Month: January 2020

Authored by Patrick Buchanan via Buchanan.org,

Can a septuagenarian socialist who just survived a heart attack and would be 80 years old in his first year in office be elected president of the United States? It’s hard to believe but not impossible.

As of today, Bernie Sanders looks like one of the better, if not best, bets for the nomination. Polls have him running first or second in the first three contests: Iowa on Monday, and then New Hampshire and Nevada.

If Bernie can best main rival Joe Biden in Iowa, he will likely thump Joe in New Hampshire. Biden’s campaign, built around “electability,” could suffer a credibility collapse before he reaches South Carolina, where Joe is banking on his African American base to rescue him if necessary and give him a send-off victory straight into Super Tuesday.

If Sanders can beat Biden two or three times in the first four primaries in February, the last remaining roadblock on Sanders’ path to the nomination could be Mike Bloomberg’s billions.

Hillary Clinton may sneer, “Nobody likes him,” but Bernie has a large, dedicated, loyal following, especially among millennials, and tens of thousands more small-dollar donors than any other Democratic candidate.

He is flush with cash. He has a radical agenda that appeals to the ideological left and the idealistic young. The rising star of the party, Alexandria Ocasio-Cortez, is campaigning alongside him.

And, say what you will, Sanders is no trimmer or time-server. He has consistently voted his values and views. He voted no to Bush 41’s Gulf War, no to Bush 43’s Iraq War, no to NAFTA, no to GATT. In the ’80s, when President Reagan battled the Marxist Sandinistas in Nicaragua, Sanders was on the other side.

But what makes Sanders an appealing candidate for the Democratic nomination may prove poisonous to him as a party nominee in the fall.

Image Source: Ben Garrison at Grrraphics.com…

For what does Bernie promise?

Free tuition at public colleges and forgiveness of all student debt.

“Medicare for All,” a single-payer government-run health care system that would require a huge hike in middle-class taxes and abolish private health insurance for the 160 million Americans currently enrolled.

He would break up the big banks, go after Wall Street, add $60 trillion of federal spending in the next decade, and raise income, corporate, capital gains, estate and inheritance taxes.

He would expand the government’s share of the U.S. economy to levels rivaling that of France, the highest in the free world.

Bernie was first to back the Green New Deal and pledges to reach carbon neutrality in 10 years in energy and transportation. As for our oil, gas and coal producers, says Sanders, they “have evaded taxes, desecrated tribal lands, exploited workers and poisoned communities.”

How would Sanders deal with the millions of illegal migrants now within the country? He’d welcome them all in.

Bernie has proposed the abolition of Immigration and Customs Enforcement and Customs and Border Protection and wants to provide a pathway to citizenship for the 11 million to 22 million illegal migrants already here. He would decriminalize border-jumping and give health and welfare benefits to the invaders.

He would decriminalize the breaching of America’s borders.

“My first executive orders,” tweeted Bernie last week, “will be to reverse every single thing President Trump has done to demonize and harm immigrants, including his racist and disgusting Muslim ban.”

Leaders of the center-left think tank Third Way warn that a Sanders nomination risks a Democratic rout of the magnitude of the 49-state losses of George McGovern in 1972 and of Walter Mondale in 1984.

Vulnerable Democrats in moderate and swing districts would have to jump ship, abandoning the ticket to survive the slaughter.

Fearful of such an outcome to a Sanders-Trump race, super PACs run by moderate Democrats have begun to dump hundreds of thousands of dollars into attack ads to blunt his momentum in Iowa.

What Socialist Jeremy Corbyn did to Britain’s Labour party — leading it to the worst defeat since the 1930s — Sanders could do to the Democratic Party, write Jon Cowan and Jim Kessler of Third Way.

In 2016, Sanders ran a surprisingly strong race for the nomination, and it was later learned that a supposedly neutral DNC had been in the tank for Hillary Clinton. The Democratic establishment, the party elite, had collaborated to put the fix in against Bernie.

Yet Sanders supported Clinton that fall. If, however, Bernie’s last chance at the nomination is aborted by an establishment piling on, party super PACs running attack ads against him, and major media taking time out from trashing Trump to break Sanders, the Democratic Party will have the devil’s time of it bringing Bernie’s backers home in the fall.

Bernie’s believers might just conclude that the real obstacle to their dream of remaking America is neither the radical right nor Donald Trump, but the elites within their own party.

Republican senators are demanding answers from the IRS about how it enforces its EV tax credits after a watchdog for the Treasury Department found millions of dollars in “erroneously claimed” credits.

IRS Commissioner Charles Retting received a letter on Monday from senators who want information about “what appear to be systemic problems,” according to The Hill. 

Fifteen senators signed the letter, including Senate Finance Committee Chariman Chuck Grassley and Senate Homeland Security and Governmental Affairs Committee Chairman Ron Johnson.

In September, the Treasury inspector general for tax administration (TIGTA) released a heavily redacted report finding that “the IRS has taken steps to address some of TIGTA’s previous recommendations to improve the identification and prevention of erroneous credit claims, many of the deficiencies previously identified still exist.” 

It claimed there were more than $70 million worth of potentially erroneous plug-in credits claimed between 2014 and 2018. Back in 2011, the same watchdog found $33 million worth of plug-in and alternative vehicle credits that were claimed erroneously. 

The GOP senators said in their letter: “…it is troubling that these improper payments continue and have more than doubled in size in the eight years since they were first reported.” 

The letter comes amidst a debate about expanding EV credits. Democrats have been pushing for the expansion while Republicans have largely pushed back. GOP senators say the program “overwhelmingly benefits wealthy electric vehicle owners in one state” and cited a WSJ article that showed about half of all EV sales occur in California.

The senators demanded information about the amount of credits erroneously claimed and whether or not the IRS has conducted their own internal audit. 

While a trade association for EV vehicles agrees that the IRS should investigate, it continues to advocate for expansion of the credits. 

Genevieve Cullen, president of the Electric Drive Transportation Association, said: “The plug-in credit was created with bipartisan support to promote investment in electric mobility and secure the energy, environmental and economic security benefits of the technology, including maintaining US competitiveness in the global marketplace. The credit has been demonstrably effective in advancing those goals.”

And lining Elon Musk’s pockets…

Authored by Adam Taggart via PeakProsperity.com,

Yesterday, the World Health Organization (W.H.O.) declared that the Wuhan coronavirus is indeed now a pandemic.

Scary news, right?

Well…not if you kept listening. The W.H.O. then proceeded to downplay the risk to public health and took pains to make it clear it doesn’t recommend placing restrictions on global trade & travel at this time.

What?!? When we may be in dealing with a viral outbreak as (or more!) virulent than the Spanish Flu? (aka The Great Influenza)

Folks, this is nothing less than a political decision to keep business/commerce flowing without regard to public health.

The W.H.O. has chosen money over people’s lives:

As an aside, this is not the first time that WHO Director-General Tedros Adhanom Ghebreyesus has potentially not told the ‘whole truth’. As The NY Times reports, he was accused in 2017 of covering up three cholera epidemics in his home country, Ethiopia, when he was health minister.

After surging higher in November, analysts expected US personal income and spending growth to slow modestly in December and it did with income growth disappointing.

Personal Spending rose 0.3% MoM (as expected) in December, slightly slower than November’s 0.4% MoM jump.

Personal Income disappointed, rising 0.2% MoM against expectations of a 0.3% rise (and November’s data was revised down from +0.5% to +0.4%).

Source: Bloomberg

But on a YoY basis, the good ‘ol American consumer refused to be restricted by weaker growth in their income (+3.9% – slowest since Jan 2017) and surged spending at a 5.9% YoY rate…

Source: Bloomberg

Sending the savings rate to 6-month lows…

Income gains accelerated for government workers in December but slowed for non-government workers…

After adjusting for inflation, spending climbed 0.1%. That gain was driven by prescription drugs and health care, suggesting that discretionary outlays may be less robust than the headline figures indicate.

Finally, we note that The Fed’s favorite inflation indicator – The PCE Deflator – ticked up in December to its highest in 12 months…

Source: Bloomberg

 

Authored by Michael Pento via DollarCollapse.com,

There are a handful of stocks in which institutions and individual investors have recently piled into. This behavior is emblematic of all bull markets once they begin to hit the manic phase. Wall Street falls in love with a few high-growth darlings and takes their valuations up to the thermosphere.

If you add up the market capitalizations of just four stocks, Google (Alphabet), Apple, Microsoft, and Amazon, their combined worth exceeds $5 trillion.

If you throw in Facebook, you get the top 5 biggest firms by market capitalization, and they compose an amazing 18% of the S&P 500. Another way of looking at this is that the market cap of a full 282 companies in the S&P 500 now equals the same as the top 5 behemoths.

Again, this is not dissimilar to what has occurred in past blow-off tops. Recall the NASDAQ internet craze in the late ’90s and the Nifty Fifty bubble mania of the late ’60s and early ’70s. In the 694 days between January 11th, 1973, and December 6th, 1974, the Dow Jones Industrial Average lost over 45% of its value, but many stocks in the Nifty Fifty fared much worse. The Dot.com disaster was even more dramatic. It caused 5 trillion dollars of equity to vanish and wiped-out nearly 80% of market value.

The Nifty 50 stocks were the fastest-growing companies on the planet in the latter half of the 1960s and became known as “one-decision” stocks. These were viable companies with real business models but became extremely over-priced and over-owned. Investors were lulled into the belief they could buy and hold this group of stocks forever. By 1972, the overall S&P 500 Index’s P/E stood at 19. However, the Nifty Fifty’s average P/E at that time was more than twice that at 42. When the inevitable crash arrived, stocks that were part of the Nifty Fifty fell much more than the overall market. For example, by the end of ’74, Xerox fell 71 percent, while Avon and Polaroid plunged by 86 percent and 91 percent, respectively.

The years 1994 to 2000 marked a period of massive growth in the adoption of the internet, leading to a massive bubble in equities surrounding this technological revolution. This fostered an environment where investors overlooked traditional metrics, such as the price-earnings ratio. During this period, the Nasdaq Composite Index rose 400%, as its PE ratio soared to 200.

It’s always the same story: near the end of a massive bull market, a relatively small number of stocks get taken to incredible heights by a public that is thirsty for some story to justify such lofty valuations that are far above fundamentals. This can be clearly proved by viewing the Market capitalization of the Wilshire 5000 as a percentage of GDP. Stock valuations have now reached at an all-time high. In fact, they are nearly twice as high as the historical average and even higher than the NASDAQ bubble peak!

Not only this, but there are a record number of IPOs that don’t make any money, and a near-record number of U.S. listed companies that are spewing red ink—just like in past bubble tops.

This particular iteration of a massive equity bubble has seen a huge turn towards passive investments and a surge of money going into ETFs.

A paper done by the Federal Reserve explains that passive funds in 2018 now account for 39 percent of the combined U.S. Mutual Fund and ETF assets under management, up from just 3 percent in 1995 and 14 percent in 2005. According to the paper, passive investing is pushing up the prices of index constituents and there is a risk that rising prices can lead to more indexed investing, and the resulting “index bubble” eventually could burst.

The Potential Problem with ETFs

This brings us to a potentially huge problem with the overall market. A study done by Factset shows that in some instances of the largest market cap stocks that are held within ETFs, they represent more than 30 days of the average daily trading volume of the individual security that is traded on the exchanges. This means, for example, if only 10% of ETF holders decide to sell the security on any given day, it will represent three times the entire volume that is traded on the NYSE. Therefore, what we have is a condition where investors have become overcrowded in a few positions–just like what has occurred in previous market tops. However, this time around the situation is compounded by an influx of new money that has piled into ETFs. These same investments have doubled down on the doomed strategy of piling into a handful of winners.

In 2008 there was just $700 billion invested in ETFs; today, there is just under $5 trillion. ETFs have greatly exacerbated market directions in the past. Their existence tends to propel bull markets higher but, on the flip side, they also have led to flash crashes. To fully understand the dangers associated with buying and holding ETFs—and the overall market in general, especially in a bear market–you have to understand the process of creation and redemption units and how Authorized Participants (AP) function.

APs are the only entities that are allowed to directly interact with an ETF provider in order to create and redeem units.

During a bull market, an ETF often trades at a premium to the underlying securities held by the index it tracks. In this case, an AP can buy the individual shares on the index at a discount and exchange them for a new ETF that is trading in the market at a higher price and then sells the ETF in the market for a profit. This process is known as creation, which adds to the supply of ETFs. And, it perpetuates the bull run.

Conversely, during market panics, an ETF will often sell at a steep discount to the shares trading on the index. In this case, an AP can buy the ETF in the market and exchange it for the individual shares on the index from the provider that is trading at a higher price. The AP can then sell the individual shares on the open market. This process is called redemption, and it reduces the number of ETF units.

However, this process has also exacerbated crashes in the past by adding more selling pressure on to the individual shares of the index, which in turn leads to more panic selling for the less liquid ETF market.

Who are these very few lucky and privileged Authorized Participants? You may have guessed it, large banks such as; JP Morgan, Goldman Sachs, and Morgan Stanley.

This is just one more reason that validates the necessity of having a process that identifies when the epoch bear market begins before one occurs… because the next bear market should be one that makes the Great Recession of 2008 seem benign in comparison.

*  *  *

Click here to read Michael Pento’s other articles.

Yesterday, shortly after the WHO managed to unleash a torrid stock rally that sent the Dow over 350 points higher when it declared the coronavirus outbreak and international health emergency and a “global pandemic” yet underscored its faith that China will be able to contain the spread of the disease, we predicted that “Stocks are amping on WHO promoting tourism to China, before reversing after China announces over 10,000 cases at 6pm”

Stocks ramping on WHO promoting tourism to China, before reversing after China announces over 10,000 cases at 6pm

— zerohedge (@zerohedge) January 30, 2020

That’s precisely what happened, with futures spiking to just shy of 3,300 as algos were enthused by the WHO’s optimism, only to slide as China reported that nearly 10,000 people are now infected and 100,000 are under observation.

On Thursday, the World Health Organization on Thursday labeled the virus a global emergency. Tedros Adhanom Ghebreyesus, WHO director-general, best known for the 2017 NYT article “Candidate to Lead the W.H.O. Accused of Covering Up Epidemics“, said the greatest worry was the potential for the virus to infect countries with weaker health systems, though his bizarre, travel agency-like praise for China’s response steadied markets, although ironically just after the World Health Organization tried to assure people that things are under control, the U.S. State Department told Americans not to travel to China and said those visiting or living there should to leave.

Not even the WHO’s full court press to avoid selling was enough to prevent the latest overnight drop though in Eminis, which was more contained than previous days, as investors still clutched at hopes that China could contain the coronavirus, even as headlines spoke of more cases and deaths, travel bans, evacuations and factory shutdowns. Even so, US equity futures dropped even as Amazon.com soared above $1 trillion in market cap in the pre-market after reporting blow-out earnings. On the other hand, Caterpillar fluctuated in early trading after its 2020 profit outlook trailed analysts’ expectations. The dollar drifted versus a basket of its major peers.

To be sure, sentiment received a boost when Amazon’s sales blew past forecasts and sent its stock soaring 11% after hours, adding over $100 billion in market value. Still, the flow of news on the virus remained bleak with China’s Hubei province reporting deaths from the disease had risen by 42 to 204 as of the end of Jan. 30. More airlines curtailed flights into and out of China and companies temporarily closed operations, while Washington told citizens not to travel to any part of China.

JPMorgan shaved its forecast for global growth by 0.3% points for this quarter: “Based on the patterns observed from other epidemics, we assume that the outbreak will likely run its course over 2-3 months, meaning the hit to activity happens in the current quarter,” JPMorgan analysts said in a note. “Also in line with historical experience, we expect a full recovery to follow.”

Europe opened 0.3% higher following a bounce in Tokyo, but European shares have since slumped into the red across the board and are headed for their worst weekly loss in three months, after the U.K. confirmed its first cases of the coronavirus…

… and following disappointing economic data in Europe, including the worst Euro Area GDP print in almost seven years…

… and an outright drop in Italy.

Earlier in the session, Asia-Pacific shares outside Japan extended their fall, dropping 0.4%, and appeared set for their worst weekly loss in a year, of 4.6%. Thursday’s 2.3% dive was the sharpest one-day loss in six months.  Asian stocks reversed earlier gains, with a regional gauge heading to its worst start to the year since 2016. The region’s benchmark MSCI Asia Pacific Index declined as much as 0.2% in afternoon, led by energy and utilities shares. Hong Kong shares erased gains and closed 0.5% lower, while Japan was the best-performing market on the last day of January. India’s Sensex index was little changed before Finance Minister Nirmala Sitharaman outlines India’s annual budget on Saturday. Asian shares are set to finish the first month of 2020 with a decline of 3%, the worst January since 2016, as the spreading coronavirus prompted a sell-off in riskier assets.

Overnight China reported its latest Manufacturing PMI for January, which mysterious came out at 50.0, right on top of the expected  50.0 (down from 50.2), despite nearly 60 million people under quarantine. Pure magic! At the same time, Chinese Non-Manufacturing PMI jumped to 54.1 vs. Exp. 53.0 (Prev. 53.5). That said, even China National Bureau of Statistics admitted the number was purely an estimation and noted the January PMI data does not fully reflect impact of coronavirus and future trend needs to be observed, with the figures said to reflect data as of January 20th.

Reports that some Chinese provinces were asking companies not to re-start until Feb. 10 after the New Year holiday suggested activity would take a hard knock this month.

“Some shorts covered after the director gave the WHO’s stamp of approval to China’s aggressive containment effort,” said Stephen Innes, Asia Pacific market strategist at AxiCorp.

“The coronavirus is outweighing everything else,” said Francesca Fornasari, head of currency solutions at Insight Investments. “We have seen quite a position unwind and … whatever is coming out in terms of data is for the period when the virus hadn’t become quite such a big issue. For now, the market’s risk lights have shifted from flickering on red to a steady shade of amber.”

As risk sold off, safe havens gained, with bonds well bid, and yields on U.S. 10-year Treasuries down 9 basis points for the week so far and near four-month lows. The yield curve between three-month bills and 10-year notes has inverted twice this week, a bearish economic signal.

In FX, sterling extended gains after jumping on Thursday when the Bank of England confounded market expectations by not getting anywhere near an interest rate cut. The pound was last at $1.3128, a relatively solid performance given that Friday is the day the UK officially leaves the European Union after years of political turmoil.

The dollar took a knock overnight when data showed the U.S. economy had grown at its slowest annual pace in three years and personal consumption weakened sharply. Yet it was up a fraction on the yen on Friday at 109.03 and stronger on the euro at $1.1016. Most of the action this week has been nervous investors selling emerging currencies for dollars and yen, leaving the majors little changed against each other.

In commodities, oil bounced on short covering, after hitting its lowest in three months as the global spread of the coronavirus threatened to curb demand for fuel. WTI regained 89 cents to $53.03 a barrel, while Brent crude futures rose 83 cents to $59.12. Spot gold was only just up for the week at $1,573.72 per ounce, having failed to get much of a safe-haven bid as a range of other commodities, from copper to soy beans, were hammered by worries over Chinese demand.

Expected data include personal income and spending. Caterpillar, Chevron, Exxon and Honeywell are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.6% to 3,269.50
• STOXX Europe 600 up 0.03% to 415.27
• MXAP down 0.2% to 165.51
• MXAPJ down 0.6% to 532.45
• Nikkei up 1% to 23,205.18
• Topix up 0.6% to 1,684.44
• Hang Seng Index down 0.5% to 26,312.63
• Shanghai Composite closed
• Sensex down 0.4% to 40,765.88
• Australia S&P/ASX 200 up 0.1% to 7,017.20
• Kospi down 1.4% to 2,119.01
• German 10Y yield unchanged at -0.405%
• Euro down 0.03% to $1.1029
• Italian 10Y yield fell 1.1 bps to 0.776%
• Spanish 10Y yield fell 0.4 bps to 0.267%
• Brent futures up 0.3% to $58.47/bbl
• Gold spot up 0.4% to $1,580.96
• U.S. Dollar Index little changed at 97.91

Top Overnight News from Bloomberg

• The U.K. confirmed two cases of coronavirus in England on Friday, while the U.S. and Japan advised citizens to avoid traveling to China
• The U.S. and Japanese governments advised their citizens to avoid travel to China as the spread of the coronavirus showed few signs of abating. The travel warnings came hours after the World Health Organization declared the outbreak a global health emergency. Global cases of the disease has now grown to surpass the number officially reported during the SARS epidemic
• The first official indicator of the Chinese economy in 2020 signaled the nation’s factories were struggling even before the country shut down for the Lunar New Year holidays and the coronavirus outbreak worsened
• U.K. consumer confidence improved for a second month in January as Britons became more optimistic about their personal financial situation and the wider economy in the wake of Boris Johnson’s election victory
• Japan’s industrial production rebounded more than expected in December, but failed to prevent factory output weighing on the economy in a dismal quarter
• Oil jumped after the WHO said there’s no need for travel and trade bans due to the coronavirus, but was still set for its worst month since May as the outbreak sapped the demand outlook. Oil traders in Asia are expecting refineries to cut operating rates and extend shutdowns as the spread of coronavirus stops people from flying or traveling by road
• Republican Senator Lamar Alexander said he will vote against calling witnesses in President Donald Trump’s impeachment trial, all but closing off chances that Democrats can secure new evidence and making it increasingly likely the trial will wrap up as soon as Friday
• Japanese Prime Minister Shinzo Abe says he will consider the use of reserve funds if needed as he monitors developments in the spread of coronavirus and its effect on tourism.
• Investors are bracing for potential losses in Chinese stocks and commodities when financial markets reopen Monday for the first time since Jan. 23. A gauge of January manufacturing signaled Friday that China’s factories were struggling even before it shut down for the extended Lunar New Year holidays
• More than a dozen Chinese provinces announced an extension of the current Lunar New Year holiday by more than a week as the nation attempts to halt the spread of the novel coronavirus that has killed hundreds of people and sickened thousands
• The U.K. Financial Conduct Authority said it’s examining the spike in the British pound in the minute before Thursday’s Bank of England’s interest-rate decision
• The euro area economy barely grew at the end of 2019 as unexpected contractions in France and Italy dragged it to its weakest quarter in almost seven years

Asian equity markets traded mixed as early relief rolled over from US following a “soft” declaration by the WHO on coronavirus and with US equity futures also underpinned by after-market earnings including Amazon – whose shares rose almost 10% after-hours. The World Health Organization declared the coronavirus a Public Health Emergency of International Concern but also stated that there has been progress made in developing a vaccine and believes measures taken by China “will reverse the tide”, while it opposed any measures or restrictions on travel or trade to China. ASX 200 (+0.1%) and Nikkei 225 (+1.0%) followed suit to the Wall St rebound with outperformance seen in Australia’s tech and healthcare sectors, while sentiment in Tokyo was underpinned by favourable currency flows and with the biggest stock gainers driven by earnings releases. Elsewhere, Hang Seng (-0.5%) initially conformed to the early stock market rebound but then steadily wiped out the gains as coronavirus infections and deaths continued to expand, while Chinese PMI data was inconclusive in which Manufacturing PMI printed in-line with estimates at the 50.0 benchmark level and Non-Manufacturing PMI topped expectations at 54.1 vs. Exp. 53.0, although the Stats Bureau noted this was taken based on data on January 20th and therefore doesn’t fully reflect the impact from the coronavirus outbreak. Finally, 10yr JGBs were relatively uneventful and held on to the prior day’s gains but with further upside limited amid the broad improvement in risk sentiment and overnight retreat in T-notes.

Top Asian News

• India Refutes ‘Unfounded’ Criticism About Government’s GDP Data
• Tourism Businesses Worldwide Brace for a Hit Worse Than SARS
• Biggest Indian Bank’s Profit Rises on Improvement in Bad Loans

European stocks have given up gains seen at the open [Eurostoxx 50 -0.6%] as the region failed to piggyback on the modest recovery seen in APAC sentiment, amid further reports the coronavirus spread – with the UK also confirming its first two cases. Major bourses are in the red with underperformance seen in the FTSE MIB (-1.5%), following a Q4 QQ contraction in the Italian economy. Thus, the Italian financial names lead the losses in the index. Elsewhere, UK’s FTSE 100 (-0.8%) saw early pressure due to a firmer Sterling in early trade, with renewed downside seen after the aforementioned virus contagion in the UK. Sectors opened in positive territory with a reflection of the risk appetite at the time, thereafter sentiment shifted to the other end of the scale with sectors now all in the red and reflecting risk-aversion – energy, once again, lags on renewed pressured in the oil complex. In terms of individual movers, Signify (+5.4%) leads the gains in the pan-European (despite slight revenue and net misses) as the group sees further improvement in adj. EBITDA margin. On the other end, Banco de Sabadell (-11.0%) rests at the foot of the Stoxx 600 in light of dismal earnings. Elsewhere, Thyssenkrupp (-5.0%) share slumped after noting that they are in a tight financial situation and confirmed the value of its elevator unit at EUR 15bln, vs. top-end estimates of EUR 20bln.

Top European News

• U.K. Mortgage Approvals Climb to Highest Level Since 2017
• Ferrexpo Falls as Ukraine Court Restricts Poltava Mining Shares
• K+S Jumps as Investment Newsletter Speculates About Takeover
• Sabadell Slumps as Provisions, TSB Loss Fuel Fresh Worries

In FX, the Pound remains relatively firm, but off best levels forged in the aftermath of super Thursday amidst positive month end vibes via a German bank flagging stock-hedge demand vs the Dollar and Franc in particular, albeit with the bulk of the buying anticipated from 3 to 4 pm London time. Cable reached 1.3140 or so before topping out and Eur/Gbp crossed 0.8400 to circa 0.8387 at one stage before Sterling lost some momentum in tandem with, if not specifically on reports of 2 confirmed cases of China’s coronavirus in the UK.

• AUD/NZD/NOK/SEK – The clear G10 underperformers and extending losses against the Greenback and Euro respectively, as Aud/Usd recoils further from fairly restrained recovery highs through the 0.6700 level to expose the 2019 low (0.6671). The Aussie gleaned scant impetus from mixed Chinese PMIs overnight, supposedly large expiry related hedging at the big figure or the so called ‘soft’ WHO classification of the deadly Chinese disease as a health emergency of international concern in recognition of the strenuous efforts to contain the outbreak and cure the growing number of those contaminated. Similarly, Nzd/Usd has plumbed deeper below 0.6500 towards 0.6450, ignoring more theoretically supportive Kiwi impulses via Westpac upgrading its RBNZ policy views to a possible shift from easing to neutral at the February meeting. Meanwhile, the Scandi Kronas continue to weaken on bearish fundamentals, techs and broad risk sentiment that has also scuppered a pretty tame rebound in crude prices.
• CAD – The Loonie derived enough leverage from hawkish sounding BoC rhetoric to regain 1.3200+ status vs its US counterpart, but the Beaudry reservations about looser policy have already lost impact with Usd/Cad breaching the 200 DMA that had been capping rallies and now eyeing 1.3250 ahead of 1.3270 that represents December 6’s peak. However, impending Canadian GDP and perhaps even PPI could provide some independent direction.
• CHF/JPY/EUR – In keeping with recent trends, underlying safe haven buying has helped the Franc, Yen and Euro to an extent (not to mention Gold) limit declines vs the Buck during periods of improved risk appetite, as Usd/Chf and Usd/Jpy stay tethered to 0.9700 and 109.00 anchors, while Eur/Usd repels attempts to break decisively below 1.1000 despite weak Eurozone data. Note, also mild to strong Dollar selling signals for month end may also be a factor as the DXY struggles to keep sight of 98.000 and threatens to close under a key chart level at 98.011 (50% Fib retracement of pull-back from 99.967 to 96.355 in Q4 last year).
• EM – No real or lasting respite for regional currencies even though the Yuan is keeping afloat above 7.0000, as SA’s Eskom warns about more power outages and wants to discuss a strategy with the Government to meet financial obligations. Usd/Zar now nudging up close to 14.9000 as a result.

In commodities, WTI and Brent front-month futures have given up most of its overnight gains which were spurred by the World Health Organisation’s verdict which did not recommend limiting trade and movements due to the outbreak – thus digested as a “softer” announcement. The declaration revived some demand relief against the backdrop of mass flight cancellations to and from China. However, WTI and Brent futures have waned off highs, with prices now weighed on by the coronavirus’ spread to the UK. WTI hovers just under 52.50/bbl at time of writing, whilst its Brent counterpart breached 57.50/bbl to the downside. Elsewhere, spot gold retains an underlying bid amid the pathogen outbreak and as DXY remains below 98.000. Copper prices resume its downwards trajectory and trade ongoing demand/global growth concerns arising from the spread of virus.

US Event Calendar

• 8:30am: Employment Cost Index, est. 0.7%, prior 0.7%
• 8:30am: Personal Income, est. 0.3%, prior 0.5%;Personal Spending, est. 0.3%, prior 0.4%
• Real Personal Spending, est. 0.1%, prior 0.3%
• PCE Deflator MoM, est. 0.2%, prior 0.2%; PCE Deflator YoY, est. 1.6%, prior 1.5%
• PCE Core Deflator MoM, est. 0.1%, prior 0.1%; PCE Core Deflator YoY, est. 1.6%, prior 1.6%
• 9:45am: MNI Chicago PMI, est. 49, prior 48.9
• 10am: U. of Mich. Sentiment, est. 99.1, prior 99.1; Current Conditions, prior 115.8; Expectations, prior 88.3

DB’s Jim Reid concludes the overnight wrap

So the big day is here. At 11pm GMT tonight we will all move on with our lives. Many will be delighted with the outcome and be optimistic about the future with some even confident that will give them a chance to move ahead of their European counterparts. On the other hand many will feel outraged and furious with the people in charge for letting things get this bad and will claim this is a huge exercise in shooting ones-self in the foot. Yes it’s the close of the transfer window in European football tonight where hopes and dreams fade or get resurrected. It’s also the last chance to see if there’s anyway your team can stop Liverpool winning both the Premier League and the Champions League. Bonne chance!! As a side piece of curiosity, the U.K. leaves the EU at exactly the same time.

Having returned from the EU last night for the last time as an EU citizen it also wrapped up my main 2020 outlook tour that has been going on for over 2 months now. I’m still travelling every week this quarter but the trips now take on a slightly different purpose. Being in Madrid yesterday it’s fair to say that they were generally typical of the audiences I have encountered for the last couple of months. The majority is expecting a year of carry. Not much more but certainly not notably worse than that. I have been more circumspect than virtually all clients as I’m not convinced the risks are fully priced. So no certainty of more difficult times ahead but a challenged risk/reward profile at these valuations. Spreads and equities (US at least) are priced for near perfection and the reality is that global data is still mixed, we’re still in the shadow of 2019’s yield curve inversion, and we have a potentially game changing US election this year. I’ve deliberately left out the Coronavirus as that’s clearly not been part of my calculus and will still have to develop substantially from here to be game changing for the medium-term economic outlook.

On the US election, Monday will see the start of primary season in Iowa where we’ll see the first evidence as to where the Democrats are heading nomination wise. In terms of background the Democratic primary process is based on delegates (need to get to 1990 out of 3979). Pledged delegates (41 in Iowa – only c.1% of national total) are selected under proportional representation, which requires a candidate have a minimum of 15% of a state’s popular vote to receive them. This is important in the narrative game (i.e. “I lost by 1% of the vote, but we got the same number of delegates so we are still in this”). Also big wins mean more delegates. This is why Super Tuesday on March 3rd is a big event as 1360 delegates or 34% of the pie is up for grabs that day.

Iowa on Monday appears very close with RealClearPolitcs’s polling average showing Sanders at 24.2% vs Biden at 21% but with both swapping leads in different polls in recent times. This is a state where Sanders has the demographics to do well, but it’s a primary rife with uncertainty, because it is a caucus, not a straight vote like in New Hampshire (8 days later). During a caucus vote, there is a first round, where – in each district all over the state – people literally walk around a large room and stand in their candidate’s corner. Then, after everyone is tallied, all candidates without 15% of the total voters present are then forced to quickly pick another candidate, this is done repeatedly until no candidate has fewer than 15% of the vote. Also, once your candidate has over 15%, you are not allowed to realign. e.g. Buttigieg is currently on 16.8% in the polls. If he gets past the first round, his voters cannot leave for a more popular candidate even if he is losing but they can if he gets less than 15%. At current polling this could hurt Biden the most as he and Buttigieg have shared the more moderate lane of the Democratic primary so far. This makes predicting the outcome perilous.

So candidates polling under 15% will likely have their votes distributed – therefore a big swing could be based around Warren who is averaging 14.7% currently. If she can’t get to 15%, her voters have a more natural home with Sanders over Biden. On the other hand Klobuchar is sitting at 9%, which is likely going to Biden. The 14% “other” will likely be spread around, with no single ideology among the other candidates. From a Monmouth University poll yesterday, when likely caucus-goers were asked to choose from the top four candidates, the race stands at 29% Biden, 25% Sanders, 20% Buttigieg, and 19% Warren. This follows a lot of polls showing that Biden is a lot of people’s 2nd choice. So in caucuses often the headline poll may not tell the full story.

Overall, Iowa on Monday should be viewed as too close to call and highly dependant on late swings, whether fringe candidates get to 15%, and how second preferences span out. Given that Sanders is favourite in New Hampshire (Feb 11th) and is closing the gap between himself and Biden in polling in Nevada (the 3rd primary on Feb 22 -also a caucus), the possibility of a win here means he could gain a lot of momentum going into Super Tuesday (March 3rd) even if the number of delegates are small. We’ll know more early next week but whatever your politics you would be hard pressed not to acknowledge the fact that markets are not set up for any kind of Sanders momentum.

The primaries have been drowned out from the news cycle by the Coronavirus over the last week but as of Monday it should more than compete for headlines. Meanwhile the latest on the virus is there have been 213 confirmed deaths now (up from 170 yesterday) while, number of confirmed cases stand at 9,692 (up from 7,783). The number of confirmed cases have now topped the official recordings of the SARS epidemic (8,096 cases). In other news related to this, the US State Department updated the travel advisory to level 4 saying that the US citizens should not travel to China. It added that travelers should be prepared for travel restrictions to be put into effect with little or no advance notice and added that those in China should consider departing using commercial means. Also, more and more Chinese provinces and cities are extending the holiday period overnight to February 10 from February 2. Russia also announced yesterday that it is closing its land border with China. Even though the Russian border with China was already closed due to the NY holidays, the Russian decision extended the closure until March 1.

Global markets actually reversed losses late in the US session immediately after the World Health Organization declared the Coronavirus outbreak in China a Public Health Emergency of International Concern (PHEIC). Officials cited an increased number of cases outside of China and clear human-to-human transmission now abroad – eight cases across Germany, Japan, Vietnam and the first in the United States yesterday. However, they did not recommend restrictions on trade or travel. Overnight, Hong Kong also confirmed its first case of human to human transfer of the virus. By declaring a Public Health Emergency, the WHO allows global health authorities to aid countries with less-robust health systems to stop the spread of the virus. The WHO reported that there had been 98 cases in 18 countries outside of China, but no deaths so far. However, even though some companies and governments have taken measures to cut off service to China, the WHO Director said there’s no need at this time for measures that interfere with travel and trade.

Yesterday our China economists put out a piece on the coronavirus (link here), asking when the number of new cases would peak. They believe that the turning point is not far away, and that assuming the measures taken are effective at containing the outbreak, the peak of new cases outside Hubei province (where Wuhan is located) will likely happen at some point next week. See their report for more.

Overnight, China’s January PMIs came surprisingly strong with manufacturing printing in line with consensus at 50 while services printed at 54.1 (vs. 53.0 expected) brining the composite read to 53.0 (vs. 53.4 last month). The survey was conducted before January 20, the day we started receiving reported numbers of cases of the virus. So this will be seen as largely meaningless. Our Asia strategists believe that the Caixin PMIs next week will also have a similar problem.

A quick refresh of our screens this morning shows that Asian markets are mostly higher with the Nikkei (+1.10%) and Hang Seng (+0.24%) up but with the Kospi (-0.32%) lower. Markets are off their earlier peaks as the news of US travel advice for China filtered in (see above). Elsewhere, Brent crude oil prices are up c. +2% this morning erasing part of yesterday’s loses (more below). As for other overnight data releases, Japan’s December retail sales printed at +0.2% mom (vs. +1.0% mom expected) while preliminary December industrial production came in at +1.3% mom (vs. +0.7% mom expected). In other overnight news, The Times has reported that UK PM Boris Johnson will call next week for a basic trade deal based on that between the EU and Canada.

Before this, large cap earnings continued to push US equities higher after the bell following the late session turnaround after the WHO report. Amazon surged c.10% after the close, with their holiday-quarter revenues and profits blowing out expectations. The e-commerce giant moved to join Apple, Microsoft, and Google as S&P 500 companies with market values over $1tr in after hours trading. NASDAQ and S&P 500 futures are up +0.21% and +0.12% respectively.

The Asian session comes after US equity markets recovered from earlier losses following the WHO declaration, with the S&P 500 recovering from an intraday low of -0.93% to close up +0.31%. The NASDAQ (+0.26%) and the Dow Jones (+0.43%) also pared back earlier losses to advance on the day. Europe closed before the pullback however, with the STOXX 600 and the DAX ending the session down -1.01% and -1.41% respectively. Brent crude also continued its decline, falling -2.54% to its lowest level in over 3 months. Also, the continued falls in the oil price saw oil and gas stocks underperform, with the STOXX Oil and Gas index in Europe closing down -2.36% at a 5-month low.

In terms of bonds the 3m10y yield curve in the US inverted on an intraday basis again yesterday, though it steepened into the close to finish at +2.7bps. Elsewhere, 10yr Treasury yields also pared back losses to close +0.01bp higher. Once again however, with Europe’s earlier close, bunds (-2.9bps), OATs (-2.3bps) and BTPs (-1.2bps), all saw yields fall. Gilts underperformed, with 10-year yields rising +2.6bps, as the BoE decided to keep rates on hold in what was for the market a knife-edge decision.

It wasn’t so close for the BoE though, with the vote at 7-2, the same as at the previous meeting. Given expectations that the Bank might cut, the fact that no further members voted for a cut compared with last time was taken by the market as relatively hawkish. The statement said that “some modest tightening of policy may be needed to maintain inflation sustainably at the target” were the economy to recover in line with their projections. However, they removed from the previous statement that this modest tightening would be “at a gradual pace and to a limited extent”. Furthermore, the statement sounded a note of optimism on the global and domestic outlook. For example, it mentioned that business activity surveys domestically had picked up, noting this was “quite markedly in some cases”. Nevertheless, the BoE cut their growth forecasts, now seeing 0.75% growth this year, compared with 1.25% back in November. They also revised down their 2021 and 2022 forecast by 25bps, to 1.5% and 1.75% respectively.

In terms of the market reaction, sterling strengthened against other major currencies following the decision, being the best performer among the G10 currencies yesterday. The pound ended a run of 5 successive declines against the dollar to close up +0.55%.

The main data highlight from yesterday was the advance reading of Q4 GDP in the US, which grew at an annualised rate of +2.1% (vs. +2.0% expected), meaning that the full year-on-year GDP growth for 2019 as a whole was at +2.3%. The surprise from the release came with the core PCE reading however, which surprised to the downside with an annualised +1.3% qoq (vs. +1.6% expected), something that will be important to the Fed. We also got the weekly initial jobless claims, which came in at 215k (vs. 216k expected), though the previous month was revised up by +12k. Nevertheless, the 4-week moving average fell to 214.5k, its lowest level since early October.

On the other side of the Atlantic, the Euro Area unemployment rate fell to 7.4% in December, its lowest level since May 2008. In a further sign of a possible economic rebound, the European Commission’s economic sentiment indicator rose for a 3rd consecutive month, up to 102.8 (vs. 101.8 expected) and a 5-month high. Finally, unemployment in Germany fell by -2k (vs. +5k expected), while the EU harmonised CPI reading rose to +1.6% (vs. +1.7% expected), its highest level since April but a touch disappointing.

To the day ahead now, and as mentioned the UK will be leaving the EU at 11pm GMT tonight. There’s also an array of economic data out, including the advance reading of Q4 Euro Area GDP and January’s CPI estimate. Elsewhere in Europe, there’s also German retail sales for December, France’s CPI inflation for January, Italy’s Q4 GDP, and UK consumer credit and mortgage approvals for December. On the other side of the Atlantic, we’ll get US personal income and personal spending data for December, as well as the Q4 employment cost index, the January MNI Chicago PMI and the final University of Michigan sentiment reading for January. Finally from Canada there’ll be November’s GDP reading. And earnings out today include Exxon Mobil, Chevron and Caterpillar.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Dow 30,000 is “unsinkable,” just like the Titanic.

A recent Barrons cover celebrating the euphoric inevitability of Dow 30,000 captured the mainstream zeitgeist perfectly: Corporate America is firing on all cylinders, the Federal Reserve’s god-like powers will push stocks higher regardless of any other reality, blah blah blah.

While the financial media looked elsewhere for its amusement, the coronavirus epidemic in China just poured fentanyl in the Dow 30,000 punchbowl. The mainstream continues to guzzle down the punch, oblivious to the fentanyl, confident that the coronavirus will quickly fade and China will soon return to its winning role of growth chariot pulling the global economy to ever greater heights.

As I noted in Could the Coronavirus Epidemic Be the Tipping Point in the Supply Chain Leaving China?, there’s a factor few of the sublimely confident Bulls consider: second-order effects: first order, every action has a consequence. Second order, every consequence has its own consequence.

The media’s focus is solely on the first-order consequences: the number of infected people and fatalities, government responses such as quarantines, and so on. The general expectation is these first-order consequences will dissipate shortly and life will return to its pre-epidemic status with virtually no significant changes.

If we consider second-order effects carefully, we draw a much different conclusion: China will experience social unrest and economic dislocation that will unleash self-reinforcing chaos in global markets. This is not a mainstream opinion, of course, because the mainstream assumes second-order effects simply won’t matter, i.e. they don’t exist. As I describe in my latest book, Will You Be Richer or Poorer?, acting as if inconvenient realities don’t exist doesn’t make them actually vanish. Ignoring realities that are difficult to measure or that don’t fit the happy story is ultimately suicidal.

Though China Bulls will never admit it, China’s economy has become increasingly fragile in a process of diminishing returns reflected in the chart of China’s S-Curve below. What worked in the boost phase (picking the low-hanging fruit of development) no longer works.

The conventional view in the West is that the Chinese people are docile and obedient, obeying the central government’s edicts without question. The idea that the working class in China could refuse to comply is not even on the margins of Western understanding.

But if we consider the thousands of spontaneous protests and wildcat strikes against authority that have occurred in China in recent years, we realise it’s Americans who are docile and obedient, slavishly worshiping at the altar of the Federal Reserve / Dow 30,000 while their “billionaire betters” pile up fortunes and political influence, reducing the vaunted American middle-class to passive, beaten debt-serfs and tax donkeys.

Despite the paper-thin veneer of official Communist rhetoric, the social contract in China is entirely financial: you (the ruling elites) make us more prosperous every month and we’ll obey. Prosperity is of course financial–higher wages, more social benefits, higher real estate valuations, and so on– but it also includes intangible forms of capital such as greater security, cleaner air and water, wider avenues of social mobility, etc.

The official mishandling of the coronavirus epidemic from the top down tells the Chinese people the unfortunate reality: you don’t count, you don’t matter. All that matters is the leadership saving face, and if millions of working-class Chinese people are sacrificed or needlessly put in harm’s way to save the leadership’s face, then the masses should quietly accept their completely needless losses and suffering.

This is a complete abrogation of the implicit social contract China’s people have come to expect of their leadership. The masses have accepted systemic corruption that enriches the few (Party leaders and crony developers, etc.) at the expense of the many because the many were gaining greater prosperity and security. But that advance has stalled in recent years as the costs of essentials have soared and wages haven’t kept pace.

The favored elites have of course kept pace, and since they control the media and machinery of governance, the unhappy slippage has been successfully buried beneath bogus official statistics and relentless suppression of any leakage or dissent.

(Note that doctors who attempted to go public with their fears of the coronavirus in early January were reportedly arrested to shut them up–par for the course for anyone who doesn’t comply with face-saving official prevarication.)

But being exposed to a potentially fatal virus because it pleased the leadership to suppress the facts will trigger second-order effects that will not dissipate. The same can be said of economic and financial second-order effects that will disrupt supply chains and China’s precariously over-leveraged shadow banking system.

Those expecting the Chinese workers to be cowed by 100,000 security cameras will be surprised when workers tear down every single camera and the police and People’s Liberation Army soldiers decline to kill their fellow citizens.

Nobody expects China’s social order or economy to unravel as a second-order effect of the epidemic, and that in itself is a sound reason to not dismiss the possibility too readily. Second-order effects: consequences have their own consequences.

Meanwhile, back on the Corporate America Ranch, Second-order effects may upset all the happy-story assumptions of Chinese suppliers magically being unaffected and workers whose jobs have vanished accepting their downward mobility without complaint.

U.S. companies may find their products are not available in the expected quantities and at the expected prices. Since 90% of American wage-earners have stagnant incomes, Corporate America has no pricing power, i.e. ability to raise prices and make them stick, so profits will be slashed as sales stagnate along with wages.

The hubris-soaked fantasy that the Fed will jack up stock valuations forever regardless of sales and profits will run aground on the unforgiving shoals of reality and all the hidden fragilities in America’s economy will emerge: too much leverage, too many zombie companies kept alive by debt, too much debt and not enough collateral, too many small businesses one tiny tipping-point away from closing for good and laying off all employees–the list is nearly endless.

Once all the second-order effects have erupted and triggered their own chaotic consequences, we’ll look back at the complacent euphoria that America is both dependent on Chinese labor and production yet magnificently detached from any consequences of China’s downward spiral and marvel at the herd’s self-congratulatory hubris, willful blindness and unforgivable negligence.

Down this slippery path lies Dow 10,000. Dow 30,000 is “unsinkable,” just like the Titanic.

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