Month: June 2020

With stocks sinking this morning, they got another helping hand from authorities at 10am when Bloomberg reported that the Office of the Comptroller of the Currency and the FDIC are have approved changes to the Volcker Rule, further easing its provisions, and allowing banks to increase their dealings with certain funds by providing more clarity on what’s allowed. The OCC also scrapped a requirement that lenders hold margin when trading derivatives with their affiliates, according to Bloomberg.

As Bloomberg notes, the revisions will complete what watchdogs appointed by President Donald Trump have referred to as Volcker 2.0 – a softening of one of the most controversial regulations included in the 2010 Dodd-Frank Act.

The Fed is expected to sign off on the proposals later today, perhaps when it announces the results from the latest stress test which may show that banks are limited in how many dividends they can dole out, but most likely won’t do anything to limit distributions to shareholders: after all the Fed has to make the rich even richer.

Separately, a reversal of the interaffiliate margin requirement for swaps trades could free up an estimated $40 billion for Wall Street banks, though regulators added a new speed bump that limits the scale of margin that can be forgiven.

While stocks promptly rewarded this indirect capital boost, some asked if this wasn’t actually a bearish signal for latent banking system problems..

Not sure if the Fed’s latest move actually sends a bearish signal that there is trouble in the US banking system that they need to address $USD pic.twitter.com/0kr0VxmI48

— Viraj Patel (@VPatelFX) June 25, 2020

… on the other hand, with the report hitting just hours before today’s stress test results, most market participants saw this as an all clear signal from the Fed and promptly sent financials surging…

… and the overall market back in the green.

Submitted by Michael Every of Rabobank

Suddenly the virus matters again. Or so it would seem, with stock markets discovering that, yes, they too can go down – as US infection numbers continue to go up and up. True, so far the mortality rates are remaining far lower in places like Texas than they were in New York – but reports underline that if you catch Covid-19 and recover it can still mean long-lasting or perhaps permanent lung or neurological damage: this is still NOT a ‘flu. The Fed’s Evans concurs that opening up too fast can worsen new spikes in infections. Indeed, while there is an obvious imperative to try to get back to normal, if the virus itself becomes normal within the population then there will never be a return to previous economic normalcy. We are all still hanging our hopes on a vaccine, which is where we have been since day one.

Let’s see how the UK fares as it is about to bravely re-open on 4 July with a 1-metre rule. That’s odd symbolism given it is a Sunday, so 3 July would have been more logical – but then when has logic played much of a role in anything on the UK Covid front so far? Indeed, the much-heralded 1-metre rule also doesn’t mean much: Bloomberg quotes a restaurant owner today saying they will still struggle to make any money with that kind of gap between seats as covers will fall from 30 to 18, or 25 at best if they invest in new tables. This has been blindingly obvious to some of us for some time. Of course, with a mini-heatwave yesterday seeing British beaches packed like sardines with young revellers ignoring social-distancing rules, why are we worrying about 1 metre at all? One wonders what the virus infection numbers will look like a week or two from now.

In the US, New York, New Jersey, and Connecticut are telling visitors from states with high infection rates to self-quarantine for 14 days if they come to visit – which means no business travel is possible. And for a real US bellwether, Disneyland is delaying its scheduled 17 July re-opening with no new date clear so far. A case of “Catch and Mouse”.

In Europe things do not seem set for a normal sunny summer, meaning that the slew of businesses which rely on those summer Euros are likely to be without any cash buffer for a long, lean winter; indeed, France’s Macron is now outlining a plan for the state to cover much of the cost of a furloughed worker for as long as two years, if needed.

The IMF underline that with escalating global infections, signs that opening up is then followed by repeated partial lock-downs, and voluntary ones from consumers, the growth outlook is even worse than it was a few months ago – not better. Global growth is seen a staggering -4.9% y/y in 2020, down from -3% expected back in April when the virus was at its peak in Europe and the UK. Growth is also now only seen bouncing 5.4% in 2021, down from 5.8% – which means basically little increase in output over the two-year period. Moreover, the likelihood is that from 2022 onwards we then see retain a very weak growth backdrop due to a legacy of higher unemployment, debt, and what may be permanent structural changes to the economy.

That rare risk-off backdrop sees the USD more on the front foot and bond yields lower to match stocks. Will it last? I am sure a central banker somewhere will say something reassuring that will see markets continue on in their own sweet path as we all slide into Japanification and de facto central planning without a plan. Yet some people do have a plan – and it is not one markets will like much:

• The US will impose USD3.1bn of tariffs on EU exports, including yoghurt, cheese (oh, the humanity!), olives, and aircraft: we can naturally expect an EU response in kind.
• India plans to impose “stringent quality control measures” (i.e., non-tariff barriers) and higher tariffs on Chinese exports of chemicals, steel, consumer electronics, heavy machinery, furniture, paper, industrial machinery, rubber articles, glass, metal, pharma, and fertilizers. They forgot the kitchen sink – unless that is included and I missed it. India is for the moment heavily reliant on said imports – but with the right incentives it can be cost-effective to produce at home, or buy from others. Chinese shipments are already being held up for extra inspection, says Reuters.
• The Pentagon has just produced a list of 20 Chinese firms that it says work with the Chinese military and hence need to be subject to restrictions – including Huawei. The pushback on that tech front is seeing significant successes: Singapore has just opted not to use Huawei for its 5G network, following key Western economies – and now India too.

Perhaps the only positive for markets in terms of geopolitics is that the White House has asked a China hawk to delay legislation with strong bipartisan backing in Congress, which would impose mandatory sanctions on individuals, firms, and *banks* on China over its treatment of Hong Kong. The administration wants to make “technical” corrections to the bill before it passes. Does this mean the US is blinking and won’t use the USD ‘nuclear option’? Possibly. At the same time, if the bill passes the US has NO option other than that nuke. This is still a key development to monitor – and within days said Hong Kong national security legislation will be passed in Beijing. It’s all going to remain very cat and mouse.

Last week, when we said that a WireCard bankruptcy was imminent after the full extent of its corporate fraud – and missing billions – was finally revealed, we observed that while stock shorts were finally taking a well-deserved and long-overdue victory lap with the stock now worthless after the company indeed filed for insolvency today…

… that the real winners here were not the stock shorts, who by definition are capped to a maximum upside of 100%, but the CDS longs (synthetic bond longs), whose only limitation was the initially available margin capital (the theta, or coupon, is tiny by comparison). As a reminder, last Friday the CDS was trading at 73 points up, virtually assuring that a default was imminent.

Fast forward to today when as shown in the chart below, WDI CDS has jumped another 10 points higher, and has now exploded from 15 points upfront just three weeks ago, to over 80, which makes sense with Wirecard bonds now trading at 17 cents on the dollar.

What happens next, besides the incarceration of several Wirecard execs as the company – until recently the most popular one among Europe’s retail traders – slides in bankruptcy?

Well, last week we wondered if we about to witness the second coming of CDS, whose very use by its reflexive definition, forces markets to reasses the fair value of credits… and will the ECB (or Fed) be forced to go company by company and bail them out by purchasing their bonds out of bankruptcy?

Alternatively, perhaps it is time for Robinhood to allow its Gen Z trading army to sell CDS now too, just so they can lever up even more on their insane stock bets, leading to a tidal wave of suicides the moment the market suffers even as modest correction.

CEC Entertainment Inc., the parent of Chuck E. Cheese and Peter Piper Pizza, filed for Chapter 11 bankruptcy on Thursday morning, making it the latest casualty of the virus pandemic that has crushed the restaurant industry. 

CEC, owned by private-equity firm Apollo Global Management Inc., said the public health crisis and virus-related lockdowns have been the “most challenging” in its history, as it grapples with the severe financial strain of continued store closures. 

The company listed both assets and liabilities in the range of $1 billion to $10 billion, according to court filings in the U.S. Bankruptcy Court for the Southern District of Texas. The strategic purpose of the bankruptcy is to “achieve a comprehensive balance sheet restructuring that supports its reopening and longer-term strategic plans.”

CEC said the U.S. and international franchise partners are excluded from restructuring. As of this week, 266 Chuck E. Cheese and Peter Piper Pizza restaurants have reopened – CEC operates more than 700 facilities, suggesting operating capacity is about 38%.

Readers may recall, bankruptcy fillings soared last week to 11-year highs matching the peak of the global financial crisis. The filings, led by weak consumer and energy sectors, were the most for any week since May 2009.

A period of high unemployment will be sticking around for the next several years – there’s a striking correlation between the unemployment rate and loan delinquencies – as we noted a month ago – will result in a “biblical” wave of bankruptcies.

The bad news this week is the emergence of the virus in California, Florida, and Texas. New quarantine orders were established in New York, New Jersey, and Connecticut on Wednesday for travelers from out of state. This all suggests lockdowns in certain states could be ahead – despite the Trump administration warning the economy cannot afford another round of lockdowns. 

If the economic recovery is drailed by a second coronavirus wave – expect a flood of bankruptcies from virus sensitive industries such as restaurants – which essentially means there’s no V-shaped recovery. 

Authored by Alex Nitzberg via JustTheNews.com,

BET founder Robert Johnson during a Wednesday interview with Fox News described people toppling statues as “borderline anarchists” and pushed back against the idea that black people support such behavior, suggesting instead that they “laugh” at those who knock down the statues.

“You know black people, in my opinion, black people laugh at white people who do this, the same way we laugh at white people who say we got to take off the TV shows,” he said mentioning the “Dukes of Hazard,” a decades-old television program that has come under fire for featuring a car emblazoned with a Confederate flag graphic.

He pointed out that knocking over a statue will not “close the wealth gap,” “give a kid whose parent’s can’t afford a college money to go to college,” “close the labor gap between what white workers are paid and what black workers are paid” or “take people off welfare or food stamps.”

Johnson said that whites who seek to “assuage guilt by doing things that make them feel good” would be much more reluctant to support payments for blacks.

Referring to actions such as “changing names, toppling statues, [and] firing professors because they said all lives matter,” Johnson explained that “it just shows to me that white America is continually … incapable of recognizing that black people have their own ideas and thought about what’s in their best interests.”

He suggested that black people should be consulted before people take actions like tearing down statues or firing someone for a comment they have made.

“Give us the belief that you respect our opinion. You go out and do something and destroy something, fire somebody because you think it hurts us. Why don’t you ask us first if it hurts us before you go and say ‘Oh, I gotta do something for the negroes to make them feel better.’ Well ask us if we want you to do that to make us feel better,” he said.

Johnson likened white people’s actions attempting to make black people “feel good” to “rearranging the deck chairs on a racial Titanic. It absolutely means nothing,” he said.

Johnson’s comments come as debates rage across the country in the aftermath of the death of George Floyd—in some cases protestors have defaced and toppled statues. President Trump has come out against changing the names of military installations named after Confederate leaders.

NatGas prices near a 25-year low on Thursday morning as the summer heat has yet to materialize, and oversupplied conditions persist. 

August NatGas futures slid 2% to 1.612 MMBtu on Thursday morning, weighed down by the lack of heat-driven demand and continued LNG weakness. 

The summer heat has taken hold across most of the Lower 48, leading to stronger power burns. But futures markets have looked for indications of extreme temperatures to drive lofty cooling demand and offset the shocks of the coronavirus pandemic and the global recession it induced.

Weather models have, so far this week, instead produced modestly cooler outlooks than what forecasters had projected over last weekend, leaving markets to focus on simmering LNG challenges and the effects of overall demand destruction inflicted by the pandemic despite governments lifting restrictions on businesses and consumers.

“After cooler trends the past few days for early next week, the data was back a little hotter, but still with several weather systems preventing impressive or widespread heat,” NatGasWeather said in a Wednesday afternoon forecast. Data also “trended cooler for the Fourth of July weekend” with weather systems over the eastern U.S. set to prevent upper high pressure “from getting quite as strong as previous runs.” – Reuters Commodity Desk 

US Lower 48 – 45-day cooling degree day 

A NatGas analysis of Bloomberg data showed gas production increased over 87 Bcf/d this week amid reports of production returning as oil drilling resumed. The data also showed the U.S. crude production hit 10.5 million b/d on June 12, has since rebounded to 11.0 million b/d on June 19. The all-time-high in production was reached on March 13 at 13.1 million b/d. The virus-related downturn in the economy has led to a collapse in energy product demand, resulting in a historic drop in oil rigs shuttering operations.

As for LNG exports, here’s what Reuters said: 

At the same time, LNG export levels hover near 4.0 Bcf/d, up from recent lows but still soft, as demand from formerly reliable destinations in Europe and Asia remains anemic due to slow economic recoveries and modest industrial energy needs. The threat of a virus resurgence also weighs on demand. In the United States, the rate of increases in Covid-19 cases has accelerated in June amid the reopening of local economies, with several states, including Texas and Arizona, reporting daily record highs this month, according to Johns Hopkins University data.

“While further progress on treatments and vaccines for Covid-19 could lead to added confidence on lifting of lockdowns … these are unpredictable times,” shipbroker Fearnleys AS said. As such, LNG sentiment remains “flat.”

Expectations for today’s U.S. Energy Information Administration (EIA) NatGas report will likely result in continued builds for the week ending June 19. 

The U.S. Energy Information Administration (EIA) on Thursday is set to issue its storage report for the week ended June 19. A Bloomberg poll found injection estimates ranging from 100 Bcf to 114 Bcf, with a median of 108 Bcf. A Wall Street Journal survey produced an average build expectation of 105 Bcf, while a Reuters survey of 17 analysts produced a 90 Bcf to 115 Bcf injection range and a median 106 Bcf injection. NGI estimated a 116 Bcf build. – Reuters 

To offset coronavirus demand loss – extreme heat in the US Lower 48 is needed this summer- if that doesn’t happen – NatGas prices will continue moving lower. 

Authored by Isabel van Brugen via The Epoch Tiomes,

Protesters at Seattle’s “Capitol Hill Organized Protest” (CHOP) zone are being encouraged by community leaders and an activist whose brother was fatally shot by city police in 2016 to leave the “occupied” protest zone.

A Twitter account, which claims to be the “official account” for CHOP, posted a statement on Wednesday addressed to “comrades in the struggle,” encouraging protesters to leave the area that was established earlier this month in the wake of Black American George Floyd’s death in police custody.

An important message from #CHOP #CHOPSeattle. Please amplify. Thank you for your support over the last two weeks. #ChopWasASuccess #CHOPcomms #CHOPCHAZ ☂️☂️☂️ #BlackLivesMatter pic.twitter.com/7e5ISrWvX6

— Capitol Hill Occupied Protest (Official Account) (@CHOPOfficialSEA) June 24, 2020

“The CHOP project is now concluded,” the message said.

“While we expect a very small handful of holdouts may try to remain in the CHOP, no further organizing will be occurring to support this presence and the number on-site will be too small to be more than an annoyance for pedestrians rather than a zonal blockade.”

It is unclear who runs the Twitter account, however, the statement was signed as from “the Capitol Hill Solidarity Committee.”

“Last night, Solidarity Committee received notice from some of our trusted partners that persons in the park were in danger. We immediately implemented our emergency relocation plan, successfully evacuating most of the park. Thankfully, no danger materialized. However, we are now left with the reality that very few people remain in our beloved CHOP,” the message continued.

Free food station for those in the zone: pic.twitter.com/SkfeI9SMLZ

— Bowen Xiao (@BowenXiao_) June 12, 2020

It called on protestors occupying the zone to “continue the struggle” through social media platforms such as Twitter, Facebook, Instagram, and Snapchat, adding: “We have held city officials accountable and can continue to do so in a way that is safe for everyone.”

The message then called on supporters to vote for presumptive Democratic presidential nominee Joe Biden, to reelect Washington Gov. Jay Inslee (D), and Seattle Mayor Jenny Durkan (D).

It comes after Durkan announced on Monday that officials were working to dismantle the blocks-long span of city streets that President Donald Trump asserted was run by “anarchists,” after a shooting left one person dead over the weekend. Three other shootings have been reported in the area in recent days.

I spent nearly 1 week inside #CHAZ interviewing different people and documenting what I saw.

Here’s what I found: https://t.co/TqnaXyxZbR

— Bowen Xiao (@BowenXiao_) June 17, 2020

Durkan said at a news conference that the violence was distracting from changes sought by thousands of peaceful protesters seeking to address racial inequity and police brutality.

“The cumulative impacts of the gatherings and protests and the nighttime atmosphere and violence has led to increasingly difficult circumstances for our businesses and residents,” she said. “The impacts have increased and the safety has decreased.”

Dozens of protestors, however, are reportedly refusing to budge despite increasing calls to do so. They say their demands to slash police budget by 50 percent and distribute funds to community efforts have not been met.

“Our demands aren’t met,” one man who had set up his tent outside the Seattle Police Department’s abandoned East Precinct building told The Seattle Times. “Why would we leave?”

As part of the 2020 and 2021 budget, we will be looking at @SeattlePD‘s culture and budget. Police should not always be first people on the scene to deal with every call for help. Not every 9-1-1 call requires someone with a firearm to show up.

— Mayor Jenny Durkan (@MayorJenny) June 23, 2020

Durkan on Wednesday submitted a “Budget Rebalancing” document (pdf) that seeks to cut $20 million from the city’s police department budget in a bid to address a series of challenges that include “a movement to demand anti-racist action, to divest and rethink policing, and end institutional racism.”

The mayor’s proposal for a $20 million cut amounts to a 5 percent cut, according to The Seattle Times.

The earliest scheduled vote on the rebalancing legislation and amendments is on July 1, according to an official committee meeting schedule.

“Not This Time” founder Andre Taylor, whose brother Che Taylor was shot by Seattle police four years ago, said the violence in the occupied zone distracts from key messages about racial injustice.

“If there was no violence, you should’ve stood there for as [long as] you wanted to stay there, but the violence creates a different narrative where the people in authority have to look at it differently,” he told KING-TV.

“Our community does not support the violence,” he added.

Last year, the local county prosecutor overseeing Taylor’s case said that charges against the police officers who opened fire on Taylor would not be filed after a majority of jurors said they believed the officers thought Taylor posed a “threat of death or serious bodily injury.” Andre argued that he believes the officers internalized their fear in the lead up to the confrontation as they observed Taylor from afar.

The statement from CHOP’s “official” Twitter account said they were told that the zone would be dismantled “no later than early next week.”

“[It] will be preceded by the removal of barriers and the reopening of streets to traffic,” the statement said.