ appointment as development chief at the end of 2016 was a clear signal that he was in line to succeed Zetsche, prompting then-Daimler trucks chief Wolfgang Bernhard to leave.

However, with regulators increasingly focusing on the company’s involvement in “Diesel-gate”, one could be forgiven for suspicions that Kallenius is being set up to bear the brunt of the criticism and consequences from the scandal, while Zetsche spends the next two years rehabilitating his reputation in preparation to retake the reins as chairman.

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Authored by Nick Cunningham via Oilprice.com,

An oil price spike is starting to look increasingly possible, with a rerun of 2008 not entirely out of the question, according to a new report.

The outages from Iran are worse than most analysts expected, and bottlenecks in the U.S. shale patch could prevent non-OPEC supply from plugging the gap. To top it off, new regulations from the International Maritime Organization set to take effect in 2020 could significantly tighten supplies.

Put it all together, and “the likelihood of an oil spike and crash scenario akin to the one observed in 2008 has increased,” Bank of America Merrill Lynch wrote in a note. BofAML has a price target for Brent at $95 per barrel by the end of the second quarter 2019. In 2008, Brent spiked to nearly $150 per barrel.

The supply picture is looking increasingly worrying, with Venezuela and Iran the two principal factors driving up oil prices in the fourth quarter. Notably, the bank increased its estimate of supply losses from Iran 1 million barrels per day (mb/d), up from 500,000 bpd previously.

U.S. shale can partially make up the difference, but the explosive growth from shale drillers is starting to slowdown, in part because of pipeline bottlenecks. BofAML sees U.S. supply growth of 1.4 mb/d in 2018 but only 1 mb/d of growth in 2019.

That means that there isn’t the same upward pressure on WTI as there is on Brent, largely because infrastructure bottlenecks in the shale patch keep supplies somewhat stuck within the United States. And it isn’t just in West Texas where the constraints are causing problems.

“[B]ottlenecks in the Permian basin could well extend to other areas such as the Bakken or the Niobrara, and we do not even rule out temporary export capacity constraints in the Gulf Coast as domestic output overwhelms logistics,” BofAML said in a note.

Meanwhile, the demand side of the equation is not as clear. For now, demand still looks strong. The IEA puts demand growth for 2018 at 1.4 mb/d, and Bank of America Merrill Lynch agrees. But BofAML says three important demand-side factors to watch, which could undermine the high price scenario.

First, the dollar is strong, which would likely prevent a run up in prices in the same way as in 2008.

Second, higher debt levels in emerging markets means that many countries are in a weaker spot than they were in 2008.

Third, capital could continue to flee emerging markets because of rising interest rates from the Federal Reserve, U.S. corporate tax cuts and U.S. tariffs.

Why the focus on emerging markets? Beyond the possibility of contagion, emerging markets represent the bulk of oil demand growth, so any faltering would upset the global demand picture. The strong dollar, higher debt and capital flight means that “significant [emerging market] oil demand destruction could follow if Brent crude oil spikes above $120/bbl,” Bank of America Merrill Lynch said.

Nevertheless, there are some ingredients in place that could lead to dramatic price spikes, even if the corresponding demand destruction makes the spike only temporary. BofAML puts total global supply outages at around 3 mb/d, only a bit lower than the recent peak of about 3.75 mb/d in 2014. And that doesn’t take into account the unfolding losses from Iran. In other words, if Iran loses around 1 mb/d of supply due to U.S. sanctions, as looks increasingly likely, total global supply outages could balloon to their highest in about two decades, not seen since the roughly 5 mb/d of outages during the 1990-91 Persian Gulf War.

Finally, the 2020 IMO regulations will force marine fuels to lower sulfur content from 3.5 percent to 0.5 percent. This will lead to a sharp increase in demand for diesel and other low sulfur fuels as the deadline for implementation approaches.

“[T]he transition to a lower sulfur fuel specification will not likely be smooth,” BofAML notes.

At a minimum, it appears that bearish sentiment from within the oil and gas industry has evaporated. Bloomberg notes that on the earnings calls of 22 major energy companies for the third quarter, not once was the phrase “lower for longer” mentioned, the first time since 2015 that was true. It wasn’t too long ago that blistering U.S. shale growth was thought to have permanently lowered the marginal price of production, which would lead to a period of lower oil prices for the foreseeable future.

That mantra seems to have been fleeting as a growing number of analysts see higher prices ahead with concerns about the possibility of triple-digits.

“The market does not have the supply response for a potential disappearance of 2 million barrels a day in the fourth quarter,” Mercuria Energy Group Ltd. co-founder Daniel Jaeggi said in a speech at the S&P Global Platts Asia Pacific Petroleum Conference, according to Bloomberg. “In my view, that makes it conceivable to see a price spike north of $100 a barrel.”

Meanwhile, the co-head of oil trading at Trafigura, another top oil trader, said that $100 oil was possible by the end of the year.

One of the key factors that will determine whether this happens or not is how Saudi Arabia responds.

“Our plan is to meet demand,” said Saudi Energy Minister Khalid Al-Falih. “The reason Saudi Arabia didn’t increase more is because all of our customers are receiving all of the barrels they want.” His comments came after the OPEC+, which ended with no plans to increase output.

The Wall Street Journal reports that Saudi Aramco has told its customers that might be running short on Arab light crude in October, and that in the long run, it won’t be able to meet demand if Iran is knocked offline. “[W]e are heading to a price spike, likely $90 to $100” an oil trader told the WSJ. “It’s not just Iran that will suffer. It’s going to have a boomerang effect with rising gasoline prices” in the U.S.

Worse, Saudi Arabia has officially said that it could cover for Iran’s losses, even if most of Iran’s production goes offline. In the past, Saudi officials have suggested that they could produce up to 12.0-12.5 mb/d if it the market needed it. But Saudi sources told the WSJ that producing “11 million is already a stretch, even for just a few months.” With output already up to about 10.4 mb/d, that leaves a significantly smaller pile of spare capacity than is commonly thought.

“It’s tearing higher,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S, according to Bloomberg. “Technicals and fundamentals seem to be pointing in the right direction at the moment and that can be quite a potent cocktail.”

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