Month: November 2018

Authored by Sven Henrich via NorthmanTrader.com,

We’re in one of the longest economic expansion cycles in history and nobody’s happy. It’s mind blowing. You’d think 2018 would have people dancing in the streets. 3.7% unemployment, record stock market prices. Well the ladder until recently that is.

So let me rephrase:

What happens if you have record buybacks, record dividends, and record earnings but 89% of assets yield a negative return in US dollar terms?

No really that’s just what happened:

The short answer is: Nobody knows because it has never happened before.

According to $DB: 

“A whopping 89 percent of assets have handed investors losses in U.S. dollar terms, more than any previous year going back more than a century”.

Mind Blowing.

No wonder The Fed Crying has Begun. Bulls are now dependent on a big year end rally to turn the ship around. And a technical case for that can certainly be made. But they only have a few weeks left in the year and they better hurry otherwise they owe everyone a big apology and can kiss their year end bonuses goodbye.

But that’s markets in 2018. It’s not reflective of what has happened to the middle class over the last 20 years.

Summary: Utterly screwed.

How else to square headlines such as these:

America’s 1% hasn’t controlled this much wealth since before the Great Depression

1 in 3 Americans have less than $5,000 saved for retirement

65% of Americans save little or nothing—and half could end up struggling in retirement

I could post more links, but the message is clear: Wealth inequality is vast and nobody’s happy.

If you don’t think so have you looked at our political discourse lately?

If things are so great why is political discontent so high? Many will want to blame Trump. But he’s an individual, one perhaps that has ruthlessly taken advantage of the underlying sentiment. He’s not created the disease, perhaps one can argue he has amplified the symptoms for his purposes, but the disease was already there and seeded the stage for his arrival.

I’ve been around the block a while and I can’t recall seeing people ever this frustrated when things are supposedly good.

My point on twitter recently:

There is nothing in economic cycle history that suggests that such low unemployment rates are sustainable. If anything history suggests a big turn is coming.

But not to worry here’s Janet:

“Keeping the U.S. economy near full employment is lifting pay for unskilled workers and helping ease inequality in the country, former Federal Reserve Chair Janet Yellen said. “I’m tempted to say there isn’t a whole lot central banks can do” about inequality, but there are some options, like following policies to keep the economy as close to full employment as possible, she said.”

2 points here:

One: Lifting pay for unskilled workers helps ease inequality. What planet does Janet live on? CEO compensation has sky rocketed again leaving workers far behind. Indeed CEOs now earn 312 times the average worker’s wage:

You really think some basic income increases on the low end is going to make even anything close to a dent in this ratio?

Especially since the question of rising costs and inflation are completely void in her argument. If you have some basic rising wages for workers and now inflation accelerates the net effect is exactly what?

Well, based on the data here’s your answer:

Zilch. No sign of improvement. So I frankly have no idea what Janet Yellen is talking about and perhaps she doesn’t either.

Two: There isn’t a whole lot central banks can do? Please. Central banks, with their extreme low rate policies benefitting the asset classes and punishing savers and retirees have greatly contributed to the record expansion in wealth inequality.

Only half of Americans actually own stocks and the wealthiest own 81% of their value. The rest? Left behind hence the headlines above.

We’re at the tail end of a long economic cycle and wealth inequality is the worst it’s been in modern times. But keep telling yourself inequality is getting better. It’s not. It’s a tragedy what’s happened to the middle class, the countless millions who have no retirement, no savings, nothing. This happy talk by Yellen is offensive as the Fed has contributed to all this. They’re not all to blame, but they’ve had a part & refuse to acknowledge it, instead they want to take credit with the consequences unaddressed and not having played out.

The consequences will only come truly to light during the next downturn. To say that wealth inequality is improving at the end of a cycle is to be willfully blind to reality and the next downturn. People who have little to no savings when things are at their best will be in dire straights when things turn.

And if the end of a cycle is the measuring stick for success then this cycle has been a failure. We see it in the economic statistics and we see it in the country’s politics. Division, resentment, and anger.

I wish it was not so. We, as a society, can’t improve it if we can’t even have an honest and realistic debate about it.

But there’s no leadership on the horizon.

The Fed? “There isn’t a whole lot we can do”.

Congress? “We just gave the top 1% and corporations a massive tax cut”.

Mind blowing.

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Despite record voter turnout and a staggering $5 billion political spend between both parties, Democrats’ hoped-for ‘blue wave’ failed to materialize on Tuesday. Instead, the reality was closer to a purple wash.

Democrats won a slight majority in the House – they were up 26 seats at last count, three more than the 23 needed to flip control, with more races expected to be called in their favor on Wednesday – but Republicans picked up seats in the Senate, solidifying what had been a razor-thin majority. Almost all of those seats were won by staunch conservatives who are expected to back the Trump agenda. Meanwhile, it’s unlikely that the Democrats will come anywhere close to the 40 seats they would have needed to signify a “tsunami-like” victory. However, at least one Democratic narrative was validated as 18 of the 29 Republican districts that flipped to the Democrats were won by women, cementing the ‘year of the woman’ narrative.

Both parties can claim important victories in gubernatorial races. Republican Mike DeWine bested Richard Cordray in Ohio, and Ron DeSantis defeated Democratic challenger Andrew Gillum in Florida, solidifying Republican control over two key swing states. But Democrats wrested control of governors’ mansions in Wisconsin, Michigan and Kansas.

Republican won several important victories in the Senate and ousted a handful of Democratic incumbents, per the FT:

In the Senate, the Democrats lost ground after its incumbents were defeated in North Dakota, Indiana and Missouri. At last count, Democrats were also trailing in Montana and Florida, with the latter race possibly set to go to a recount. The only real upset for Democrats in the upper chamber was the defeat of Nevada’s Dean Heller, who lost to Democrat Jacky Rosen. But the Senate victories were strong enough to vindicate President Trump’s controversial campaign strategy, which saw the president hold a blitz of campaign rallies across the US, while elevating immigration to the race’s defining issue.

Still, the Democrats’ takeover of the House suggests that they will almost certainly use their subpoena power to investigate everything from Trump’s tax returns to his financial ties in Eastern Europe to his purported “relationship” with the Kremlin. It also signals that Trump is in for a two-year struggle as partisan gridlock will almost certainly hamstring parts of his agenda.

Here’s a summary of the night’s big wins and losses, courtesy of the Guardian.

• In the House, Democrats secured the 218 seats needed to regain control.
• Democrats won Republican-held seats in Colorado, Florida, Kansas, Minnesota, New York, Pennsylvania and Virginia.
• In the Senate, Republicans have expanded their majority, and Trump declared the night a “tremendous success”.
• Missouri Democratic senator Claire McCaskill lost to a Republican challenger.
• A Republican also ousted senator Joe Donnelly, Indiana’s only Democratic statewide officeholder.
• Texas Senate candidate Beto O’Rourke, who became a Democratic superstar this election, narrowly lost in his race to unseat Ted Cruz.
• Republican senator Dean Heller also lost his seat in Nevada to a Democratic challenger.
• In the governor’s races, Democrats gained seven new seats.
• Wisconsin governor Scott Walker, an influential Republican, lost his seat to a Democratic challenger.
• Andrew Gillum, Democratic candidate for governor in Florida, lost to Republican Ron DeSantis.
• The governor’s race in Georgia was too close to call, with Democrat Stacey Abrams saying she would not concede to Republican Brian Kemp, the state’s secretary of state. It could result in a runoff.
• A record number of women won races across the country, and candidates of color and LGBT people have also broken barriers.
• Voters passed ballot measures across the country with new laws on voting rights, marijuana, taxes and more.

And as the FT pointed out, for Trump, there might be a silver lining. The paper noted that many of those ousted were moderates who had resisted the Trump agenda. By flushing these lawmakers out of the party, Trump may have just solidified his dominance of the Republican Party.

While many mainstream political pundits refused to acknowledge it, this fact wasn’t lost on Trump.

Those that worked with me in this incredible Midterm Election, embracing certain policies and principles, did very well. Those that did not, say goodbye! Yesterday was such a very Big Win, and all under the pressure of a Nasty and Hostile Media!

— Donald J. Trump (@realDonaldTrump) November 7, 2018

Tremendous success tonight. Thank you to all!

— Donald J. Trump (@realDonaldTrump) November 7, 2018

Received so many Congratulations from so many on our Big Victory last night, including from foreign nations (friends) that were waiting me out, and hoping, on Trade Deals. Now we can all get back to work and get things done!

— Donald J. Trump (@realDonaldTrump) November 7, 2018

Seeing President Trump’s Wednesday morning “victory” tweet, and hearing reports about his jubilant White House reception, some Democratic pundits were inclined to accuse the president of embracing an unrealistically positive take on the night’s events. But even as their “blue wave” fizzled, Democrats were inclined to do some wishful thinking of their own.

If the Senate didn’t exist you would think this is a massive blue wave,” Brendan Boyle, a Pennsylvania Democrat who won re-election to a third term told the Financial Times. “In the House, governor, and state legislative races, we’re seeing big Democratic wins. But in the Senate, against that deep red map, not at all.”

Nancy Pelosi, who will almost certainly reclaim the title of speaker of the house now that Democrats have taken back the chamber, tried her hardest to play down the disappointment Democrats probably felt as Trump’s party expanded its majority in the Senate while staving off a Democratic super-majority.

“Today is more than about Democrats and Republicans,” said Ms Pelosi. “It’s about restoring the constitutions’ checks and balances to the Trump administration.”

Trump will retain the ability to appoint conservative judges (and replace several cabinet members including Attorney General Jeff Sessions, is widely believed to be on his way out) thanks to Republicans’ expanded Senate majority (Republicans picked up two Senate seats, though ten races remain undecided), but with Democrats reigning in the House, there’s no question that life for Trump is about to get a lot more difficult.

“Life is going to get far tougher for President Trump,” said James Knightley, chief international economist at ING Bank NV. “The split Congress means that there is more likely to be gridlock, which will significantly curtail his legislative agenda. Bi-partisan action may be possible in areas such as infrastructure spending, but for the most part divisions between and within the parties mean that progress will be difficult.”

In summary, voters are about to become reacquainted with one of the defining features of the Obama era – that is, intractable gridlock in Washington (profiled here) as partisan warfare becomes the defining theme. While analysts believe there might be room for cooperation on infrastructure spending, Trump will now need to focus on what he can accomplish out of the executive (and, when it comes to appointing judges, the judiciary) branch. Passing major legislative priorities, which was already hard enough with his fractious Republican majority in the Senate, will be nearly impossible.

But investors didn’t seem to mind, as US stock futures surged Wednesday morning as the market celebrated the triumph of its “base case”.

But legislative priorities aside, Washington will now turn its attention to the 2020 campaign, which has already unofficially begun. 

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For once the pollsters were – generally – right, and while there was no blue wave, Democrats did win the House majority as most predicted, as Republicans not only kept the Senate majority but gained a few additional seats. The outcome, which had been extensively analyzed in advance, can be summarized in one word: gridlock.

Here, as explained by Goldman’s political economist Alec Phillips, is what the US divided congress, i.e., gridlock, means for the US economy, and for US policies for the next several years.

• A consensus outcome. With many races not yet called, most major media outlets have called the overall midterm election results: the House majority has flipped to the Democrats (many results are still outstanding but most projections suggest a split of roughly 230 Democrats and 195 Republicans in the House) and the Republicans will keep their majority in the Senate (most projections show 53-54 Republicans and 46-47 Democrats, including independents). The overall outcome was the widely held consensus view going into Election Day, though the Republican gain in the Senate is larger than expectations.
• No major changes on taxes: We expect no major tax legislation to become law under a divided Congress. Democratic House leaders might attempt to pass tax legislation that redistributes the 2017 tax cut toward lower income households while also reversing the limitation on the state and local tax deduction. A proposal to partly reverse the corporate tax cuts is also a possibility. However, a proposal making substantial revisions to the 2017 tax reform legislation is very unlikely to attain the 60 votes needed in the Senate, if it even came up for a vote. Our projections of the growth impulse from fiscal policy assume no substantial tax changes will be enacted over the next few years, and the election result should not change this assumption.
• Spending is likely to be extended around current levels: Under a divided Congress, we expect Congress to approve discretionary caps for defense and non-defense spending for FY2020 and FY2021 that are roughly flat in real terms with the spending caps for 2019 that Congress approved earlier this year. While President Trump has called for a 5% cut in discretionary spending—this would work out to around a $65bn (0.3% of GDP) reduction—we expect that Democratic House leaders will insist on a higher level closer to the current level. Note that whatever is decided is unlikely to influence spending trends until 2020, as the spending caps for FY2019 were already agreed to earlier this year. This legislative scenario is consistent with the assumptions underlying our current government spending forecasts.
• An infrastructure deal seems unlikely: A divided Congress is unlikely to enact a major infrastructure program, in our view. While President Trump and congressional Democrats have both supported infrastructure programs, the details differ substantially and, more importantly, Democrats might not be motivated to reach an agreement with the White House prior to the 2020 presidential election.
• Healthcare will be a major issue: Healthcare was listed as a top issue for more voters than any other in exit polling, with 42% listing it as the top issue. The Democratic-majority House is likely to pass drug pricing legislation, but it could be blocked in the Senate. That said, with President Trump also publicly supportive of drug pricing changes, Senate Republicans could come under pressure to reach a compromise on the issue.
• Trade policy should not be directly affected: A Democratic House poses some risk to passage of the implementing legislation for the US-Mexico-Canada Agreement (USMCA), but we expect that the deal would eventually be approved. However, potential opposition could prompt President Trump to initiate the withdrawal process from the current NAFTA, forcing the House to choose between the new deal or none at all. We do not expect the midterm election outcome to change the Administration’s direction on US-China trade policy, where we think additional tariffs in 2019 are more likely than not.
• Little impact on the regulatory agenda: Control of the House has little direct impact on the regulatory agenda, since (1) most House-passed legislation would likely be blocked in the Senate, and (2) most regulatory changes under the Trump Administration have been carried out with existing authority and have not needed congressional approval. That said, it is likely that regulatory scrutiny of some regulated industries (health care, financial services) could increase through House committees.
• Fiscal deadlines become riskier: Fiscal deadlines will become somewhat riskier under a divided Congress, in our view. The next spending deadline is December 7, 2018 (before election results take effect) but this is likely to be pushed to either Q1 2019 or September 30, depending on what Congress decides after the election. Under a divided Congress, there will be a substantial risk of shutdown at the next spending deadline in 2019, though whether it happens will depend on the political environment at that point. The debt limit will be reinstated March 1, 2019 and we expect Congress will need to raise it by August. We note that the two most disruptive debt limit debates in recent memory, in 2011 and 2013, both occurred in a divided Congress.
• No major signal regarding 2020: We do not believe that the midterm election result sends much of a signal regarding the outlook for the 2020 presidential contest. While there are examples of a party winning the White House two years after flipping the House majority (President Obama in 2008 followed a Democratic win in the House in 2006), there are examples of the opposite as well (the 1994 and 2010 Republican midterm wins were followed by Democratic wins in 1996 and 2012). Perhaps more tangible is the potential Republican gain of 2-3 seats in the Senate, which, if the result holds, would make it more difficult for Democrats to win control of the Senate in the 2020 election, all other things equal.

Source: Goldman Sachs

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So much for the consensus midterm election outcome being priced in: one look at global markets this morning shows a sea of green, and confirms that markets clearly like gridlock more than many had expected.

After what was initially a muted reaction from financial investors in the United States and globally, European stock markets turned higher ignoring a mixed Asian Session with S&P futures following, gaining as much as 1% percent.

A quick look at global markets saw Asian equities mixed, Europe solidly in the green, while in FX, the Indonesian rupiah, which soared the most since June 2016, led gains as the dollar weakened for the third day. South Africa’s rand jumped to the strongest in three months. Egyptian shares rose 1.5% and Turkish stocks gained 1.1%.

US politicians will now be looking to the 2020 elections, so “Republicans should now push the Trump Administration to pursue more cautious economic policies, particularly with respect to trade,” said Jan Dehn, the head of research at Ashmore Group. With Democrats keen on constraining Trump, there may be a moderation in policies, he added. And finally, “the likelihood of very large stimulus measures has now declined,” Dehn said. “All in all, these factors will weigh on the dollar and support EM currencies.”

Recapping last night’s results, Democrats regained a majority in the House of Representatives while Republicans not only clinched control of the Senate but also gained 3 extra seats. And while the results will hamper Trump’s business-friendly agenda and could lead to uncertainty about his administration at a time when investors are already worried that a decade-old bull market may be ending, dimming chances for any major fiscal initiative from the administration that might have pushed yields higher and strengthened the greenback, so far stocks are enjoying a relief rally that the outcome wasn’t worse.

Indeed, the results for the GOP were no worse than investors had feared and point to a protracted political gridlock that had largely been expected by investors. That left investors free to buy back into a market that had its worst month in seven years in October.

“Given what futures are pointing to right now, I think it’s probably a sign that on balance Republicans have marginally outperformed,” said UBS global wealth management CIO Geoffrey Yu. “The big question from here is do we add risk. Given how weak markets were in October, there is a slightly stronger case for us to outperform in the short-term.”

As Reuters notes this morning, gridlock in Washington will all but eliminate the potential for more tax cuts, which Trump has called for and which many on Wall Street would like. The sweeping corporate tax cuts passed by the Republicans last year have supercharged earnings growth. It also means a lower debt deficit on net, lower yields and a lower dollar. And indeed, the greenback tumbled overnight even as risk assets jumped, with the Bloomberg dollar index sliding to a two weeks low after peaking at the start of the month. The BBDXY fell as much as 0.6% following the results of U.S. midterm elections, with the move gaining traction after the London open as short-term names added fresh shorts; the 10-year Treasury yield fell almost 5bps below 3.18%.

The euro rose a third day to set a fresh two-week high against the dollar in early London hours, supported by data showing that German industrial output picked up steam in September, supporting the view that a third-quarter stagnation will prove temporary. Sterling advanced as U.K. Prime Minister Theresa May is preparing to ask the Cabinet to approve a draft Brexit deal potentially within days; option traders are less bearish on the pound, especially in the front end

The Democrats’ victory in the House could also benefit the market, some investors suggested, by tempering Trump’s aims such as on international trade.  Indeed, the Democrats’ ability to prevent Trump from passing new laws may push him to focus more on resolving U.S. disputes with China, although that wasn’t obvious to Chinese stocks, with the Shanghai Composite one of the few indexes closing in the red, and near session lows overnight.

Some investors were hopeful that Republicans and Democrats could agree on spending to improve infrastructure, which could boost many companies’ profits and drive more economic expansion.

In any case, investors will be happy just to move on from the elections: “It’s one less thing that’s in front of you that you have to worry about,” said Greenwood Capital CIO Walter Todd.

And with the elections now in the rearview mirror, the biggest macro themes remain the Fed’s ongoing interest rate hikes and the trade war after recent warnings from major names including Christine Lagarde and Former U.S. Treasury Secretary Hank Paulson. Meanwhile, the Italian government is holding a confidence vote on Wednesday, the Federal Reserve is set to decide interest rates on Thursday, and Theresa May is pushing on with efforts to agree a Brexit deal.

“Now that the elections are behind us, earnings and the Fed will be back in focus,” said Mohannad Aama, managing director at Beam Capital Management in New York. “Neither of those factors support expanding multiples for stocks.”

Elsewhere shares of Spanish banks surged after the local Supreme Court ruled they don’t have to pay back billions of euros in back taxes. The euro rallied as data showed German industrial output picked up steam in September.

Mortgage applications data is due, as well as earnings from Qualcomm, Prudential and Rockwell Automation, among others

Market Snapshot

• S&P 500 futures up 1% to 2,786.00
• Gold spot up 0.6% to $1,234.44
• U.S. Dollar Index down 0.6% to 95.79
• STOXX Europe 600 up 1.2% to 366.76
• MXAP up 0.2% to 153.15
• MXAPJ up 0.5% to 490.65
• Nikkei down 0.3% to 22,085.80
• Topix down 0.4% to 1,652.43
• Hang Seng Index up 0.1% to 26,147.69
• Shanghai Composite down 0.7% to 2,641.34
• Sensex up 0.1% to 34,991.91
• Australia S&P/ASX 200 up 0.4% to 5,896.87
• Kospi down 0.5% to 2,078.69
• German 10Y yield fell 0.7 bps to 0.427%
• Euro up 0.5% to $1.1486
• Brent Futures down 0.01% to $72.12/bbl
• Italian 10Y yield rose 7.0 bps to 3.026%
• Spanish 10Y yield fell 3.2 bps to 1.552%

Top Overnight News from Bloomberg

• Republicans won Senate seats from Democrats in states where Trump repeatedly journeyed for raucous, red-meat-filled rallies, including Indiana, Missouri and North Dakota. Trump allies won governors’ mansions in Florida, Iowa and Ohio. Trump’s party lost control of the House of Representatives. Democrats took at least 26 seats held by Republicans and one of the most high- profile races, in Georgia, was too close to call early Wednesday
• The Democratic takeover of the House of Representatives cripples Trump’s conservative agenda and opens the way for unfettered investigations into his scandal-plagued administration, his presidential campaign and his family’s business empire
• Former U.S. Treasury Secretary Hank Paulson warned of an “Economic Iron Curtain” dividing the world if the U.S. and China fail to resolve strategic differences; former Federal Reserve Chair Janet Yellen warned the U.S. might struggle to cope with lending risks that have spread beyond banks
• The People’s Bank of China sold 20 billion yuan ($2.9 billion) of bills in its first issuance in Hong Kong Wednesday, a move that could reduce the offshore yuan’s liquidity and support the Chinese currency
• CME Group Inc. is moving its European market for short-term financing, the largest in the region, out of London because the exchange operator wants to guarantee continental firms can continue to use it if there is a no-deal Brexit

Asian equity markets traded cautious as all focus centred on the US mid-term election results. A strong start for the Democrats weighed on US equity futures in early trade, although stock futures then recovered after further results and projections trickled in which suggested the unlikelihood of a Blue Tsunami (Democrat-controlled House and Senate) as the Republicans won in key Senate battlegrounds such as Indiana and tightly-contested Texas. As such, there was a non-committal tone in most Asia bourses with ASX 200 (+0.4%) and Shanghai Comp. (-0.7%) choppy, while Nikkei 225 (-0.3%) was initially bolstered by recent favourable currency moves before dipping into the red. Hang Seng (+0.1%) briefly outperformed amid a tech-led surge, before slipping into the red. Finally, price action in 10yr JGBs reflected the non-committal risk tone as participants second-guessed the election results and amid jittery trade in T-notes.

Top Asian News

• China’s Foreign Reserves Post Third Decline Amid Outflow Signs
• China’s Car Market May Contract This Year, Official Warns
• China’s Datang, Huadian Said to Await Final Merger Approval
• Vietnam’s Growth at Risk as Banks Face Capital Squeeze

European equities are positive across the board as investors digest the consequences of a split Congress, with US equity futures edging higher as some traders see the Democratic House majority as a prospect for trade policies to be reeled in slightly, albeit a lot of powers will still be retained by Trump. It is also worth noting the split Congress may translate to less fiscal stimuli as US tax reforms would face greater obstacles when passing through Congress. Going back to Europe, sectors are largely experiencing broad-based gains, while IT names lag. Spain’s IBEX outperforms as banking names (Caixabank +3.8%, Sabadell +2.9%, Santander +2.8%, BBVA +2.4%) benefit from reports the Supreme court ruled that banks are not required to pay mortgage stamp duty, which saves the banks from potentially having to reimburse billions of EUR to borrowers, although source reports noted that the Spanish government is to propose a law change so banks pay mortgage stamp duties, which contradicts the ruling. In terms of individual movers, Adidas (-1.9%) is the laggard in the German benchmark after revenues missed expectations, while Fresenius Medical (+9.0%) and Mediclinic (+5.0%) rose to the top of their respective indices after voters in California rejected a proposal to cap profits on dialysis companies.

Top European News

• Ukraine May Join Euro-Bond Rush in Bid to Deepen Investor Pool
• SNB’s Foreign Currency Reserves Rise to Near-Record Level
• Salvini Says Italian Government ’Absolutely Not at Risk’
• Why May Closing In on a Brexit Deal Can’t Stem a Business Exodus

In currencies, the DXY saw a relatively marked retreat in the index amidst broad Greenback losses in wake of the US mid-term elections, as currency markets factor in the prospect of policy protraction and a more difficult passage for President Trump’s fiscal agenda through a divided Congress. The DXY has lost grip of the 96.000 handle and also breached pre-NFP lows to test support/underlying bids around 95.700. CHF/EUR/AUD/GBP – Also firmly ahead vs the Usd, with the Franc back above parity and almost testing 0.9950 resistance despite latest SNB assurances that an accommodative and proactive stance is necessary due to fragile FX moves. The single currency has put aside persistent Italian budget concerns to clear some key upside technical levels, including 21 and 30 DMAs (1.1453 and 1.1479 respectively) to test a Fib just a fraction below 1.1500 where a whole host of orders are anticipated ranging from stops, option expiry and barrier hedging. The Aud is partially piggy-backing its antipodean counterpart, as the cross holds above 1.0700, but also extending post-RBA gains after upgrades to the 2018 and 2019 growth outlooks to probe offers/resistance ahead of 0.7300. Meanwhile, Cable continues to climb on Brexit hopes as well as the indirect bid via Buck weakness, and has now advanced above 1.3150 to circa 1.3175. JPY/CAD – Both lagging other majors amidst the post-midterm Dollar demise, but still well ahead and rebounding from recent lows around 113.00 and 1.3075 respectively, with the Loonie also benefiting from a recovery in oil prices amidst reports that Russia and Saudi Arabia may discuss crude output cuts in 2019. EM – Everyone’s a winner vs the increasingly down-trodded Usd, and even the Rouble that could yet face more US sanctions – Usd/Rub sub-66.0000.

In commodities, Brent (+1.0%) and WTI (+0.9%) are both higher on the day due to dollar weakness and general market sentiment, with a recent uptick in prices attribute to sources noting that Russia and Saudi Arabia are to begin discussing production cuts in 2019. In regards to Iran, the Nigerian oil minister stated that OPEC needs data on Iranian oil production ahead of the 6th December meeting, while adding that Iranian sanctions may not lead to a “nose dive” in Iranian oil output. Last night’s API crude inventories showed a build of 7.8mln barrels, which was more than three times the expected 2.4mln barrels. Traders will be mindful of the weekly DoE crude inventories for any signs of rising US crude production. Gold (+0.7%) hovering near session highs of USD 1235.4/oz as a weaker dollar boosts the yellow metal. Elsewhere, copper prices have increased on the back of dollar action and risk sentiment as market fears were alleviated by the GOP’s retention of the senate

Looking at the day ahead, much of the focus will likely be spent digesting the midterm results especially with the data on the light side. This morning in Europe it’ll be worth keeping an eye on the September industrial production print in Germany while UK house price data for October and September retail sales for the Euro Area are also due. In the US the only release of note is September consumer credit this evening. Away from that, EU trade chief Cecilia Malmstrom is due to make a speech in Brussels today while Russian PM Medvedev is due to meet Chinese Premier Li Keqiang in Beijing.

US Event Calendar

• 7am: MBA Mortgage Applications, prior -2.5%
• 3pm: Consumer Credit, est. $15.0b, prior $20.1b

DB’s Jim Reid concludes the overnight wrap

Straight to the main event this morning where the US midterm election results have mostly fallen in line with results indicated by polls, with the Democrats looking set to gain control of the House of Representatives but the Republicans retaining control of the Senate (and even potentially gaining 3 seats) according to all the major media outlets. It seems at the moment that the results have been broadly in line with what you’d expect given the President’s approval rating. There wasn’t a big blue wave but we will have a split Congress. A couple of hours before we went to print it was actually looking close in the House before the Democrats pulled away.

As for what markets have done, on net, moves have been orderly, though there were some sharper moves overnight when it looked like the Republicans might in fact retain control of both chambers. S&P 500 futures rallied as much as +0.56% around 3am GMT, but are back to +0.25% now. Similarly, the dollar swung from a +0.15% gain to -0.37% as we go to print. 10y Treasury yields are also now down 3.9bps to 3.186% however that was after touching a high of 3.2501% which in fact is higher than the closing high made back in October – which is also a seven year high. So a decent swing. In Asia we’ve also seen bourses advance including the likes of the Shanghai Comp (+0.26%), Hang Seng (+1.17%), Nikkei (+0.55%) and Kospi (+0.22%).

Yesterday’s session is a bit of an afterthought now but for completeness we did see Wall Street finish on a strong note, albeit on lighter-than-usual volumes. The NASDAQ fully reversed Monday’s loss to close +0.64% while the S&P (+0.63%) and DOW (+0.68%) also advanced into yesterday’s close with healthy gains. Mixed comments from China’s Vice President Wang Qishan about China reaffirming a desire to “work for a solution on trade acceptable to both sides” but also not to be “bullied and oppressed by imperialist powers” seemingly had little impact on sentiment. The same cannot be said for oil, where WTI and Brent slumped -1.41% and -1.42% respectively after the US issued temporary waivers to eight countries on purchases of Iranian crude. Treasuries (10-year +2.7bps) edged higher and to within half a basis point of that seven year high – which is impressive given the recent risk off – although as we’ve seen above they’ve rallied back overnight.

Prior to that, European markets just failed to clamber back onside having spent the majority of the session in the red. The STOXX 600 (-0.26%) notched up a second consecutive modest decline while the DAX and FTSE MIB ended -0.09% and -0.07% respectively. Bunds sold off +0.8bps, while BTPs underperformed (+7.2bps). The final October services PMI revisions were the highlight of the morning session, with the big headline being the outsized miss for Italy (49.2 vs. 52.0 expected). That represented a drop of 4.1pts from September and was also the first sub-50 reading since May 2016. That sent the composite down to 49.3 and a 59-month low, however the wider Eurozone composite print was revised up 0.4pts to 53.1 after Germany’s services print was revised up 1.1pts to 54.7. Italy was really the only real negative in October, as European growth looks much less synchronized than it did last year. On the positive side, however, Italy’s idiosyncratic weakness has not been contagious as yet.

Away from that, German factory orders rose +0.3% mom in September, with the August figures revised higher as well. That’s consistent with our economists’ expectations for 0.0% German growth in Q3 but a bounce to 0.3-0.4% qoq in Q4. The only data in the US yesterday was the September JOLTS report. Job openings declined slightly (to 7.01m from 7.29m in August) however the overall quits rate and the private quits rate held at 2.4% and 2.7%, respectively, matching their highest levels since 2001. Our US economists note that this data leads ECI wage growth and points to the ECI rising to 3.4% yoy by mid-2019 which, if realised, would be the highest level of the cycle.

The British Pound bounced between gains and losses yesterday but ultimately rose +0.44% amid a slew of Brexit-related headlines. The CME group announced that it is moving its eur-dominated bond and repo trading hub to Amsterdam to address potential “hard Brexit” uncertainties, while Prime Minister May is reportedly preparing to seek cabinet approval to a new draft Brexit deal. Press reports (like Bloomberg) suggested that a full Parliamentary vote could come as soon as 19 November. Ultimately, these headlines do not change the fundamental situation, where a solution to the Northern Ireland border remains the key sticking point. The DUP leader was quoted as saying that if the rhetoric goes in the current direction we’re heading for a no-deal. That’s a worry for PM May as it indicated the DUP aren’t best pleased with the current shape of the deal and without their support that chances of getting a deal through Parliament are more limited. It would also raise the prospect of an early general election if relations between the Conservatives and the DUP broke down completely as a result. Having said that cable is back above $1.31 having traded at $1.27 only a week ago.

As far the day ahead, much of the focus will likely be spent digesting the midterm results especially with the data on the light side. This morning in Europe it’ll be worth keeping an eye on the September industrial production print in Germany while UK house price data for October and September retail sales for the Euro Area are also due. In the US the only release of note is September consumer credit this evening. Away from that, EU trade chief Cecilia Malmstrom is due to make a speech in Brussels today while Russian PM Medvedev is due to meet Chinese Premier Li Keqiang in Beijing.

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Authored by Nick Cunningham via Oilprice.com,

The decision by the U.S. to grant waivers to eight countries, allowing them to continue to import oil from Iran, has helped ease the tension in the oil market. No longer are oil traders talking about $100 oil.

Iran’s oil exports stood at 1.7 million barrels per day in October and won’t fall to zero anytime soon. But that may not be the end of the story. “While consistent with our expectations, the granting of waivers does not imply that Iran exports will stabilize near current levels,” Goldman Sachs said in a research note on November 1. As more Iranian supply goes offline, the market will continue to tighten. Iran could lose nearly 600,000 bpd of exports by the end of the year, relative to October levels, the bank predicts.

“As a result, we still expect that the global oil market will be in deficit in 4Q18, leading to a strengthening in Brent timespreads,” Goldman said.

In fact, while everyone focuses on the short-term movements in oil prices, Goldman says it’s important to look at the futures curve.

“In our view, the most interesting takeaway from today’s oil price sell-off is the parallel shift in the crude forward curve. This is consistent with a move down on the oil cost curve as recent supply news (less Iran losses, more US and Saudi production) point to fewer high-cost marginal barrels needed in 2019,” the bank said.

That’s a bit of financial jargon, but the gist is that traders are suddenly less concerned that high-cost producers will be needed to supply the marginal barrel. Earlier this year, when Iran sanctions were announced and fears about Permian bottlenecks permeated into the market, oil futures prices rose sharply, with Brent five-year prices rising from $57 per barrel in May to $68 per barrel in September. This can be boiled down to investors believing that the oil market will need high-cost production in the years ahead to supply the marginal barrel, as low-cost producers are at their maximum levels.

However, over the last few weeks, the five-year Brent price fell back.

“The retracing of this last move higher reflects the realization that such high cost marginal barrels may no longer be needed,” Goldman Sachs analysts wrote.

That was due to several reasons. The EIA revealedthat U.S. shale production surged in August, rising by an astounding 400,000 bpd compared to a month earlier. That’s obviously important to the immediate present, since it means a lot more supply has been brought online than previously thought, just as Iranian exports go offline.

But it also suggests that U.S. shale can grow more at a given price level than many analysts had thought. It shows that “US shale is able to deliver more production at the lower 1H18 incentive price than previously expected and that Permian constraints are not as binding as initially feared.” WTI averaged just $65 per barrel in the first half of the year, with some producers in the Permian likely fetching less than that because of discounts related to pipeline bottlenecks. Goldman’s logic is that if U.S. shale can grow as quickly as it did this year, with WTI in the $60s per barrel, then that means it can continue to grow briskly, which means that oil prices in the years ahead will be lower than previously thought.

Another reason longer-dated futures prices fell back was because Saudi Arabia and Libya added new supplies. Low-cost production from these two countries could lower the price of the marginal barrel in the years ahead. The same is true for Iran – the losses from Iran are going to be more gradual than previously thought.

The result is a steeper backwardation in the futures curve, Goldman argues. A long bet on oil is more profitable, which could induce investors to jump in. That, in turn, could help edge up spot prices and near-term futures. Goldman sees Brent rebounding to $80 per barrel by the end of the year.

However, the longer-dated price is still lower. The investment bank sees Brent falling back to about $65 per barrel by the end of 2019 as midstream bottlenecks in the Permian clear up. That may allow OPEC to dial back on production and rebuild spare capacity. Goldman calls this a “re-anchoring of long-term oil prices.”

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It sounds like Theresa May and her cabinet are putting the cart before the horse.

Despite winning a major concession from the EU chief negotiator Michel Barnier last week, Theresa May’s revised “secret” Brexit plan has so far failed to pass muster in Westminster. And as the battle over the controversial “backstop” agreement – a plan to avert a hard border between Northern Ireland and Ireland at all costs, even if Brexit trade talks go “pear-shaped” – rages on despite the EU’s openness to keeping the entirety of the UK in the customs union (albeit temporarily), May’s leadership team has decided to skip the hard part and start formulating a plan to sell the deal – whatever that might be. 

And although May’s senior cabinet officials were not presented with a deal this week, presumably because the various factions in May’s conservative party have yet to unify behind whatever outline is presently being circulated, the leadership did at least manage to agree that, whatever happens with the details, May will have a deal in hand by the end of the month. And to help sell that deal, May and her top officials plan to stress a strategy of “measured success”, according to the BBC, which reportedly saw a copy of May’s government’s plan to market the deal.

“The narrative is going to be measured success, that this is good for everyone but won’t be all champagne corks popping.”

The plan relies on endorsements from foreign leaders like Japanese Prime Minister Shinzo Abe, as well as a flurry of corporate endorsements, to help shore up support before May shares the details of the deal in a speech to the CBI, one of the UK’s biggest and most influential business groups. The campaign strategy will culminate with an all-out blitz on the evening of the vote, expected late this month, demanding that lawmakers put their own agendas aside and put the country’s interests first.

Here’s the rough timeline of May’s plan, courtesy of the BBC.

Cabinet reviews the deal this Tuesday, the 6th November. They expect all the details to then leak.

“A moment of decisive progress” will be announced this Thursday. Raab to announce.

The narrative is going to be measured success, that this is good for everyone, but won’t be all champagne corks popping.

Then there’s recess until 12th.

After the announcement of decisive progress there follows the 10 days of Sherpa meetings with EU 27 and then daily themed announcements.

19th November – “We have delivered on the referendum” PM speaks at the CBI conference.

Saying this deal brings the country back together, now is the time for us all to unite behind it for the good of all our futures etc. She will also hold a business reception.

This is the day both the Withdrawal Agreement and Future Framework will be put to Parliament by way of a statement from Raab who will also do media. Junior ministers are doing regional media all day. Government lining up 25 top business voices including Carolyn Fairburn and lots of world leaders eg Japanese PM to tweet support for the deal.

20th – Theme is Delivering for the Whole of the UK – PM to visit the north and or Scotland and the Commons will debate in business motions the date of the Meaningful Vote.

PM will be back in the house to vote. The Cabinet Office publishes its explainer of the deal and what it means for the public, comparing it to No Deal, but not to our current deal.

Other business leaders to come out and back it eg Adam Marshall from Chambers of Commerce and supportive voices in devolved regions like Andy Street and Andy Burnham. Also hoping to get 3rd Sector voices out supporting it.

21st – Theme is Economy, Jobs, Customs. Philip Hammond to open debate in Commons and Raab to close it. Institute of Directors to speak out.

Hoping for Stephen Martin, Martin McTeague etc

22nd – Theme is immigration – take back control of our borders. Home Sec doing media and visits. Raab on QT in the West mids.

Hope Mike Hawes of SMMT will speak out in favour along with influential voices from the rest of the world saying how great this is for the flow of global talent.

23rd – Theme is money – NHS funding and structural funds. Matt Hancock hospital visit. David Everett to welcome the deal alongside Tech for UK.

24th Theme is Northern Ireland and The Union – no hard border in the UK and the integrity of the Union is protected. PM visits border communities and business in NI and maybe also to Wales to visit agri and export businesses. Karen Bradley doing media.

Trying to get Varadker to support and Anand Menon and Henry Newman too.

25th – Theme is global Britain. We can strike trade deals with RoW (rest of world) security in this one too.

Speech from Liam Fox. Jeremy Hunt on Marr. Hope Miles Celic to come out in support (City UK).

Lining up lots of former foreign secs to come out in support and Mark Littlewood of the IEA.

26th – theme is taking back control of our laws, Raab doing media. PM interview with Dimbleby.

27th – morning theme is agri and fisheries. Gove doing a visit and media.

Evening is the vote. HISTORIC MOMENT, PUT YOUR OWN INTERESTS ASIDE, PUT THE COUNTRY’S INTERESTS FIRST AND BACK THIS DEAL.

Understanding the controversy surrounding the Brexit “backstop” – and why the issue of avoiding a hard border in Northern Ireland has become such an intractable sticking point – can be difficult for non-Europeans (and, indeed, even some Europeans who haven’t closely followed the meandering negotiations).

According to the FT, Britain wants to avoid measures that could divide Northern Ireland and London, so keeping Northern Ireland in the EU customs Union while the rest of the UK leaves is a political non-starter for conservatives and members of the Democratic Unionist Party, the party in Northern Ireland that is helping to prop up May’s conservative government. The party’s leader recently said a customs border in the middle of the Irish Sea would be tantamount to “annexation” by Europe.

May and her government hope that the deal will win enough support to incentivize Barnier to call a summit of EU leaders to hammer out the language of a final deal that has a solid chance of passing Parliament.

Of course, no matter the text of the deal, Parliament still has the power to send negotiators back to square one which, this late in the game, would almost certainly lead to a “no deal” Brexit. Though May and her team are setting a “hard” deadline for the end of the month, observers can rest assured that, in reality, every deadline is a “soft” deadline. May and her team have little choice but to continue negotiations until the very last minute, at which point either a deal will emerge, or it won’t.

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Authored by Tom Luongo,

Immigration is a tricky subject for a lot of libertarians.  If there is one issue that has caused more fights in libertarian circles it is the question of restricting a person’s right to movement.

But in a world of private property where does that right end?  We know where it is in a world of public property.  It doesn’t.  I’m very Hoppean in my views on private property and the private production of defense.  So, I have zero problem going toe to toe with the left-libertarians who refuse to divorce themselves from reality and their principled hobby horses and push for open borders uber alles.

It’s stupid, counter-productive and, frankly, one of the main reasons why libertarians are thoroughly corrupted as a political force in the U.S., having been neutered by the Koch brothers fighting about irrelevancies.

Immigration issues are on the ballot today. 

The Soros-funded invasion caravan is a thinly-veiled political stunt which is being used to fuel the unquenchable greed of globalists using Marxist arguments of envy to sow sympathy for those marching to take back what was supposedly stolen by evil white American Imperialists.

The sad truth is that part of that narrative is true.  It’s also why open borders are incompatible with the world we live in today.  Because both the warfare state and the welfare state create an artificially high supply of migrants and an artificial demand for subsidy of those migrants, especially, as here in the U.S. where those migrants overwhelmingly vote for the party who will further subsidize them.

This is far beyond the principle that peaceable people should be free to traverse arbitrary political boundaries.

Those artificial political boundaries are created through the application of private property of the citizens nee subjects of the government.  If anyone has a claim on the property expropriated by this government it is the taxpayers themselves and not those trudging across Mexico in search of a handout.

Because like it or not, that’s what’s on the table today.  That’s reality.  When my grandparents came here from Italy they didn’t ask for a handout.  They weren’t given one either.

All they wanted was the opportunity, which they took and were grateful for.

So, it makes me happy today to see Italian Interior Minister and all-around badass Matteo Salvini highlight just how sick and insane the whole immigration issue is by announcing he’s cutting in half the daily allowance of migrants from 35€ per day (PER DAY!) to 19€.

That’s nearly $1200 per month folks.

As Ron Paul so succinctly said on the campaign trail, when you subsidize something you get more of it.

So, Italy under the direction of an EU-appointed Prime Minister and government was handing out nearly €1 billion a year to migrants in a country under a brutal austerity program and laboring under a crushing debt load due to fiscal mismanagement.

Now, it doesn’t take an economist to tell you that people respond to incentives.   No wonder everyone wants in.  And this is where I break with my left-libertarian brethren.

Open borders are incompatible with public property on the subject of defense. Because the state via public roads exports behavior the community doesn’t want to your front yard and you have no direct way to combat this.

It is especially incompatible with public property in which Marxist wealth transfer systems are in place.

In fact, the political system is so dysfunctional it encourages this behavior to suit the agenda of the wealthy at the expense of the middle class.  So has it been in both Europe and the U.S.

And the sick display of using economic migrants as political footballs lies at their feet.  And those who stand up against this abrogation of the basic property rights of natives are labeled racists, elitists, populists and Nazis.

So, Salvini made a brilliant political move by highlighting this insane practice of paying people to come be subsidized by native Italians who, frankly, had very little say in the matter.

Because up until today I didn’t know Italy was paying these people €35 per day.  And I’m sure a lot of Italians didn’t either.  So, by cutting the allowance Salvini highlights the practice but doesn’t end it outright, leaving that decision to voters to continue to be outraged about.

It also puts both his coalition partners at Five Star Movement and the rest of the Italian political elite and media in a position to defend a practice that 60% of Italians are furious about, illegal immigration.

He can do this because the polls are trending in his favor.  Any disagreement with his coalition partner puts them on a path to call for snap elections and reversing the terms of the coalition since The League now out-polls M5S.  Salvini knows this and it’s why he can continue to push on this issue because it is 1) popular and 2) the right thing to do.

The solution to the immigration problem lies at the heart of our attitude towards government.  The more power the government has to co-opt private property and the private production of defense the more the borders have to be controlled because of the perverse incentives the State engenders.

Like with most of our political problems, the solution is leaving the wealth of a community in the hands of that community to be free to try different solutions of their own accord.  It isn’t more power to the state.

And to the left libertarians who think destroying the country by flooding it with economic migrants is the most efficient way to achieve that end, I say, try that in your backyard, bub.

Because it ain’t happening in mine.

*  *  *

Join my Patreon if you want to discuss real solutions to the border problems.

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French President Emmanuel Macron had enough to say in a new and lengthy interview with Europe 1 radio to anger officials in both Washington and Moscow. 

While calling for greater independence in European defense he managed to take aim at both Russia and the United States, saying “We have to protect ourselves with respect to China, Russia and even the US.” He proposed in the Tuesday interview while at an event commemorating 100 years since the end of WWI that European leaders create a “real European army” not only to better defend the continent against Russia, but also to extricate French and European policy from that of the United States.

“We won’t protect Europeans if we don’t decide to have a real European army,” Macron said. “We must have a Europe that can defend itself on its own without relying only on the United States,” he asserted.

He further framed the idea in terms of combating rising nationalism and populism at home which might threaten the fragile peace on the continent, in an indirect reference to the build-up of tensions behind WWI. He called for a “stronger, protective Europe,” and decried an “increasingly fractured” continent that’s recently witnessed nationalism on the ascent. 

Amidst discussing the ambitious proposal, which could make NATO further obsolete in the long-run, the French president took a swipe at Trump. Speaking of President Trump’s recent decision to withdraw from the Reagan-era Intermediate-Range Nuclear Forces Treaty (INF), Macron said:

When I see President Trump announcing that he’s quitting a major disarmament treaty which was formed after the 1980s euro-missile crisis that hit Europe, who is the main victim? Europe and its security.

He said, “Russia… is near our borders and has shown it could be threatening,” and alarmingly described that “Peace in Europe is precarious.”

The closest thing to a current “EU army” that does exist (if it can be called even that) – the Common Security and Defence Policy (CSDP) – is generally perceived as more of a civil and emergency response joint EU member mechanism that would be ineffectual under the threat of an actual military invasion or major event. 

There’s been similar grumblings over the US decision to pull out of the INF in Germany, though Macron was the first head of state openly level the charge that the Trump White House is now putting European security at risk. Germany and France and other European countries have also sought to salvage the Iran nuclear deal, and have sought ways to circumvent US sanctions on Tehran. 

Within the past year Trump has pushed for NATO countries to pull their weight in terms of defense spending. According to 2017 numbers, the U.S. accounted for 51.1% of NATO’s combined GDP and 71.7% of its combined defense expenditure, which amounts to more American funds to NATO than Germany, France, Italy, Spain, the UK and Canada combined.

Thus the natural and long term by-product of a “real European army” — as Macron is suggesting — would be the slow eroding and demise of US power in the region, something that Putin would also no doubt welcome, so maybe there’s actually mutual interests in Paris and Moscow here. 

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