Month: June 2020

Arizona Gov Doug Ducey last night announced plans for a month-long rollback of the state’s economic reopening, closing bars, restaurants, movie theaters, water parks and other venues, while pushing back the first day of school in the state until Aug. 17. Hours later, on the other side of the world, the leaders of Australia’s second-most-populous state, Victoria, ordered 36 suburbs surrounding Melbourne, the country’s second biggest city, to try and stop a cluster that has emerged over the past couple of weeks.

Australia never had a huge COVID-19 problem (the biggest outbreak before this incident in Victoria was caused by the “Ruby Princess” and the decision to allow infected passengers to disembark without any real scrutiny. Yet, weeks after its neighbor, New Zealand, declared the outbreak over, the country is seeing its worst outbreak yet.

Beginning at midnight on Wednesday (local time), the first suburb-specific stay-at-home order will come into effect for 320,000 people, according to Victorian Premier Daniel Andrews, who spoke at a news conference on Tuesday. For four weeks, residents in the suburbs will be seeing a return to lockdown conditions: They must stay home unless traveling for work, school, healthcare, exercise or food. Restaurants are back to takeout only just weeks after the reopening. Local leaders described the move as a devastating setback for the local economy.

Most of Australia has reported zero or low single-digit daily increases in COVID-19 infections for weeks, Victoria has experienced double-digit increases for each of the previous 14 days, bringing Australia’s national daily totals back toward their highs. Victoria reported 64 new cases on Tuesday, down from the previous day’s 75 new cases.

More lockdown news from overnight: Nevada Governor announced the state won’t hesitate to reimpose restrictions if state-wide trends don’t improve. Georgia Governor Kemp extended his state’s public health emergency until Aug. 11, while LA Mayor Eric Garcetti announced a ‘hard pause’ on cinema reopenings for the largest theater market in the US.

As the number of new cases reported daily accelerates around the world, global cases have reached 10,278,458, according to JHU, while the worldwide death toll has hit 504,936. Elsewhere in Asia, Indian Prime Minister Narendra Modi on Tuesday unveiled plans to extend a plan to provide free grain to more than 800 million Indians until the end of November as the battle against the virus has left India’s economy in tatters. Though its daily number of new cases is off its highs, the numbers its seeing are still well above the peaks from just a couple of weeks ago. On Tuesday India reported 18,522 new cases, down from the 19,459 recorded the prior day, bringing the country’s total to 566,840. The country reported 418 new deaths, bringing the total to 16,893 deaths.

Indian PM Narendra Modi said Tuesday that while the country’s COVID-19 death rate is “under control,” the country’s outbreak has reached a “critical juncture.”

“People are becoming careless,” he said, adding, “we need to call out the violators.”

Back in East Asia, South Korea confirmed 43 new cases, up from 42 a day ago, as total infections reach 12,800 with 282 deaths, while in Japan, Tokyo has found more than 50 new cases for the fifth day running, TV Asahi reported.

China reports 19 new coronavirus cases, up from 12 a day earlier. Of the new infections, seven were in Beijing, which has been battling a fresh outbreak. China also reported four new asymptomatic patients, who tested positive for COVID-19 but showed no symptoms.

Yesterday, US states recorded fewer than 40k new cases for the first time in a week.

States reported ~36k new cases today. States typically report the fewest cases on Mondays (red in the chart) because of a weekend lag effect.

For example, Arizona reported 600 cases today after four straight days over 3000 cases. pic.twitter.com/PUMWCzmlnI

— The COVID Tracking Project (@COVID19Tracking) June 29, 2020

And deaths remain at or close to their lowest levels from March.

There were 332 reported deaths today. The 7-day average in deaths remains about unchanged.

Why are deaths falling or holding steady while cases rise?

Probably for a few reasons: https://t.co/ZXFERIyS6I pic.twitter.com/FkkYBQ7U96

— The COVID Tracking Project (@COVID19Tracking) June 29, 2020

Following a move to rollback California’s economic reopening by closing bars and other venues, LA has joined a growing group of cities around the country that are planning to close their beaches for the July 4 weekend.

BREAKING: All L.A. County beaches ordered CLOSED for 4th of July weekend 7/3 through 7/6. This new order makes it illegal to trespass at these locations and is punishable by law to include, but not limited to, a $1000 fine. @FOXLA

— Bill Melugin (@BillFOXLA) June 29, 2020

Following a handful of vaccine-trial updates out of China, British media reported that a global trial designed to test whether the anti-malaria drugs hydroxychloroquine and chloroquine can prevent infection with COVID-19 will soon re-start after being approved by regulators.

Finally, the US isn’t on a “safe list” of destinations for non-essential travel due to be released by EU members later on Tuesday as the bloc unveils guidelines for leisure and business travel beyond its borders. For the past few days, a steady stream of leaks has claimed that the EU would exclude travelers from the US for the remainder of the summer, at least.

While recent home sales data has rebounded stunningly, Case-Shiller’s home-price appreciation index was expected to show signs of slowing in April (always lagged) – the peak of the lockdowns across the states… but it didn’t.

Somehow, whether through smoothing or seasonal adjustments, the 20-City Composite home price index accelerated at +3.98% YoY (up from March’s revised 3.91% and better than the expected 3.80% rise)

Source: Bloomberg

Despite a MoM disappointment (+0.33% vs +0.5%), home prices have accelerated for 9 straight months.

Phoenix, Seattle, Minneapolis reported highest year-over-year gains among 19 cities surveyed (Detroit excluded for month due to virus-related reporting delays).

Submitted by Michael Every of Rabobank

New Deals

End of June; end of Q2; end of H1; and the end of unrest in Hong Kong – or the end of Hong Kong as Hong Kong, depending on what you read. Lots of things for markets to ponder today against a backdrop of equities once again soaring and yet bond yields staying low: while the US 10-year is at 0.63% at time of writing, up 1bp, and vs. a 2020 low of 0.54%, the US 5-year is at its lowest ever at 0.28%.

In the US, Fed Chair Powell yesterday released the prepared comments to be used in his joint testimony –with Treasury Secretary Mnuchin– to Congress today. In them he noted: “We have entered an important new phase and have done so sooner than expected,” yet mentions “extraordinary uncertainty” over the outlook. On that note, it’s unclear if the “new phase” refers to the economic rebound or the virus second wave. (I joke: he refers to the economy, but underlines there is no true recovery without getting Covid under control. Even then, perhaps not: AirBnB’s CEO has just made some extremely gloomy comments on the outlook for the global travel industry, for example: “I will go on record to say that travel will never, ever go back to the way it was pre-Covid: it just won’t.”)

The Capitol Hill questions for Powell and Mnuchin today are obviously going to revolve around what happens next: specifically, how much more fiscally, and on what? With US unemployment support about to end in weeks, part of that answer would appear to be a no-brainer. Yet look at some of the US headlines today and so is the apparent push for a US troop escalation in Afghanistan in order to fight Russia. Regardless of where the stimulus goes, markets will want to see signs that more is coming. Soon. That’s true everywhere: UK PM Boris Johnson, who also wants to taper furlough support in weeks, is now trying to ape FDR rather than Churchill, declaring a British “New Deal” – which critics allege does not offer a great deal of new money. Let’s see if he can get the economy to take off as Leicester is locked down (again).

Meanwhile, the phrase “We have entered an important new phase and have done so sooner than expected” also applies to Hong Kong, where Beijing this morning passed the new national security law for it, which will be effective from tomorrow – when a mass public protest in defiance is possible. It would be nice to give you some details of the law – but we have as few as Hong Kong CEO Carrie Lam. All that is known at this stage is that the legislation will incur life imprisonment for certain transgressions; and that just before the law was passed the US formally revoked Hong Kong’s special status. Moreover:

• China has threatened to revoke visas for US officials wanting to visit Hong Kong, mirroring US restrictions on Chinese officials in the US – to which Secretary of State Pompeo has tweeted: “We will not be deterred from taking action to respond”;

• Hong Kong political activist Joshua Wong, among others, has just tweeted he has withdrawn from pro-democracy political group Demosisto; and

• Chinese imports of soybeans from Brazil were up 41% y/y to 8.86m tonnes in May while from the US they were down 50% y/y to 491K tonnes. Seasonal patterns play a role, but a whole lot of buying from the US is needed in H2 to keep on track with the phase one trade deal.

Of course, this is all being entirely shrugged off in Hong Kong markets. Indeed, China just announced the partial relaxation of capital controls between it and the mainland to try to boost its role as a financial hub. Specifically, HK can now offer wealth management services to rich mainlanders in the Pearl River Delta –those who lacked the initiative to get their gains into it anyway– which means CNY inflows, perhaps. Hong Kongers will be able to buy (opaque) financial products sold by Chinese banks meaning, if people bite, HKD (hence USD) flowing north. None of this answers questions about how HK will cope with no USD flowing *in* and/or USD flowing out, should US sanctions be imposed. As noted, this is being shrugged off “because it would be too damaging for the US”. Recall the same being said about US tariffs on China, and on Chinese action on Hong Kong?

Or Brexit, where face-to-face talks have begun in Brussels. Expect much talk of “level-playing fields” and fish.

“We have entered an important new phase and have done so sooner than expected” also applies to India-China, where both sides continue to escalate at various points along their long border. Trade relations are suffering further too as 59 Chinese apps are banned as “prejudicial to the sovereignty and integrity of India”. For his part, the Global Times editor is doing his usual exacerbatory job, tweeting: “Well, even if Chinese people want to boycott Indian products, they can’t really find many Indian goods. Indian friends, you need to have some things that are more important than nationalism.” And *that* is why the Indian press says not only does India not want in to the RCEP trade deal, but that it does not want to be reliant on China at all.

Which means more lifting for the Chinese domestic market – where data remain mixed. The June PMIs show a mixed bag. Manufacturing was 50.9, up m/m and slightly above consensus. New orders were 51.4 (again up), as were new export orders, albeit at a weak 42.6; but inventories at 46.8 were down, and so was employment at 49.1. The non-manufacturing PMI was 54.4 (also up), but while employment at 48.7 was higher on the month it still means jobs are being shed.

Japanese data today also underline the depth of the Q2 downturn: industrial production came in at -8.4% m/m vs -5.9% consensus and -25.9% y/y. Likewise, ANZ NZ business confidence was still -34.4 in June vs. -41.8 in May despite the virus having been beaten locally; and Aussie private-sector credit dropped 0.1% m/m in May vs a flat consensus and was 3.2% y/y, down from 3.6%, which will not help propel growth ahead.

In short, the month, quarter, and half-year all end with the virus mostly rampant and the economy mostly being propped up by fiscal stimulus we mostly aren’t guaranteed to see extended with new deals, as all the while geopolitics getting decidedly uglier. Yet markets are relying on their own unique take on the economy – and their take-away from central banks.

Oh, and a Great White shark warning has been issued for Cape Cod. Because we apparently needed more The-Mayor-of-Amity-saying-“Those beaches will be open for this weekend” memes.

Royal Dutch Shell published its second-quarter 2020 outlook Tuesday morning, warning that it would write down up to $22 billion worth of assets and revise its long-term energy price outlook.

Based on these reviews, aggregate post-tax impairment charges in the range of $15 to $22 billion are expected in the second quarter. Impairment charges are reported as identified items and no cash impact is expected in the second quarter. Indicative breakdown per segment is as follows:

• Integrated Gas $8 – $9 billion, primarily in Australia including a partial impairment of the QGC and Prelude asset values

• Upstream $4 – $6 billion, largely in Brazil and North America Shales

• Oil Products $3 – $7 billion across the refining portfolio

– Shell second quarter 2020 update 

Given the commodity bust and global economic downturn – Shell provides a revised outlook for spot Brent and NatGas:

• Brent: $35/bbl (2020), $40/bbl (2021), $50/bbl (2022), $60/bbl (2023) and long-term $60 (real terms 2020)

• Henry Hub: $1.75/MMBtu (2020), $2.5/MMBtu (2021 and 2022), 2.75/MMBtu (2023) and long-term $3.0/MMBtu (real terms 2020)

Shell shares trading on the Eurex Exchange is down 2.54% on Tuesday following the news of the write-down.

Credit Suisse analyst Thomas Adolff said the company’s write-down in the second quarter was already expected given market conditions. Adolff called the update a “wake up call.” 

“While revised volume guidance looks weak in absolute terms, it was in fact better than previous guidance for 2Q,” he wrote. 

Bloomberg Intelligence noted: 

“However, better operational performance when prices are low and tax effects go against you does not, unfortunately, get you very far,” Bloomberg Intelligence says Shell’s forecast for asset impairments confirms BI’s view of a “historically weak quarter.” 

RBC Capital Markets said the update in the second quarter is “much better” than the guidance provided at the end of April:

“Lower refining-margin assumptions over time were a bigger surprise than lower near-term price deck for oil and gas,” analyst Biraj Borkhataria wrote.

Brent crude August futures show prices have stalled in the 43-39 range for the last 20 sessions.

We noted last week that much of the “recent optimism in oil markets has left many analysts scratching their heads, with no real fundamental reason for the shift in sentiment.” 

Over the years, we have periodically reported of the occasional gold bar discovered as counterfeit in Manhattan’s Diamond District which instead of containing the yellow precious metal would be filled with gold-plated tungsten or in some cases copper. The news would spark a brief wave of outrage, prompting physical gold holders to run ultrasound spot checks of their inventory, at which point interest would wane and why not: buyer, after all, beware in gold as in every other market, and if someone is spending thousands to buy fake gold, well that’s Darwinism in action.

Yet one market which seemed stubbornly immune to any counterfeiting was that of physical gold in China, which was odd considering that over the past decade China had emerged as the world’s biggest counterfeiter of various, mostly industrial metals used to secure bank loans, better known as “ghost collateral“, and which adding insult to injury, would frequently  be rehypothecated meaning often several banks would have claims to the same (fake) asset.

All that is about to change with the discovery of what may be one of the biggest gold counterfeiting scandal in recent history. And yes, not only does it involve China, but it emerges from a city that has become synonymous for all that is scandalous about China: Wuhan itself.

With that preamble in mind, we introduce readers to Wuhan Kingold Jewelry Inc., a company which as the name implies was founded and operates out of Wuhan, and which describes itself on its website as “A Company with a Golden future.”

In retrospect, it probably meant “copper” future, because as a remarkable expose by Caixin has found, more than a dozen Chinese financial institutions, mainly trust companies (i.e., shadow banks) loaned 20 billion yuan ($2.8 billion) over the past five years to Wuhan Kingold Jewelry with pure gold as collateral and insurance policies to cover any losses. There was just one problem: the “gold” turned out to be gold-plated copper.

Some more background: Kingold – whose name was probably stolen from Kinross Gold, one of the world’s largest gold miners – is the largest privately owned gold processor in central China’s Hubei province. Its shares are listed on the Nasdaq stock exchange in New York (although its current market cap of just $10MM is a far cry from its all time highs hit when the company IPOed on the Nasdaq around 2010) . The company is led by Chairman Jia Zhihong, an intimidating ex-military man who is the controlling shareholder.

What could go wrong?

Well, apparently everything as at least some of 83 tons of gold bars used as loan collateral turned out to be nothing but gilded copper. That has left lenders holding the bag for the remaining 16 billion yuan of loans outstanding against the bogus bars. And as Caixin adds, the loans were covered by 30 billion yuan of property insurance policies issued by state insurer PICC Property and Casualty and various other smaller insurers.

The fake gold came to light in February when Dongguan Trust (one of those infamous Chinese shadow banks) set out to liquidate Kingold collateral to cover defaulted debts. As the report continues, in late 2019 Kingold failed to repay investors in several trust products. To its shock, Dongguan Trust said it discovered that the gleaming gold bars were actually gilded copper alloy.

The news sent shockwaves through Kingold’s creditors. China Minsheng Trust – another shadow banking company and one of Kingold’s largest creditors – obtained a court order to test collateral before Kingold’s debts came due. On May 22, the test result returned saying the bars sealed in Minsheng Trust’s coffers are also copper alloy.

And with authorities investigating how this happened, Kingold chief Jia flatly denies that anything is wrong with the collateral his company put up. Well, what else could he say…

As Caxin notes, the Kingold counterfeiting case echoes China’s largest gold-loan fraud case, unfolding since 2016 in the northwest Shaanxi province and neighboring Hunan, where regulators found adulterated gold bars in 19 lenders’ coffers backing 19 billion yuan of loans, or about USD $2.5 billion. In that case, a lender seeking to melt gold collateral found black tungsten plate in the middle of the bars.

In the case of Kingold, the company said it took out loans against gold to supplement its cash holdings, support business operations and expand gold reserves, according to public records. It then appears to have decided to apply a gold-layer to tons of copper and pretend it was money-good gold collateral. And even more shocking, for years nobody checked the authenticity of the pledged collateral!

In 2018, the company beat a number of competitors in bidding to buy a controlling stake in state-owned auto parts maker Tri-Ring Group. Kingold offered 7 billion yuan in cash for 99.97% of Tri-Ring. The Hubei government cited the deal as a model of so-called mixed-ownership reform, which seeks to invite private shareholders into state-owned enterprises. But Kingold has faced problems taking over Tri-Ring’s assets amid a series of corruption probes and disputes involving Tri-Ring.

After obtaining the test results, Minsheng Trust executive said the company asked Jia whether the company fabricated the gold bars: “He flatly denied it and said it was because some of the gold the company acquired in early days had low purity,” the executive said. In a telephone interview with Caixin in early June, Jia denied that the gold pledged by his company was faked.

“How could it be fake if insurance companies agreed to cover it?” he said and refused to comment further. Well, the answer is simple: the insurance companies were in on the scam, but that’s a story for another day.

In early June, Minsheng Trust, Dongguan Trust and a smaller creditor Chang’An Trust filed lawsuits against Kingold and demanded that PICC P&C cover their losses. PICC P&C declined to comment to Caixin on the matter but said the case is in judicial procedure. A source from PICC P&C told Caixin that the claim procedure should be initiated by Kingold as the insured party rather than financial institutions as beneficiaries. Kingold hasn’t made a claim, the Caixin source said.

In total, Kingold pledge tens of thousands of kilograms of gold to no less than 14 creditors amounting to just under 20 billion yuan.

Caixin learned that the Hubei provincial government set up a special task force to oversee the matter and that the public security department launched an investigation. The Shanghai Gold Exchange, a gold industry self-regulatory organization, disqualified Kingold as a member as of last week.

Following Dongguan Trust and Minsheng Trust, two other Kingold creditors also tested pledged gold bars and found they were fake, Caixin learned. A Dongguan Trust employee said his company reported the case to police Feb. 27, the day after the testing result was delivered, and demanded 1.3 billion yuan of compensation from PICC P&C’s Hubei branch.

Meanwhile, Kingold defaulted on 1.8 billion yuan of loans from Dongguan Trust with an additional 1.6 billion yuan due in July.

The 83 tons of purportedly pure gold stored in creditors’ coffers by Kingold as of June, backing the 16 billion yuan of loans, would be equivalent to 22% of China’s annual gold production and 4.2% of the state gold reserve as of 2019.

In short, more than 4% of China’s official gold reserves may be fake. And this assume that no other Chinese gold producers and jewelry makers are engaging in similar fraud (spoiler alert: they are.)

* * *

Founded in 2002 by Jia, Kingold was previously a gold factory in Hubei affiliated with the People’s Bank of China that was split off from the central bank during a restructuring. With businesses ranging from gold jewelry design, manufacturing and trading, Kingold is one of China’s largest gold jewelry manufacturers, according to the company website.

The company debuted on Nasdaq in 2010. The stock currently trades around $1 apiece, giving Kingold a market value of $12 million, down 70% from a year ago. A company financial report showed that Kingold had $3.3 billion of total assets as of the end of September 2019, with liabilities of $2.4 billion.

Jia, now 59, served in the military in Wuhan and Guangzhou and spent six years living in Hong Kong. He once managed gold mines owned by the People’s Liberation Army, which means he likely has connections all the way to the very top.

“Jia is tall and strong,” one financial industry source familiar with Jia told Caixin. “He’s an imposing figure and speaks loudly. He is bold, reckless and eloquent, always making you feel he knows better than you.”

Several trust company sources said Jia is well connected in Hubei – the epicenter of the coronavirus pandemic – which may explain Kingold’s surprise victory in the Tri-Ring deal. But a financial industry source in Hubei said Jia’s business is not as solid as it may appear.

“We knew for years that he doesn’t have much gold ― all he has is copper,” said the source, who declined to be named.

Local financial institutions in Hubei have avoided doing business with Kingold, but they don’t want to offend him publicly, the source said. Why? Because of his extnesive connections with the Chinese army.

“Almost none of Hubei’s local trust companies and banks has been involved in (Kingold’s) financing,” he said.

That explains why most of Kingold’s creditors are from outside Hubei. Caixin learned from regulatory sources that Minsheng Trust is the largest creditor of Kingold with nearly 4.1 billion yuan of outstanding loans, followed by Hengfeng Bank’s 3.9 billion yuan, Dongguan Trust’s 3.4 billion yuan, Anxin Trust & Investment Co.’s 1.9 billion yuan and Sichuan Trust Co.’s 1.8 billion yuan.

But wait, counterfeiting gold is just the tip of the company’s fraud iceberg: several industry sources told Caixin that the institutions were willing to offer loans to Kingold because Jia promised to help them dispose of bad loans.

Hengfeng Bank is the only commercial bank involved in the Kingold affair. The bank in 2017 provided an 8 billion yuan loan to Kingold, which in return agreed to help the bank write off 500 million yuan of bad loans, bank sources said. Kingold repaid half of the debts in 2018. But the loan issuance involved many irregularities as access to the pledged gold and testing procedures was controlled by Kingold, one Hengfeng employee said.

The loan was pushed forward by Song Hao, former head of Hengfeng’s Yantai branch. Song was placed under graft investigation in March 2018 in connection with the bank’s disgraced former Chairman Cai Guohua, whose downfall led to a major revamp in the bank’s management. In 2019, Hengfeng’s new management sued Kingold for the unpaid loans and moved to dispose the collateral. But a test of the gold bars found they are “all copper,” the bank source said.

It is still unclear whether the collateral was faked in the first place or replaced afterward. Sources from Minsheng Trust and Dongguan Trust confirmed that the collateral was examined by third-party testing institutions and strictly monitored by representatives from Kingold, lenders and insurers during the process of delivery.

“I still can’t understand which part went wrong,” a Minsheng Trust source said. Bank records showed that the vault where the collateral was stored was never opened, the source told Caixin.

The falling dominos

Public records showed that Kingold’s first gold-backed borrowing can be traced back to 2013, when it reached an agreement for 200 million yuan of loans from Chang’An Trust, with 1,000 kilograms of gold pledged. The two-year loan was to fund a property project in Wuhan and was repaid on time. Before this, Kingold’s financing mainly came from bank loans with property and equipment as collateral.

It appears that one way or another, the company realized that it could fabricate gold ownership and receive money in exchange for what were basically worthless copper bricks painted as gold; and thanks to Jia’s military connections nobody would ask any other questions.

As a result, starting in 2015, Kingold rapidly increased its reliance on gold-backed borrowing and started working with PICC P&C to cover the loans. In 2016, Kingold borrowed 11 billion yuan, nearly 16 times higher than the previous year’s figure. Its debt-to asset ratio surged to 87.5% from 43.4%, according to a company financial report. That year, Kingold pledged 54.7 tons of gold for loans, 7.5 times higher than the previous year.

It is now safe to assume that most of that gold never existed.

A person close to Jia said the surge of borrowing was partly due to Kingold’s pursuit of Tri-Ring. In 2016, the Hubei provincial government announced a plan to sell Tri-Ring stakes to private investors as a major revamp of the Hubei government-controlled auto parts manufacturer.

In 2018, Kingold was selected as the investor in a deal worth 7 billion yuan. According to the investment plan, Kingold’s purchase of Tri-Ring was part of a strategy to expand into the hydrogen fuel cell business, which is obviously a “logical” fit for a company involved in gold jewelry. Sources close to the deal said Kingold was attracted by Tri-Ring for its rich holding of industrial land that could be converted for commercial development.

Yes, at the very bottom of the fraud we finally get to the one true and endless Chinese asset bubble: real estate.

A Dongguan Trust investment document showed that Tri-Ring owns land blocks in Wuhan and Shenzhen that are worth nearly 40 billion yuan.

The deal drew immediate controversy as some rival bidders questioned the transparency of the bidding process and Kingold’s qualifications.

And here things get even crazier: according to Kingold’s financial reports, the company had only 100 million yuan of net assets in 2016 and 2 billion yuan in 2017, sparking doubts over its capacity to pay for the deal. Despite the fuss, Kingold paid 2.8 billion yuan for the first installment shortly after the announcement of the deal. The second installment of 2.4 billion yuan was paid several months later with funds raised from Dongguan Trust.

In December, Tri-Ring completed its business registration change, marking completion of Kingold’s takeover. However, the new owner has since faced troubles mobilizing Tri-Ring’s assets because of a series of corruption probes surrounding the auto parts maker since early 2019 that brought down Tri-Ring’s former chairman. As Caixin the notes, a majority of Tri-Ring’s assets were frozen amid the investigation and subsequent debt disputes, limiting Jia’s access to the assets.

The fraud is finally exposed

Hobbled by the Tri-Ring deal, which cost billions of yuan but has yet to make any return, Jia’s capital chain was eventually broken when Hengfeng Bank pushed for repayment, triggering a series of events that brought the fake gold to light, said a person close to the matter. Insurers’ involvement was key to the success of Kingold’s gold-backed loan deals. The insurance policies provided by leading state-owned insurers like PICC P&C were a major factor defusing lenders’ risk concerns, several trust company sources said.

“Without the insurance coverage from PICC P&C, (we) wouldn’t issue loans to Kingold as the collateral can only be tested through random picked samples,” one person told Caixin.

PICC P&C’s Hubei branch provided coverage for most of Kingold’s loans, Caixin learned. All the policies will expire by October. As of June 11, 60 policies were still valid or involved in lawsuits.

PICC P&C faces multiple lawsuits filed by Kingold’s creditors demanding compensation. But a PICC P&C spokesperson said the policies cover only collateral losses caused by accident, disasters, robbery and theft. Not fraud, and certainly not losses when the collateral never even existed!

Whose fault

Wang Guangming, a lawyer at Dacheng Law Offices, said the key issue is what happened to the pledged gold and which party was aware of the falsification. If Kingold faked the gold bars and both the insurers and creditors were unaware, the insurers should compensate the lenders and sue Kingold for insurance fraud, Wang said. Insurers are also responsible to compensate if they knew of Kingold’s scam but creditors didn’t, Wang said.

If Kingold and creditors were both aware of the fake collateral, insurers could terminate the policies and sue the parties for fraud. But if insurers were also involved in the scam, then all the contracts are invalid and every party should assume their own legal responsibilities, Wang said.

A financial regulatory official told Caixin that previous investigations of loan fraud cases involving fake gold pledges found there was often collusion between borrowers and financial institutions.

Earlier this year, PICC P&C removed its Hubei branch party head and general manager Liu Fangming. Sources said staff members involved in business with Kingold were also dismissed. PICC P&C said Liu’s removal was due to internal management issues. It didn’t answer Caixin’s question about whether Liu was involved in the Kingold scandal.

* * *

The above story is shocking in exposing just how multi-faceted fraud is in China: capitalizing on pre-existing cronyism and connections with China’s powerful army, the founder of Kingold was allowed to basically do anything he wanted, no questions asked, including counterfeiting over 83 tons of gold bars to get billions in funds to participate in China’s housing bubble, only for a series of unexpected events to unwind the frauds one after another and expose the type of sordid scandal that is at the heart of most Chinese “enterprises” and business ventures.

As for the gold, yes – several billion in gold bars never existed and yet resulted in a cascade of subsequent cash flow events allowing tens of billions in funds to be released, “benefiting” not only founder Jia, but China’s broader economy. Which is, needless to say, terrifying: because whereas just after the financial crisis China was engaged in building ghost cities, everyone knew these were a symbol of demand that would never materialize, even if the cities themselves did exist. However, it now appears that a major part of China’s subsequent economic boom has been predicated on tens of billions in hard assets – such as gold – which simply do not exist.

As for what this means for the price of gold… well, Kingold is certainly not the only Chinese company engaging in such blatant fraud, and the consequences are clear: once Chinese creditors or insurance companies start testing the “collateral” they have received in exchange for tens of billions in loans and discover, to their “amazement”, that instead of gold they are proud owners of tungsten or copper, they have two choices: reveal the fraud, risking tremendous adverse consequences and/or prison time, or quietly buy up all the gold needed to literally fill the void from years of gold counterfeiting.

Something tells us option two will be far more palatable to China’s kleptoculture where one domino cold trigger a collapse of the entire financial system. What happens next: a panicked scramble to procure physical gold, one which even our friends at the BIS will be powerless to stop from sending the price of the precious metal to all time highs.

Authored by Paul Joseph Watson via Summit News,

Seattle Police Chief Carmen Best asked why two African-Americans were dead at a place that “clamed to be working for Black Lives Matter” after a 16-year-old teenager was killed inside the CHOP police-free zone.

Despite organizers urging occupiers to abandon the CHOP zone last week, it still remains very much active and as crime-ridden as ever.

A 19-year-old man was shot dead and another wounded during an incident in the area two weekends ago.

That was followed by a similar incident in the early hours of Monday which left a 16-year-old dead and a 14-year-old critically wounded.

During a press conference where she was heckled throughout by BLM supporters, Police Chief Carmen Best stated, “It’s very unfortunate that we have yet another murder in this area identified as the CHOP – two African-American men dead at a place where they claim to be working for Black Lives Matter.”

“Two African-American men are dead at a place where they claim to be working for Black Lives Matter.”

Seattle police chief @carmenbest is heckled by angry protesters at a press conference inside “CHAZ” addressing the homicide & injury of two black children by CHAZ security. pic.twitter.com/RvvLkFyYxc

— Andy Ngô (@MrAndyNgo) June 30, 2020

Best went on to assert that activists shouldn’t have been allowed to “take over an entire neighborhood,” adding “enough is enough here”.

“As an African-American woman with uncles and brothers and stuff, I wouldn’t want them to be in this area,” said Best, before she was interrupted again by someone using a bullhorn.

“This kind of behavior is irrational and unacceptable,” she added.

Seattle Mayor Jenny Durkan originally defended CHOP by characterizing it as a “summer of love” despite an explosion of rapes and other violent crimes in the area.

She did a 180 last week and ordered police to dismantle the CHOP zone, but that has yet to happen.

*  *  *

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There was some sound and fury in a very illiquid overnight session, which ended up signifying nothing, and futures were little changed from their Monday closing ramp as markets puts a close to the best quarter for stocks since 1998.

The MSCI world equity index was up about 0.1% in early trading after Asian shares rose on strong data from the U.S. housing market and Chinese factories. European shares continued the rally.  S&P futures fluctuated and the dollar index strengthened to a one-month high amid concern that new virus infections could slow the pace of business re-openings.

Overnight sentiment fizzled after Australia’s Victoria state said it would shutter 10 areas in the metropolis of Melbourne. Arizona also ordered a number of establishments including gyms to close for 30 days and New Jersey halted plans for indoor dining. However, this latest gloom was quickly forgotten shortly after Europe reopened and the magical overnight futures levitation kicked in right on schedule.

“Renewed shutdowns of economic activity would bring additional market volatility,” said Kristina Hooper, the chief global market strategist at Invesco in New York. “But importantly, we do not expect the same draconian shut-down measures as seen earlier in the year.”

After new cases of the coronavirus trended lower in May, they climbed again in June, denting investors’ enthusiasm that the U.S. economy would recovery relatively quickly from the crisis. Investor enthusiasm had been driven in part by recent economic data that were better than expected.

A spike in virus infections in Southern and Western states last week spooked investors. Florida, Texas, California and Arizona, which were the top four states with the most new cases, account for nearly a third of U.S. economic output. California’s government on Sunday ordered bars in several counties to close due to the coronavirus rebound, while San Francisco put plans to reopen businesses on hold.

Los Angeles has become a new epicenter in the pandemic as coronavirus cases and hospitalizations surge there despite California Governor Gavin Newsom’s orders requiring bars to close and residents to wear masks in nearly all public spaces. The World Health Organization (WHO) will “read carefully” a Chinese study on a new flu virus found in pigs, a spokesman said, adding that the findings underscored the importance of influenza surveillance during the current pandemic.

“Asset markets are looking beyond COVID stats,” said Neil Jones, head of FX sales at Mizuho Bank. “There’s some expectation of containment and then, further down the line, an expectation of some form of measure to combat the virus.”

Anyway, back to markets, where Uber climbed in pre-market trading after reports that the company is in talks to buy Postmates as a consolation prize after it failed to acquire Grub Hub. Boeing, which idiotically surged yesterday on trials of the 737 MAX airplane which nobody will want to fly in, slipped after one of its biggest European customers scrapped its $10.6 billion purchase deal.

European shares edged up, with the Euro STOXX 600 up 0.1% in early trading having been relatively range-bound for the past two weeks. Germany’s DAX was up 0.3%.  London’s FTSE 100 was down 0.6%. Britain’s economy shrank by the most since 1979 in early 2020 as households slashed their spending, according to official data that included the first few days of the lockdown. Annual inflation in the Euro area accelerated to 0.3% in June from a four-year low of 0.1% in May, beating forecasts for no change and supporting the European Central Bank’s expectation that a negative reading may be avoided.

Earlier in the session,  Asian stocks gained, led by materials and communications, after falling in the last session. The Topix gained 0.6%, with EJ HD and DVX rising the most. The Shanghai Composite Index rose 0.8%, with Xinjiang Yilu Wanyuan Industrial Investment and Chengtun Mining posting the biggest advances. China’s parliament passed national security legislation for Hong Kong in response to last year’s pro-democracy protests. The United States, Britain and other Western governments have said the legislation erodes the autonomy the city was granted at its 1997 handover. Market reaction was limited.

While the latest stronger than expected Chinese PMI print added to reopening optimism…

…  some investors are questioning the rally that has carried global stock benchmarks higher. The MSCI All Country World Index is up about 18% this quarter and just 10% below its February record high, the biggest advance in a decade. Yet the World Health Organization warned that the worst of the coronavirus pandemic is still to come. As a result, investors are parsing an array of factors that could weigh on stocks in the months ahead, including potential delays in reopening parts of the U.S. economy and sky-high stock valuations.

The S&P 500’s strongest quarterly performance since the fourth quarter of 1998 — during the dot-com boom — was driven by gains in April and May, followed by an overall flat June after Wall Street gave back gains in the second half of the month.

In FX, the dollar advanced against all its Group-of-10 peers amid quarter-end positioning and as investors tracked a resurgence in coronavirus infections. The dollar got a boost while the Aussie swung to a loss as the Australia’s second-most populous state imposed a lockdown in some areas for four weeks, while also diverting flights for a shorter period; other risk-sensitive currencies reacted in a similar fashion.

“I would expect overall dollar demand to continue as we go into July,” Mizuho’s Neil Jones said. “If there’s a summer lull then we may see a dollar sell-off into the elections but as we run up to the end of the year I would expect to see a resurgence of dollar demand,” he added.

The euro was down around 0.3% against the dollar, at $1.1208, while the Australian and New Zealand dollars also edged down. The Australian and New Zealand dollars are set to end the best quarter against the greenback since the financial crisis; Sweden’s krona and Norway’s krone are heading for their best quarter against the euro in a decade or more.

In rates, Treasuries were steady ahead of a slew of Fed speakers. European peripheral spreads widened as Bunds popped through Monday’s best levels, however Italian bonds advanced as a sale of 10-year debt saw the highest oversubscription rate since 2012. Copper rose above $6,000 a ton for the first time since January.

In commodities, oil prices slipped as traders took profits after sharp gains the previous session and Libya’s state oil company flagged progress in talks to resume exports, potentially boosting supply. Prices then recovered partially. WTI was down 0.6% at $39.15 a barrel, having hit as low as $39.00, while Brent crude slipped 0.6% to $41.16 per barrel.

Looking at today’s calendar, expected data include Chicago PMI. FedEx reports earnings.

Market Snapshot

• S&P 500 futures down 0.1% to 3,045.75
• STOXX Europe 600 down 0.3% to 358.75
• MXAP up 0.7% to 157.99
• MXAPJ up 0.7% to 513.21
• Nikkei up 1.3% to 22,288.14
•  
• Topix up 0.6% to 1,558.77
• Hang Seng Index up 0.5% to 24,427.19
• Shanghai Composite up 0.8% to 2,984.67
• Sensex up 0.5% to 35,128.74
• Australia S&P/ASX 200 up 1.4% to 5,897.88
• Kospi up 0.7% to 2,108.33
• German 10Y yield fell 0.8 bps to -0.478%
• Euro down 0.2% to $1.1221
• Brent futures down 0.7% to $41.44/bbl
• Italian 10Y yield rose 0.6 bps to 1.17%
• Spanish 10Y yield unchanged at 0.47%
• Brent futures down 1.2% to $41.22/bbl
• Gold spot down 0.1% to $1,771.15
• U.S. Dollar Index up 0.18% to 97.70

Top Overnight News

• China’s top legislative body approved a landmark national security law for Hong Kong, a sweeping attempt to quell dissent that drew fresh U.S. retaliation and could endanger the city’s appeal as a financial hub
• Boris Johnson will confirm his commitment to spending billions of pounds on infrastructure to rebuild the coronavirus-ravaged U.K. economy in a major speech on Tuesday, arguing that balancing the books must wait until recovery is secure
• Bets that the Federal Reserve will implement yield-curve control sooner rather than later are showing up in positioning data and the curve itself
• Germany is paving the way for a green bond revolution in Europe by announcing it will sell its first government-backed securities later this year
• Some of Germany’s furloughed workers are beginning to return to work full time, according to a survey by the Ifo Institute
• Prices in the euro area rose 0.3% in June from a year ago, according to preliminary data, versus a 0.2% estimate, as economies across the bloc allowed more businesses to reopen
• France risks losing control of its debts unless the government overhauls its long- term fiscal policy, according to the national auditor

Asian equity markets traded higher as the region took its cue from the firm performance on Wall St which was attributed to several factors including technical buying in the S&P 500 around the 3000 level and encouraging comments by Fed Chair Powell who suggested the US economy entered an important new phase sooner than expected and that recent economic data offers some positive signs, while better than expected Chinese PMI figures also contributed to the overnight optimism. ASX 200 (+1.4%) was lifted from the open with upside in Australia led by firm gains in energy and strength in the top weighted financials sector, with industrials also inspired by the outperformance of their counterparts stateside after Boeing shares soared by double digits as it began 737 MAX test flights. Nikkei 225 (+1.3%) was underpinned as recent favourable currency moves helped participants overlook the soft data which showed the weakest Industrial Production since March 2009 and highest Unemployment Rate in 3 years. Hang Seng (+0.5%) and Shanghai Comp. (+0.8%) were also positive after Chinese Manufacturing PMI and Non-Manufacturing PMI both topped estimates, but with gains capped following another PBoC liquidity drain and after China’s legislature reportedly passed the Hong Kong security bill as expected. Finally, 10yr JGBs traded lower to test support at the 152.00 level as the gains in riskier assets sapped haven demand which also resulted in the 40yr yield rising to its highest since March last year, while weaker results at the 2yr JGB auction further weighed on prices.      

Top Asian News

• BOJ’s Bond Purchases Signal Japan’s Curve to Steepen Further
• CAR Inc Surges 17%, Sparks Speculation of Progress in Stake Sale
• BOJ Widens Buying Ranges for Bonds Due Up to 10 Yrs in July Plan

Another day of volatile price action across the equity-sphere but European bourses are ultimately negative [Euro Stoxx -0.1%] as the risk appetite seen during APAC hours petered out on month/quarter and HY-end, where Citi’s month-end model shows a relatively strong signal for a rotation out of European and Japanese stocks into bonds, specifically US, Asian and Canadian. Furthermore, markets could also be bracing for a rise in COVID case-counts as the weekend effect dissipates. Add to that the passage of the Hong Kong security law which is likely to face international pushback, namely from the US, UK and the EU, albeit the latter two have previously signalled a more balanced approach to the situation given their preferability for a Chinese partnership. It’s also worth bearing in mind that Germany will take the EU presidency from tomorrow and have previously hinted at the tougher stance against China. For refence, Eurex suffered an outage overnight for several hours. Nonetheless, European stocks saw a bout of buying immediately after the cash open – somewhat mimicking yesterday’s actions – before gains again subsided. Sectors are now mixed after earlier flow rotated into defensives from cyclicals shortly after the open. The detailed breakdown sees Tech holding its position in the green on the back of Micron’s (+4% pre-mkt) after-market earnings in which guidance was upgraded – thus propping up European peers STMicroelectronics (+1.8%), Dialog Semiconductor (+1.9%), Micro Focus (+0.8%) and Infineon (+0.3%). Banks are on the other end of the spectrum amid lower yields and after Wells Fargo (-1.8%), the fourth largest bank State-side, opted to cut its Q3 dividend when it reports earnings on July 14th. In terms of individual movers, Wirecard (+96%) shares feel some reprieve after UK FCA lifted restrictions on the Co’s UK arm. Meanwhile, Novartis (-1.0%), the likely culprit for losses in the Healthcare sector, remains pressured after the Canadian federal court dismissed a plea by drug makers, including Co., challenging the government’s new regulation aimed at lowering prices of patented drugs.

Top European News

• Shell to Write Down Up to $22 Billion as Virus Hits Big Oil
• Boris Johnson Vows ‘New Deal’ to Rebuild Britain After Virus
• Hedge Funds Score Big Gains on Dividend Bets That Hurt Banks

In FX, the Dollar may yet succumb to bearish rebalancing flows around daily fixes, but more pronounced weakness in major currency rivals is keeping the index afloat around 97.500 and close to a new 97.774 peak amidst waning risk appetite on the final day of June, Q2 and the first half of 2020. Moreover, the Greenback has maintained momentum following Monday’s positive US data (pending home sales) and a slightly more upbeat economic assessment via the text of a speech to be delivered by Fed chair Powell to the House later today.

• NOK/NZD/AUD – Another downturn in crude prices has undermined the Norwegian Krona’s revival, while the Kiwi and Aussie have pulled back from overnight highs after the latter failed to sustain post-Chinese PMI gains on reports that 10 sectors of Melbourne are returning to lockdown and some suburbs may be on the verge of being ordered to stay at home. Eur/Nok has rebounded from sub-10.9000 towards 10.9500, Nzd/Usd has lost grip of the 0.6400 handle and Aud/Usd is back below 0.6850 after fading ahead of 0.6900 where a hefty 1.4 bn option expiry resides.
• GBP/EUR/CAD – Also weaker vs the Buck, as Cable languishes below 1.2300 in wake of weaker than expected UK Q1 GDP awaiting further BoE commentary via Haldane and Cunliffe, while the Euro is only just holding up above 1.1200 and the 100 DMA (1.1205) in the midst of big expiries either side of the round number, and with Eur/Usd one of the only exceptions to the modest sell Dollar for portfolio mantra over month/quarter/half year end. Elsewhere, the Loonie is trying to keep its head above 1.3700 in advance of Canadian GDP for April and the first full month of COVID-19 contagion.
• CHF/JPY – Relative G10 ‘outperformers’ or at least showing more resilience than others due to underlying safe-haven demand and for the Yen in particular reports of RHS Usd/Jpy interest that is seen gathering pace, if not peaking in the run up to 4 pm London time. However, a weaker than forecast Swiss KOF survey has offset a rebound in retail sales, while Japanese ip missed consensus and the jobless rate hit a 3 year high.
• EM – Some respite for the Rand via SA Q1 GDP contracting considerably less than anticipated, as Usd/Zar pares back from nearly 17.4000, albeit still higher in line with peers against the backdrop of fragile risk sentiment and broad Dollar strength. Conversely, the Rouble is still underperforming and jittery on the last day of voting for/against the new Russian convention before Wednesday’s national holiday, with Usd/Rub hovering just shy of 70.9000, and Eur/Pln is firmer following a surprise rebound in Polish CPI.

In commodities, A downbeat session thus far for the oil complex as stocks hold onto losses as with global economies re-imposing some targeted lockdowns amid local flare-ups in COVID-19 cases, with Australia’s Victoria state the latest to re-introduce stay-at-home orders across 10 postcodes. Negativity also arises from the passage of the Hong Kong Security Bill, poised to be implemented tomorrow. WTI Aug resides near session lows, just north of the USD 39/bbl mark (vs. high 39.80/bbl), whilst Brent Sep trades on either side of USD 41.50/bbl, off its USD 41.80/bbl high. Looking ahead, price action will likely be dictated by COVID-related headlines in the absence of anti-China flare-ups over the National Security Bill ahead of the weekly Private Inventory numbers . Elsewhere, spot gold remains within recent ranges between USD 1768-1774/oz as markets eye portfolio rebalancing. Copper prices meanwhile gained overnight amid broader upside in APAC stocks and with supply concerns still on trader’s minds.

US Event Calendar

• 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.5%, prior 0.47%;  CS 20-City YoY NSA, est. 3.8%, prior 3.92%;
• 9:45am: MNI Chicago PMI, est. 45, prior 32.3
• 10am: Conf. Board Consumer Confidence, est. 91.4, prior 86.6; Expectations, prior 96.9; Present Situation, prior 71.1

Central Bank Speakers

• 11am: Fed’s Williams Speaks on Central Banking in the Age of Covid
• 11:05am: Fed’s Brainard Discusses a Decade of Dodd- Frank
• 12:30pm: Powell and Mnuchin Speak Before House Financial Panel
• 2pm: Fed’s Bostic and Kashkari Takes Part in Panel on Diversity

DB’s Jim Reid concludes the overnight wrap

Welcome to the last day of the first half of 2020. We’ll have our usual month, quarter and YTD (H1) performance review out tomorrow. As H1 draws to a close, equity markets yesterday resolutely looked past the negative headlines from the US and abroad on the coronavirus, choosing to focus on some better than expected economic data. However it’s quite clear from yesterday that there will be hiccups to come in terms of re-openings. In New York City, Mayor de Blasio said that the city might slow the restart of indoor dining, which is currently scheduled to be reopened from July 6, given the spread seen elsewhere. Concurrently, the New York Times reported that Broadway would remain closed for the N this year, with other large cultural venues such as the Metropolitan Museum and Lincoln Center likely to delay opening until later in the summer even if the city gives them a green light. Over in Florida, cases continued to grow, with the state seeing a further 3.7% increase (weekly average of 5.5%), and parts of the state are now indicating they will make mask wearing mandatory. Florida’s slight drop in case growth was seen elsewhere in US. Cases rose by 1.5% overall, compared to the 1.6% weekly average, but the weekend effect was clearly seen in some states. Arizona saw cases rise by 0.8%, but cited a clerical error, where one lab didn’t submit a report to the state’s record keepers. This compounded by the lower testing capacity that we have seen across the US over the weekend likely means there will be a sharp revision in the next couple of days.

Our US Chief Economist, Matthew Luzzetti, released a new video yesterday where he assesses whether the recent deterioration in covid trends across many states led to a retrenchment in economic activity even prior to official rollback of reopenings. A link to video and report are here.

Looking elsewhere, reports continued to be concerning, with Iran reporting its highest number of daily fatalities since the outbreak began, with 162 new deaths in 24 hours. New cases in India continue to grow rapidly, at roughly 3.8% per day on average over the past month, while South America as a whole is now seeing over 40,000 new cases per day with the largest countries yet to see a meaningful drop in new cases. However reported fatalities remain relatively contained given caseloads in those regions. With around 280 fatalities per 1 million residents, Chile, Brazil, and Peru are well below the US (388), UK (642), and Italy (575), however they do trail Germany (108) and Canada (225).

Even against this worrisome virus backdrop, global equity markets rallied following a rather lackluster start to the day as economic data from the US came in stronger than expected and turned the session around. The S&P 500 closed up +1.47%, which as it stands puts the index just one day away from its strongest quarterly performance on a total returns basis since Q4 1998. And that comes after a first quarter that was the worst since Q4 2008, so it’s fair to say we’ve had an eventful few months in financial markets. There may have been some quarter-end rebalancing at work as well given the over +0.5% move in the last 10 minutes of US trading – typical of quarter end type price action. Tech stocks just slightly underperformed, with the NASDAQ up +1.20%, while the Dow Jones climbed +2.32% as Boeing surged +14.43% (best S&P performer on the day) following the weekend announcement that the Federal Aviation Administration had approved some test flights for the 737 Max. Europe lagged slightly as it missed the afternoon rally in New York. The Stoxx 600 gained +0.44%, even while some of the individual bourses were higher. The DAX (+1.18%), IBEX (+1.39%) and FTSEMIB (+1.69%) all outperformed the index.

Other risk assets also benefited from the sudden turn in sentiment yesterday, including commodities. Oil prices recovered from their losses earlier in the session to move higher, with Brent (+1.68%) and WTI (+3.14 %) both advancing, while copper rose +0.77% to a 5-month high as well. Over in fixed income, yields on 10yr Treasuries fell a further -1.8bps to 0.623%, which is their lowest level in over 6 weeks. And in the UK, yields on both 2yr and 5yr gilts fell to a record low as they inched deeper into negative territory.

Asian markets have followed Wall Street’s lead this morning with the Nikkei (+1.67%), Hang Seng (+0.89%), Shanghai Comp (+0.58%), Kospi (+1.74%) and ASX (+1.39%) all up. Meanwhile, futures on the S&P 500 are up a more modest +0.22%.

In terms of the main headlines overnight, China’s NPC has passed the new Hong Kong security law, expected to become effective from July 1. The SCMP has reported that Hong Kong’s Basic Law committee is expected to meet immediately to discuss insertion into Annex III of the city’s mini-constitution. Xinhua, the official state news agency, is expected to publish the details at some point today, marking the first time the law will be fully disclosed to the public.

Prior to that, US Commerce Secretary Wilbur Ross said that regulations affording preferential treatment to Hong Kong over China, including the availability of export license exceptions, are to be suspended while adding “further actions to eliminate differential treatment are also being evaluated”. He also said, “with the Chinese Communist Party’s imposition of new security measures on Hong Kong, the risk that sensitive U.S. technology will be diverted to the People’s Liberation Army or Ministry of State Security has increased, all while undermining the territory’s autonomy.”

Meanwhile, we’ve also had the latest PMIs out of China which surprised to the upside. The manufacturing PMI rose to 50.9 (vs. 50.5 expected and 50.6 last month) while the non-manufacturing PMI printed at 54.4 (vs. 53.6 expected and 53.6 last month) which left the composite at 54.2 (vs. 53.4 last month). Encouragingly, there was a broad improvement in the details for the manufacturing PMI with output, new orders and new export orders all rising from last month.

The other overnight story has come from here in the UK, with Bloomberg reporting that PM Johnson will announce £5bn of accelerated spending today in roads, schools and hospitals while promising to publish a strategy for further capital spending in the fall. The report further added that in a briefing note about the speech, Johnson’s office has said decisions over increasing taxes or cutting services to pay for the debt will have to wait. The report also added that UK’s Chancellor Sunak is poised to make an economic statement next week.

Back to yesterday. When referencing the EU Recovery plan in a joint press conference with President Macron, Chancellor Merkel made it clear the “talks won’t fail because of us, but there will be no new proposal.” This is not necessarily a negative coming from the two biggest proponents of an extensive continent-wide recovery proposal, as the President of the European Council, Charles Michel, is the one trying to craft a compromise proposal based on the original Merkel-Macron plan. All 27 EU members will convene in Brussels on July 17 to continue hammering out the details of the nearly €750bn plan. Ahead of their press conference, continental sovereign bonds were steady yesterday, with yields on 10yr bunds (+1.2bps), OATs (+0.5bps) and BTPs (+0.6bps) seeing relatively little movement.

While we’re on Europe, it’s worth mentioning a couple of ECB headlines in the light of the recent German constitutional court ruling on their asset purchases. One was a letter from ECB President Lagarde to an MEP which said that the ECB Governing Council had received a request earlier this month from the Bundesbank President “to authorise the disclosure by the Deutsche Bundesbank of non-public documents that show how the ECB has assessed and continues to assess the proportionality of the PSPP and of all its instruments of monetary policy.” It said that the Governing Council had accommodated the request and authorised them to disclose these to the German government, who in turn can share the documents with the German Parliament. This followed a report from FAZ earlier in the day that German finance minister Scholz had told the Bundestag President that the Bundesbank was “permitted to continue to participate in the implementation and execution” of the PSPP since the demands of the German constitutional court had been fulfilled.

Staying with Europe, yesterday our UK team put out a note looking at the state of play in the Brexit negotiations (link here ), and whether there’s room for a deal in the remaining time before the end of the year. Their view is that although the UK has said it wants to complete a deal by the end of the summer, the bar for this remains high. And with a deal also needing time for ratification, it could be that late October/early November becomes the real deadline. On balance, they still see a deal as the more likely outcome, with space for compromise in many of the key areas slowly emerging.

Looking at yesterday’s data releases, in Germany the EU-harmonised CPI reading rose to +0.8% in June, which was above expectations for a +0.6% reading, and up from its nearly-four year low of +0.5% back in May. Meanwhile the European Commission’s economic sentiment indicator for the Euro Area rose to 75.7 (vs. 80.0 expected), which was the second successive increase from April’s low, but still well below the 103.4 reading recorded back in February. And over in the US the data surprised to the upside, with pending home sales rebounding by +44.3% month-on-month in May, well above the +19.3% rebound expected, while the Dallas Fed manufacturing activity also beat expectations to rise to -6.1 (vs. -21.4 expected).

To the day ahead now, and one of the main highlights will be the appearance of Fed Chair Powell and US Treasury Secretary Mnuchin before the House Financial Services Committee. Otherwise, central bank speakers include the BoE’s Haldane and Cunliffe, the Fed’s Williams and Kashkari, and the ECB’s Schnabel and de Guindos. In terms of data, we’ll get the flash June CPI reading for the Euro Area, along with the preliminary June CPI for France and Italy as well. Otherwise, there’ll be Canada’s GDP for April, and from the US we have the Conference Board’s consumer confidence reading for June and the MNI Chicago PMI for June.

Roughly half a million Chinese living in Hebei Province (not Hubei, Hebei), a province in northern China that surrounds Beijing (which operates as an independent ‘national city’) are under lockdown, but in an effort to try to convey just how prepared Chinese public health officials are for another outbreak (keep in mind, the WHO’s “independent” delegation of investigators is expected to arrive in China next week) they’ve warned every English-language media outlet that will listen that officials have identified another potentially pandemic-quality flu pathogen.

According to the BBC, Chinese scientists have identified a new strain of flu that has “the potential to become a pandemic”. It emerged recently in China’s already-dwindling pig population, but scientists say it can infect humans, which would make it similar to the H1N1 virus that spread across Asia and made it all the way to North America in a short-lived pandemic.

Among other factors, scientists have credited the natural human immunity to flu viruses, built up in elderly people over decades, for stopping H1N1 from becoming the global pandemic that many scientists feared. In fact, the extremely dire warnings about that virus, which never came to pass, partially contributed – one could argue – to the complacent attitude in the US toward viruses spreading from China.

For those who haven’t been paying attention, China is only just starting to recover from a devastating outbreak of “pig ebola” – a particularly deadly strain of swine flu – that wiped out ~1/3rd of China’s pig population.

The team of scientists published their findings in a medical journal where they could be sure that science and health-care reporters would find it.

The researchers are concerned that it could mutate further so that it can spread easily from person to person, and trigger a global outbreak.

While it is not an immediate problem, they say, it has “all the hallmarks” of being highly adapted to infect humans and needs close monitoring.

As it’s new, people could have little or no immunity to the virus.

The scientists write in the journal Proceedings of the National Academy of Sciences that measures to control the virus in pigs, and the close monitoring of swine industry workers, should be swiftly implemented.

But how worried should we be? The third-party ‘expert’ quoted by the BBC explained that the global medical community must be ever-vigilant toward new viral threats. Though since this virus hasn’t yet infected humans, it would seem pretty early in the process to get all hysterical.

The virus, which the researchers call G4 EA H1N1, can grow and multiply in the cells that line the human airways.

They found evidence of recent infection in people who worked in abattoirs and the swine industry in China when they looked at data from 2011 to 2018.

Current flu vaccines do not appear to protect against it, although they could be adapted to do so if needed.

Prof Kin-Chow Chang, who works at Nottingham University in the UK, told the BBC: “Right now we are distracted with coronavirus and rightly so. But we must not lose sight of potentially dangerous new viruses.”

While this new virus is not an immediate problem, he says: “We should not ignore it.”

In theory, a flu pandemic could occur at any time, but they are still rare events. Pandemics happen if a new strain emerges that can easily spread from person to person.

Although flu viruses are constantly changing – which is why the flu vaccine also needs to change regularly to keep up – they do not usually go pandemic.

Prof James Wood, head of the Department of Veterinary Medicine at the University of Cambridge, said the work “comes as a salutary reminder” that we are constantly at risk of new emergence of pathogens, and that farmed animals, with which humans have greater contact than with wildlife, may act as the source for important pandemic viruses.

Shortly after the western press picked up on the latest pig influenza, the WHO chimed in and warned that we must “never let our guard down” when it comes to the risk posed by influenza.

• WHO SPOKESMAN SAYS CHINA STUDY ON NEW VIRUS IN PIGS SHOWS “WE CANNOT LET OUT GUARD DOWN” ON INFLUENZA DURING COVID-19 PANDEMIC

But before we get carried away speculating about this new pandemic, how about we first figure out how things went so badly wrong during the early days of the last one?