Month: June 2021

Coming off the highly provocative visit of a trio of US senators to Taiwan over the weekend, The Wall Street Journal is reporting that the Biden administration has launched plans for trade and investment talks with Taiwan, in what Beijing will surely see as creeping efforts to ‘normalize’ Taiwan independence claims in violation of the longstanding One China policy.

Without giving much in the way of details, Secretary of State Antony Blinken told a House committee hearing on Monday that “We are engaged in conversations with Taiwan, or soon will be—on some kind of framework agreement,” when asked about potential deeper talks.

The statement was enough to trigger an expected condemnation out of China’s Foreign Ministry, with its embassy in D.C. telling the WSJ that Washington must “stop all forms of official exchanges and contacts with Taiwan, stop elevating its relationship with the Taiwan region in any substantive way.”

Further the statement called for a US return to its commitments under decades-old agreements guided under One China which recognizes mainland sovereignty over the island.

Crucially all of this further comes amid a global semiconductor chip shortage, which increasingly looks to extend into 2023, as the WSJ report notes:

Taiwan is a major source of semiconductors for the U.S., which imported $7 billion last year in chips and $20 billion in other computer and telecommunications equipment out of $60 billion in total imports, double U.S. exports to the island, according to the Census Bureau.

Thus deepening investment and US-Taiwan trade talks appear also geared toward securing reliable and ‘safe’ supply chains while slowly decreasing dependence on the Chinese tech sector.

Taiwan is also expected to be a central topic of discussion at this week’s upcoming G-7 summit in the UK, which Biden and other world leaders will attend in person. Nikkei this week is reporting that for the first time “Discussions are underway on including a reference to the Taiwan Strait in the joint statement to be issued after this month’s Group of Seven summit as the U.S. and Japan seek a united front to counter Chinese pressure on the island…”.

News of the U.S. planned trade talks w/ Taiwan came ahead of an August vote on American pork imports, an idea many Taiwanese opposed in polls. “Ideally the DPP wants to get something ASAP, to be able to show that this was all worth it,” says @lnachman32 https://t.co/raQsF2c0Tf

— Joyu Wang (@joyuwang) June 8, 2021

The strait has never been explicitly mentioned in a G-7 summit statement, and further Chinese human rights abuses centered on the Uyghurs are also expected to receive mention. This comes off May’s preparatory meeting of G-7 foreign ministers wherein they underscored “the importance of peace and stability across the Taiwan Strait, and encourage the peaceful resolution of cross-Strait issues.”

All of this further ups the ante in terms of the recent uptick in US warship sail throughs of the Taiwan Strait, also as Chinse PLA military drills become more frequent and expansive. 

While Anthony Fauci spent much of last year telling the public that COVID-19 couldn’t have possibly come from a Wuhan lab his agency was funding, the Lawrence Livermore Lab’s intelligence arm, known as the “Z-Division,” found the Wuhan lab-leak theory to be quite plausible and deserving of further investigation, according to the Wall Street Journal.

In a classified May 27, 2020 report that the US State Department heavily relied upon its investigation (and which President Biden canceled shortly after taking office), scientific investigators studied the genetic makeup of the SARS-CoV-2 virus, in what was “among the first U.S. government efforts to seriously explore the hypothesis that the virus leaked from China’s Wuhan Institute of Virology along with the competing hypothesis the pandemic began with human contact with infected animals.”

One person who read the document, which is dated May 27, 2020, said it made a strong case for further inquiry into the possibility the virus seeped out of the lab.

The study also had a major influence on the State Department’s probe into Covid-19’s origins. State Department officials received the study in late October 2020 and asked for more information, according to a timeline by the agency’s arms control and verification bureau, which was reviewed by The Wall Street Journal.

The study was important because it came from a respected national laboratory and differed from the dominant view in spring 2020 that the virus almost certainly was first transmitted to humans via an infected animal, a former official involved in the State Department inquiry said. -WSJ

The WIV was home to scientists internationally known for genetically modifying COVID viruses to better infect humans – perhaps including an intermediate horseshoe bat coronavirus they collected in 2013 which is  96.2% identical to SARS-CoV-2, while we know know that a subagency of the NIH headed by Fauci was funding risky coronavirus research to the tune of millions of dollars, funneled through nonprofit EcoHealth Alliance after the Obama administration cut off funding for so-called “gain of function” research in 2014.

What’s more, the Fauci’s agency resumed funding the risky research in 2017 without the approval of a government oversight body.

Of note, the WIV “had openly participated in gain-of-function research in partnership with U.S. universities and institutions” for years under the leadership of Dr. Shi ‘Batwoman’ Zhengli, according to the Washington Post‘s Josh Rogin.

On May 26, President Biden called for a fresh, 90-day review of intelligence collected on the origins of COVID-19. While he didn’t directly reference the Lawrence Livermore classified report, he said that US national laboratories overseen by the Energy Department would augment the spy agencies’ work. Hours after Biden’s announcement, the New York Times reported the existence of  a ‘raft’ of still-unexamined evidence which required additional supercomputer analysis.

In other words, the US government has been sitting on a large collection of intelligence in perhaps the most important investigation into an economy-wrecking global pandemic, as China destroyed evidence and has refused to cooperate with international probes. According to the report, Biden’s call for the new investigation was in response to the ‘new’ evidence.

According to the report, US allies have been providing evidence since the beginning of the pandemic. Australia, a member of the so-called Five Eyes partnership which also includes Britain, Canada and New Zealand, has strongly promoted the lab-leak theory. And while US intelligence agencies are reportedly coming together “around the two likely scenarios,” a former State Department official says the evidence to support the natural origin theory is virtually non-existent.

“We were finding that despite the claims of our scientific community, including the National Institutes of Health and Dr. Fauci’s NIAID organization, there was almost no evidence that supported a natural, zoonotic evolution or source of COVID-19,” said former State Department official David Asher in a statement to Fox News. “The data disproportionately stacked up as we investigated that it was coming out of a lab or some supernatural source.“

Authored by Lance Roberts via RealInvestmentAdvice.com,

After a decent rally from the recent lows, there are multiple warning signs a correction approaches.

Over the last few weeks, we discussed the rising risk of a correction between 5-10%, most likely this summer. Such drawdowns are historically very common within any given year of an ongoing bull market. As Sentiment Trader recently noted, we are now in one of the more extended periods without such an occurrence.

Of course, as is always the case, amid a bullish advance, it is easy to become complacent as prices rise.

Before we go any further, it is essential to clarify we are discussing only the potential for a short-term correction. As is often the case, some tend to extrapolate such to mean I am saying a “crash” is coming, and you should be all in cash. Such an extreme move is ill-advised without a significant weight of evidence.

However, there is reason to be cautious in the near term.

Suppressed Volatility

As I stated, during a “bullish advance,” investors become incredibly complacent. That “complacency” leads to excessive speculative risk-taking. We see clear evidence of that activity in various “risk-on” asset classes from Cryptocurrencies, to SPAC’s, to “Meme Stocks.”

A measure of speculative excess is the Volatility Index (VIX). The chart below is from my colleague Jim Colquitt of Armor ETF’s.

The top pane is the 15-day moving average of VIX, which is on an inverted scale. The bottom pane is the S&P 500 index.

“The market may have one last push higher over the next several weeks. Such will take the VIX even lower and complete the VIX wedge pattern. That pattern has been evident in the last three 10% or greater corrections. By this measure, the correction should begin somewhere around July 21st – August 10th.” – Jim Colquitt

As they say, “timing is everything.” While a July-August time frame is entirely possible, a June-July correction is just as likely. What is essential, as we will discuss momentarily, is understanding that risk is prevalent.

Market Exuberance Stretched Again

It isn’t just complacency that is suggestive of a short-term market correction. There are numerous others as well.

As my friend Daniel Lacalle recently posted, Morgan Stanley‘s market timing indicator is at levels that have typically coincided with market downturns. Just for reference, the current reading is the most “bearish” on record.

Furthermore, a host of other indicators posted by @Not_Jim_Cramer also suggests there are reasons for concern about a correction.

Inflationary Warning

Lastly, this note from Tom Bowley caught my eye on Saturday.

“The S&P 500 reached a high on Friday of 4233.45, narrowly eclipsing the all-time high close of 4232.60 from May 7th. Unfortunately for the bulls, selling in the final few minutes ruined the breakout attempt. This false breakout, ever so slight, could be quite ominous for next week and there’s one MAJOR reason why. Inflation data.

That May 7th all-time high came just days before the shocking April CPI data was released on May 12th. Now here we are back at the high again. As the late Yogi Berra might say, “it’s deja vu all over again!” I don’t believe inflation to be a problem, but just the possibility of it could trigger scary headlines and encourage selling in the week ahead.” – Tom Bowley, Stockcharts

The chart below shows the differential between the annual rates of change of the Producer Price Index (PPI) and the Consumer Price Index (CPI.) It should not be surprising that when PPI surges well ahead of CPI, equity markets tend to run into problems. Such is because this shows producers are unable to pass the inflation along to their customers. Consequently, this leads to reduced earnings and a repricing of risk assets.

Tom goes on to state inflation will not be a problem longer-term correctly. However, in the near term, the surge in inflation will weigh on outlooks, creating corrective actions.

The Problem With Technicals

I want to reiterate a point from the most recent newsletter:

The biggest problem is that technical indicators do not distinguish between a consolidation, a correction, or an outright bear market. As such, if you ignore the signals as they occur, by the time you realize it’s a deep correction, it is too late to do much about it.

Therefore, we must treat each signal with the same respect and adjust risk accordingly. The opportunity costs of doing so are minimal.

If we reduce risk and the market continues to rise, we can increase risk exposures. Yes, we sacrifice some short-term performance. However, if we reduce risk and the market declines sharply, we not only protect capital during the decline but have the liquidity to deploy at lower price levels.

Such is the problem with “buy and hold” strategies. Yes, you will perform in line with the market, but given that you didn’t “sell high,” there is no cash available with which to “buy low” in the future.

With that stated, here is the most significant problem of technical analysis. All of the warnings noted above suggest there is a risk of a correction in the near term. However, technical analysis does not differentiate between a 5% pullback, a 10% correction, or a “bear market.”

You will only find that out once it begins, and such is why risk management is essential.

“Risk management is much like driving a car. If there is a blind spot ahead, and you don’t tap on the brakes to control your speed, you are unlikely to avoid the hazard ahead. Yes, tapping on the brakes to provide more control over the car will slow your arrival time to your destination. However, being late is a much better option than not getting there at all.” 

Just A Warning

Again, I am not implying, suggesting, or stating that such signals mean going 100% to cash. What I am suggesting is that when “sell signals” are given, that is the time when individuals should perform some essential portfolio risk management such as:

• Trim back winning positions to original portfolio weights: Investment Rule: Let Winners Run

• Sell positions that simply are not working (if the position was not working in a rising market, it likely won’t in a declining market.) Investment Rule: Cut Losers Short

• Hold the cash raised from these activities until the next buying opportunity occurs. Investment Rule: Buy Low

As stated, there is minimal risk in “risk management.” In the long term, the results of avoiding periods of severe capital loss will outweigh missed short-term gains.

While I agree you can not “time the markets,” you can “manage risk” to improve your long-term outcomes. 

Well, it looks like we finally might have some clarity as to why Elon Musk was bashing bitcoin.

The answers – we think – could lie in Tesla’s sales numbers in China. After an April where Tesla sales collapsed, ostensibly as a result of an ongoing rocky relationship between the company and the CCP, China’s passenger car association just reported that the company’s May numbers were “back on track”, of sorts, rising 29% from April.

Sales were 33,463 cars in May, including exports, according to Reuters. Total NEV sales in China surged 177% to 185,000 cars in May. 

Tesla stock was up about 3% in pre-market trading on Tuesday morning on the news. 

We can’t help but noting the timing. Sales in China slipped in April after a protestor made a public scene at the Shanghai Auto Show about Tesla’s brakes being faulty. This was also a point in time where Musk was embracing Bitcoin and the CCP had continually been railing against the use of cryptocurrencies in China.

Then, shortly after Musk’s rebuke of Bitcoin, which occurred around May 11-12, media in China appeared to do an “about face” on the company, writing favorably about its Shanghai expansion for the first time in weeks. Global Times published a piece stating that “work at Tesla’s Shanghai Gigafactory is going smoothly,” just days after it was reported that Tesla was halting its expansion in China, seen as key to its plans to export from its Asia headquarters. 

And now, we find out that sales in the country appeared to be back to “business as usual”. 

Recall, it was just about 3 weeks ago we noted that just 11,949 Tesla vehicles were registered in China in April, down sharply from 34,714 registrations in March. We also noted that data from China’s Passenger Car Association showed that the company sold 25,845 Chinese-made vehicles in April, down from 35,478 in March.

But that trend appears to have reversed. And before we ask the question of whether or not the honeymoon is back on between the CCP and Elon Musk, we have to ask: if it is, what sacrifices has Tesla made to “right the ship” overseas?

While stocks remain rangebound ahead of Thursday’s CPI print which according to Deutsche is “the most closely watched data release so far this year“, the real action remains below the surface where the continuation of last week’s big story in Equities is the acute underperformance of Longs relative to the Squeeze in Short Books led by the Retail “Meme,” SPAC and Bankruptcy plays. As Nomura’s Charlie McElligott shows, this appeared in risk-premium HF Crowding Factor which dropped -1.3% on the week, along with Size Factor (Large over Small) -1.3%, Growth Factor -1.6% and 1m Reversal -2.2%

Yet while the return of the short-squeeze is a closely watched if transitory phase, the big picture “renormalization reflation” narrative remains alive and well, with the 3 month Value inflow now surging to $44.5 billion (99.9%-ile since 2003) compared to a 3-month outflow from Growth stocks of -$20.8BN (2.7%-ile).

McElligott also observes a “critically important” shift in index/ETF option positioning which is currently in a substantial Delta-accumulation phase “as funds are using upside options as cheap beta”, with Delta for SPX/SPY options now at an extreme 93%-ile since 2014 and QQQs at an 85%-ile.

Which brins us to the infamous summer Doldrums, which according to McElligott are a function of 1) this “long gamma/long delta” option market stabiliziation (at least until next week’s op-ex, more below), which is also boosted by 2) a “full-throttle” corporate buybacks ahead of the upcoming earnings season “blackout” period, as well as the 3) red hot overall inflows into global equities, which soared to $71BN over the past month (97%-ile), all of which pairs off with 4) a continued slow bleed in VIX ETN Net Vega where the previously discussed long vol positions which had initially hoped to monetize on last month’s CPI overheat “shocker” have given up, thanks to what McElligott calls “the Fed’s “transitory” Jedi mind-tricks messaging and increasingly “goldilocks” US data—particularly the disappointment surrounding Labor prints.”

And yet, the doldrums may not last too long, as the current period of peace sets-up for something “real” into the Friday of next week’s Op-Ex cycle turn, where the Nomura quant expects potential “window for a pivot” as a result of massive amounts of Gamma and Delta which expire and are de-risked, with front-month being 82% of the SPX / SPY Delta and 90% of the QQQ Delta

Add to this the expectation of Vol Control flows peaking this week into what should continue being an insulated “long Delta, long Gamma” trade (Nomura estimates that a 50bps daily change would see vol-control buy +$31.6BN SPX, while 100bps daily change would add another +$21.8BN), it is likely that shortly after Friday’s Opex — into any sembalance of options de-risk around Op-Ex and greater ability to move thanks to reduced Dealer hedging flows— that we could see “Vol Control” funds turn a mechanical seller, only requiring a smaller incremental daily change as catalyst.

Finally, it is around this time when the corporate buyback blackout period also begins (heavily owned “Banks” kicking-off as always June 14th with 75% into blackout by July 1st), which sets the stage for at least a short-term reversal in supply/demand flows, i.e., some downside market action.

Nonetheless, as McElligott concludes, should this sell-off materialize, it would be par for the course with what the Vol market has been saying for weeks. Specifically, the Nomura quant references the SPX Put Skew which remains extreme on the “inflation tail” (as it acts to “pull forward” Fed tightening / QE Taper), while SPX index-level Call Skew continues to only see negligible demand (levels are well below the put skew, in the 20%-30%iles) with all the “crash up” being held via “cyclical reflation overshoot” usual suspect plays in SMH, FXI, EEM, XME, XLF, USO and XLB.

In short: expect continued melt-up for two more weeks, meme stocks turmoil notwithstanding, before next Friday’s op-ex opens a trapdoor into what will likely be a shallow selloff, as most traders are already hedged for it.

 

US equity futures suffered a violent airpocket shortly after 6am, sliding 20 points in minutes after news that a Fastly outage had sent many media and government websites offline in a repeat of last year’s Cloudflare fiasco, pushing traders to buy safe assets, but then rebounded just as quickly rising to session highs even as the dollar and Treasuries also rose. Nasdaq 100 contracts rebounded. The 10-year yield fell back to 1.55% area with focus turning toward Thursday’s blistering CPI report that may offer clues on how far the Fed can postpone a tapering of stimulus.

Fastly shares fall as much as 5.5% Tuesday morning in pre-market trading after its services went down, impacting websites across the internet including the New York Times, Reddit, and the U.K. government. It has since pared its losses to about 2.7%, after the software company said the issues that were impacting some of its services earlier had been identified and a fix is being implemented. Cyberstocks which moved on the news were FEYE +0.6%, CRWD +0.6%, SWI -0.4%, while other stocks also moving were AMZN -0.3%, CLDR -0.6%. Amusingly, NYT shares were up about 0.5% after the NYT website went down. Here are some of the other notable pre-market movers today:

• Apple (AAPL) gains 0.3% as analysts praised its Worldwide Developer Conference for small software changes that would improve the user experience, though some said these wouldn’t have a direct impact on sales and noted that the tech giant didn’t release any new hardware products.
• AMC Entertainment (AMC) climbs 4%, pointing to an extension of Monday’s 15% rally.
• Biogen (BIIB) slips 0.3% in premarket trading amid concerns on the pricing of its Alzheimer’s drug. At least five analysts upgraded the stock.
• Cyclerion Therapeutics (CYCN) soars 16% after company insiders, including its own chief executive officer, bought shares.
• Cryptocurrency-exposed companies like Marathon Digital (MARA) and Coinbase (COIN) slide in premarket trading Tuesday with Bitcoin and other digital tokens falling.
• Tesla (TSLA) rises 3% in premarket trading after the electric-vehicle maker reported a surge in May deliveries in China.
• Wendy’s (WEN) shares gain 8.3%, following a tout for the fast-food restaurant operator on Reddit. Other so-called meme stocks also higher.
• Stitch Fix jumped 16% after the clothing company projected revenue that topped analyst expectations.

Fastly fiasco aside, US futures and global equities hovered near record highs, and Treasury yields have eased for three successive weeks. That suggests the Fed’s assurances are calming fears of a so-called taper tantrum for now. Yet on Tuesday, traders were exercising caution before the inflation data, helping the dollar post its first gain in three days. The upward momentum in markets came as the G7 nations reached a landmark deal on Saturday to back a minimum global corporate tax rate of at least 15%, lifting shares of technology giants such as Microsoft and Facebook as their future tax obligations become more predictable. At the same time, expectations that data on Thursday will show another jump in U.S. inflation could weigh on tech stocks this week, according to Ipek Ozkardeskaya an analyst at Swissquote.

“The market is mostly willing to believe the Fed in this theory of nothing but a transitory rise in inflation,” she said. “But with Biden’s huge spending plans, positive pressure on commodity prices, slow global logistics and worldwide shortages due to the pandemic, there is a chance that we see a more-persistent-than-what-the-Fed-expects inflation in the short run.”

Stocks globally have mainly treaded water over the past two months. Investors are trying to gauge the downsides from potentially higher inflation and interest rates against the upsides of economic reopenings and continued massive government stimulus. “The next leg higher is likely upon us … with cyclicals expected to do better again versus defensives,” JPMorgan strategists led by Marko Kolanovic wrote in a report. “Despite peaking in some activity indicators, the market is likely to get comfortable that growth will remain significantly above trend in the second half, supported by both consumer and capex.”

While Kolanovic being permabullish is hardly news, it is the case that the recovery in the world’s largest economy and the Fed’s continued dovish stance are supporting a risk-on environment, even as gains are punctuated by worries over inflation, high valuations and disparities in global vaccine rollouts. Forecasts for deepening price pressures have underpinned volatility this week as traders await clues to when the U.S. central bank will begin discussions on a tighter policy. “We advocate looking through near term market volatility and remain pro-risk, predicated on our belief that the Fed faces a very high bar to change its easy monetary policy stance,” BlackRock Investment Institute strategists led by Elga Bartsch wrote in a note.

The Stoxx Europe 600 Index rose for a third day, up 0.3%, led by travel and leisure companies. British insurance company Aviva advanced 3.5% to the highest in more than a year after Swedish activist investor Cevian Capital AB revealed it had bought almost 5% of the stock and planned to use its stake to target greater cost cuts and shareholder returns. Dutch telecommunications provider KPN dropped 2.9%.

European stocks ground higher after an uninspiring start with the majority of indexes eventually breaching Monday’s best levels. Eurostoxx 50 and FTSE 100 were up 0.3% with travel, tech and mining stocks outperform.  Vol measures drifted lower with the V2X dropping toward May’s lows. Here are some of the biggest European movers today:

• Aviva shares rise as much as 3.8%, touching the highest since January 2020, after Swedish activist investor Cevian Capital AB revealed it had bought almost 5% of the company.
• Intermediate Capital gains as much as 7.6%, hitting a record high. The investment firm’s 2H performance was a beat across the board and its outlook is positive, Citi (buy) writes in a note.
• Nexi rises as much as 3.3% to the highest since Oct. 6 after Jefferies raises its price target on the Italian payments firm, citing its post-M&A organic growth potential.
• Windeln.de jumps as much as 104%, following a 133% jump on Monday, amid discussions on Reddit about the German online retailer for baby and toddler products.
• GEA Group falls as much as 5.2%, the most since Nov. 5, after Goldman Sachs downgraded the stock to sell, arguing long- term growth is being overestimated and the short-term outlook is clouded by cost concerns.
• Lufthansa falls as much as 4.4% after Goldman Sachs downgraded the stock to sell due to factors including corporate travel exposure (45%) and limited progress on structural cost cuts.

Earlier in the session, Asian equities dipped as losses in China and the technology sector held sway in a market searching for fresh clues. MSCI’s gauge of Asia Pacific stocks outside Japan rose 0.11%, following the path taken by its All-Country World Index which advance 0.1% on Monday, hitting its sixth record close in seven days. The regional benchmark was on track for its fifth straight daily move of 0.2% or less.  Australia’s S&P/ASX 200 was up 0.32% while Japan’s Nikkei 225 edged up 0.35%, as the country revised first-quarter data showing the economy shrank at a slower pace than initially reported. Alibaba and TSMC were the biggest drags on the MSCI Asia Pacific Index, while Japanese drugmakers Eisai and Daiichi Sankyo cushioned the downside. Chinese stocks slid as Kweichow Moutai and other baijiu distillers declined amid concern about valuations and the prospect of local governments imposing consumption taxes. Vietnam’s main equity benchmark dropped nearly 3% while Indonesia’s fell more than 1%.

In rates, price action was muted with curves bull flattening mildly. Treasuries held gains after retreating from session highs reached in a burst of risk-off trading as multiple internet outages briefly spooked investors. A calm Asia session gave way to firming in bunds following data-packed European morning. BTPs widen to core with more than EU60 billion orders at Italy’s 10y syndication. The Treasury auction cycle kicks off with $58b 3-year note sale at 1pm ET.  Ahead of the 3-year note auction, WI yield ~0.33% compares with 0.329% stop in May, a 0.2bp tail; cycle comprises 10-year note and 30-year bond reopenings Wednesday and Thursday.

In FX, the Bloomberg dollar index was little changed in a quiet morning for FX. GBP is the worst performer in the G-10 space with cable off 0.3%, finding support near 1.4129.  The pound led declines and fell the most since Thursday on concerns the country’s exit from lockdown could be delayed and rising tensions between Britain and the EU. Norway’s krone led G-10 peers, reversing a loss versus the euro and rising above parity against the Swedish krona after Norges Bank’s regional network survey raised prospects for a central bank hike in September. Brussels is ready to consider tougher retaliatory measures if the U.K. government fails to implement post-Brexit obligations over Northern Ireland, according to an EU official. An announcement on the final step out of lockdown is due on June 14. The Australian dollar declined for the first day in three after a gauge of business confidence eased from a record high; bond yields slid for a second day. The yen fell from a more than one- week high versus the dollar after a government report showed Japan’s economy shrank less in the first quarter than earlier reported.

In commodities, oil prices lost more ground on Tuesday as concerns about the fragile state of the global recovery in demand for crude and fuels were heightened by data showing China’s oil imports fell in May. As a result, crude futures were in the red but off worst levels: WTI dropped is 0.5% lower near $68.89 having dropped as much as 1%. Spot gold edges lower, down ~$6 near $1,892/oz. Base metals are mostly in the green with LME tin up as much as 2.5%, outperforming peers. Bitcoin rebounded after dropping as low as $32,000 overnight, slumping to a two-week low, with some analysts pointing to the recovery of Colonial Pipeline Co.’s ransom as evidence that crypto isn’t beyond government control

Looking ahead, the ECB is due for its monetary policy meeting on Thursday, the same day U.S. consumer price index number will be released, potentially fuelling talks of tapering by the Federal Reserve. In Asia, China inflation data is due on Wednesday. “The start of a new week has not seen much by way of price action across all asset classes,” said Ray Attrill, head of FX Strategy at National Australia Bank.”It’s hard to avoid the sense the global markets are for the most part now simply lurching from one big event risk to the next with not a lot to see in-between,” he said.

To the day ahead now, and data releases include German industrial production and Italian retail sales for April, along with Germany’s ZEW survey for June. Meanwhile in the US, we’ll get the trade balance and job openings for April, as well as the NFIB small business optimism index for May. Finally, central bank speakers include BoE Chief Economist Haldane.

Market Snapshot

• S&P 500 futures little changed at 4,229.25
• STOXX Europe 600 up 0.3% to 454.90
• MXAP down 0.2% to 209.80
• MXAPJ down 0.2% to 702.90
• Nikkei down 0.2% to 28,963.56
• Topix little changed at 1,962.65
• Hang Seng Index little changed at 28,781.38
• Shanghai Composite down 0.5% to 3,580.11
• Sensex down 0.2% to 52,237.61
• Australia S&P/ASX 200 up 0.1% to 7,292.59
• Kospi down 0.1% to 3,247.83
• Brent Futures down 0.71% to $70.98/bbl
• Gold spot down 0.34% to $1,892.81
• U.S. Dollar Index up 0.18% to 90.11
• German 10Y yield fell 0.8 bps to -0.205%
• Euro down 0.14% to $1.2173

Top Overnight News from Bloomberg

• The EU will conduct three syndicated bond sales before the August summer break under the NextGenerationEU plan designed to help it finance a recovery program, according to a call the bloc held with investors
• The G-7’s tax deal raises the prospects of the G20 reaching a similar agreement in coming talks, according to Japanese Finance Minister Taro Aso
• ECB policy makers have all the evidence they need to keep in place their ultra-loose monetary stimulus when they meet on Thursday, thanks in part to their opposite numbers at the Federal Reserve
• Yields on government bonds might be agreeing with the Federal Reserve that price pressures are transitory, but they could also just be artificially low thanks to a constellation of arcane money market rates
• China’s sovereign bonds have defied expectations for a selloff all year but their day of reckoning may be getting closer. The amount of cash in the banking system has been shrinking, while local government debt sales are set to double this week, hoovering up more funds
• As the global economic recovery from the coronavirus gathers momentum, Japan looks to be standing still, while its currency goes backward
• European businesses are increasing investment in China and moving supply chains onshore after the quick recovery from the pandemic last year made China an even more important source of growth and profits

Quick look at global markets courtesy of Newsquawk

Asian equity markets lacked direction following a similar indecisive performance on Wall Street where the major indices closed mixed as the absence of any significant catalyst, had participants looking ahead to the key events later in the week including the ECB meeting and US CPI data. ASX 200 (+0.2%) was choppy after stalling at fresh record highs and with early advances in the index pared by weakness in mining names and financials, while mixed NAB Business Survey data also added to the non-committal tone. Nikkei 225 (+0.1%) was initially lifted following the revised Q1 GDP figures which showed a narrower than expected contraction to Japan’s economy, although the gains were then briefly wiped out with the index not helped by the recent currency moves and amid concerns of stealth tapering by the BoJ which refrained from ETF purchases throughout the whole of last month for the first time since Governor Kuroda began QQE in 2013. There was plenty of focus on Eisai which remained untraded but set to hit limit up amid a glut of buy orders after the FDA approved the ADUHELM drug for Alzheimer’s disease which earlier boosted shares in development partner Biogen. Hang Seng (-0.3%) and Shanghai Comp. (-0.5%) were choppy with initial upside limited by the continued China-related tensions with the G-7 expected to reference the Taiwan Strait into its summit statement and express concerns about human rights abuses against Uyghur Muslims, as well as the pro-democracy crackdown in Hong Kong. Furthermore, China was said to be making progress on legislation to counter US sanctions and reports citing Secretary of State Blinken also suggested the US is planning trade talks with Taiwan which is likely to add to the tensions with China. Finally, 10yr JGBs were rangebound amid the indecisive mood across the region and with some concerns of stealth tapering by the BoJ after it refrained from ETF purchases throughout the entire of last month, although there was some mild support following the mixed results of the 30yr JGB auction which showed a slightly higher b/c.

Top Asian News

• Li’s Bridgetown 2 SPAC Said in Talks to Merge With PropertyGuru
• Huarong Trading Dwindles in Onshore Bond Market as Bids Vanish
• China Bond-Selloff Fears Grow as Liquidity Begins to Tighten
• China Vows to Prevent Coal Fatalities and Blames Higher Prices

Major bourses in Europe experienced another lacklustre cash open with sideways action persisting throughout the early European hours and following on from a mostly downbeat APAC handover. The region thereafter adopted a mild but fleeting upside bias in conjunction with upward revisions to Q1 EZ GDP and a sub-par German ZEW – which was accompanied by constructive forward-looking commentary. US equity futures have also been drifting off throughout the morning but came under pressure with some pointing to the mass outages seen across several news vendors including the FT, Guardian, CNN, Reddit and New York Times among others are currently unavailable – which seemingly dented sentiment – but the breadth of the price action remains narrow. Sectors in Europe are mostly firmer with no stand-out bias nor theme. Banks continue to be pressured by the pullback in yields. Oil & Gas also lags amid sluggish crude prices. The upside meanwhile sees Travel & Leisure amid a surge in summer demand, whilst healthcare coat-tails on the State-side sectoral performance yesterday after Biogen shares soared on the FDA green-lighting its Alzheimer’s drug. In terms of individual movers, Aviva (+3.5%) is supported by Cevian Capital announcing a 5% stake in the group, suggesting that it should have a value of over GBP 8/shr within three years and more than double its dividend to GBP 0.45. British American Tobacco (+1.8%) rose after the Co. upped its revenue growth guidance to “above 5%” from the prior of “3-5%”. Meanwhile, Volkswagen shares (-1.1%) shares opened lower by around 3% with potential catalysts for the move including a Business Insider article about work councils getting more hands-on with bonus payments, alongside perhaps read-across from the earlier Apple EV battery source reports. However, the exact catalyst behind the move remains unclear.

Top European News

• Euro-Area Economy Shrinks Less Than Reported in First Quarter
• Aviva Gets New Activist Owner as Cevian Reveals 4.95% Stake
• BAT Lifts 2021 Sales Outlook on Growing Alternatives Demand
• EU, U.K. Head for Fresh Brexit Collision Over Northern Ireland

In FX, the Sterling and Yen remain the main G10 laggards with the former drifting lower in light of reports that the UK June 21st reopening could be delayed by a fortnight, as well as ongoing tensions with the EU over the Northern Ireland protocol. Technicals are also keeping the Pound under pressure – EUR/GBP tested and failed to breach 0.8600 to the downside in early hours in a move that coincided with touted stopped being tripped in GBP/USD at its 21 DMA around 1.4144, according to market contacts. In terms of nearby levels, the pair sees yesterday’s low at 1.4110 ahead of the psychological 1.4100 and with 1.4080 touted as major support. Up next, BoE’s outgoing Chief Economist Haldane is poised to speak at 14:00BST albeit at an Inequality workshop. Elsewhere, the JPY experienced weakness heading into the Tokyo fix overnight with some also noting of investment demand and speculative bargain-hunting. USD/JPY rebounded from its 50 DMA (109.17) and rose above its 21 DMA (109.30) to reside around the 109.50 mark which sees around USD 1bln in OpEx ahead of the NY cut.

• DXY – The broader Dollar and index remain on firmer footings with the aid of some overnight inflows as risk sentiment deteriorated, whilst losses in the JPY and GBP offer further tailwinds. The index clambered off its 89.953 low and again mounted its 21 DMA (90.093) to a current high of 90.181 ahead of yesterday’s 90.302 high. Looking ahead, the State-side docket remains light with US CPI (Thursday) the main highlight and as Fed officials continue to observe its blackout period.
• EUR, AUD, NZD – All relatively flat and mirroring Dollar action. EUR/USD came under gentle pressure just before the 1.2200 mark with some also citing sell orders at the psychological level – with the pair later dipping below its 21 DMA at 1.2177 to a current low at 1.2171. The Single Currency saw was unfazed by the upward EZ GDP revisions and below-forecast German ZEW print which was accompanied by some hopeful economic commentary. The Aussie and Kiwi remain contained by a barrage of nearby DMAs, with AUD/USD meandering around its 21 DMA at 0.7747 whilst its 50 and 100 DMAs overlap at 0.7727. NZD/USD is back under its respective 21 DMA (0.72222) whilst the 50 and 100 reside at 0.7182 and 0.7175 respectively.
• NOK – The NOK gained impetus on an overall optimistic Norges Bank Regional Network survey – which suggested that contacts expect substantial output growth ahead as the measures ease through summer. All-in-all, the report indicates that the Norges Bank’s policy normalization plans (which look for a rate increase around the end of this year) are on track as things stand. EUR/NOK dipped from its 10.08 high, through its 50 DMA (10.0688) to a current low of 10.5021.

In commodities, WTI and Brent front month futures remain subdued as the benchmarks largely moved in tandem to risk amid the absence of catalysts, and with the complex looking ahead to this week’s tri of oil market reports. WTI and Brent hit session lows of USD 68.50/bbl and USD 70.70/bbl respectively as APAC sentiment sourced, before trimming losses to trade around USD 69/bbl and 71.25/bbl at the time of writing as equities edge higher – . Aside from the sentiment-driven moves, news flow for crude has been light. Next up, the EIA STEO scheduled for later today will be eyed for commentary on demand heading into the Summer, whilst the agency’s Iran-related risks will also be interesting as JCPOA talks are poised to restart this Thursday. Elsewhere, spot gold and silver have been trundling lower as precious metals continue to tackle the lower yield environment with a perkier Dollar intraday. Spot gold trades sub-1,900/oz (vs 1,903/oz high) but still above its 21 DMA at 1,877/oz, whilst spot silver inches closer towards UDS 27.50/oz from its 27.97/oz peak. Elsewhere, LME copper has trimmed losses as overall market sentiment improves, but prices remain below USD 10,000/t as the upside is capped by US-Sino tensions. Dalian iron ore futures fell for a third straight session overnight, with some citing the decline in China’s inventory of construction steel rebar – which slowed sharply last week – indicating easing demand.

DB’s Jim Reid concludes the overnight wrap

Since we went to Legoland last week there are now hundreds of bits of small Lego pieces strewn around various parts of the house and from my home office I keep on hearing yelps and cursing from downstairs as my wife treads barefooted on yet another piece. It kept me very entertained on a dull market day yesterday even if marketing the inflation piece kept me busy.

Indeed markets have felt a bit like August over the last 24 hours. If they feel the same way after Thursday’s US CPI then the Fed will surely be able to crack open the champagne ahead of next week’s FOMC. In terms of the specific moves, Europe’s STOXX 600 (+0.22%) edged to another new record whilst the S&P 500 fell back -0.08%, though that still left the S&P less than quarter of a per cent away from its all-time closing high a month ago. It’s now kept within a 4% band for the last two months now. The last time the S&P 500 traded within such a 4% range for two months was early-October 2018.

Cyclical sectors underperformed, with materials (-1.23%), financials (-0.63%) and industrials (-0.69%) weighing on the S&P, whereas the NASDAQ gained +0.49% on the back of biotech (+1.13%) and media (+0.62%) stocks. The former was driven primarily by a record +38.34% rise in Biogen Inc., which received FDA approval for the company’s new therapy to treat Alzheimer’s disease. Lower commodity prices weighed on European stocks with basic resources (-1.61%) and energy (-0.25%) companies among the largest laggards, while the day’s gainer were led by autos (+0.88%) and consumer products (+0.79%)

There was marginally more action in sovereign bond markets, where yields moved higher on both sides of the Atlantic. US Treasuries lost ground following Treasury Secretary Yellen’s Sunday comments that a higher interest rate environment would “actually be a plus for society’s point of view”, and 10yr Treasury yields were up +1.5bps to 1.569%. But it was noticeable that the rise was entirely driven by higher real yields (+3.6bps) rather than inflation expectations (-2.2bps). Indeed, US10yr breakevens closed at a five-week low yesterday of 2.40%, which is over 16bps beneath their 8-year high a few weeks ago and just shows that investor concern over the inflation issue has become much less acute as the month has gone on since that last CPI release. Separately in Europe, yields on 10yr bunds (+1.5bps), OATs (+1.9bps) and BTPs (+4.1bps) all moved higher.

We’ll have to see if that more relaxed attitude on inflation lasts past Thursday, but one of the drivers of inflationary pressures lately has been higher commodity prices, with Bloomberg’s Commodity Spot Index closing at its highest level in nearly a decade on Friday. Nevertheless, the index fell back slightly yesterday with a -0.55% decline, as both WTI (-0.56%) and Brent crude (-0.56%) oil prices lost ground, whilst the industrial bellwether of copper (-0.06%) fell back as well. Commodities broadly lost ground even as the dollar index fell -0.21% on the day.

Overnight, Asian markets have erased early gains to trade mostly flat to lower. The Nikkei (-0.16%), Hang Seng (-0.35%), Shanghai Comp (-0.51%) and Kospi (-0.04%) are all lower. In general, commodity related sectors like materials and energy are leading the underperformance. Futures on the S&P 500 (+0.05%) and the Stoxx 50 (-0.02%) are fairly flat. Elsewhere, Bitcoin is trading down -4.58% and sub $33k this morning after yesterday’s -4.23% move lower. In terms of overnight data, Japan’s final Q1 2021 annualised GDP printed at -3.9% qoq (vs.-5.0% qoq) and April labour cash earnings came in at +1.6% yoy (vs. +0.8% yoy expected) with previous month’s reading revised up to +0.6%yoy from +0.2% yoy.

Turning to the pandemic, the news has continued to brighten at the global level, with the growth rate of weekly cases now at its slowest since mid-March, whilst cases in the US are rising at their slowest pace since March 2020. In Asia, the tide is also turning for India with the country reporting sub 100k daily cases for the first time in over two months. Most states in India have now laid out a plan to embark on a graded reopening. In the UK however, there have been continued signs of rising cases, with the numbers having risen by +53% compared with last week (albeit from low levels). The all-important question will be how this translates into hospitalisations and deaths now that 53% of the adult population are fully vaccinated, and there’ll be intense focus on those numbers given that the government are expected to outline on Monday what they’re going to do about the potential full easing of restrictions on June 21. The Times is reporting that a two week delay is being considered by the government.

Separately in India, it was announced by Prime Minister Modi that all adults would be vaccinated for free from June 21. In Italy, the government announced a goal of vaccinating 80% of the country’s population by September. This plan was helped by news that Moderna applied for authorisation to make their vaccine eligible for 12-17 years olds in the EU, after having already started the approval process in the US and Canada.

There wasn’t much data to speak of yesterday, though German factory orders in April fell by -0.2% (vs. +0.5% expected). Lower domestic demand drove the decline, having fallen by -4.3%, whereas foreign orders were up +2.7% on the month.

To the day ahead now, and data releases include German industrial production and Italian retail sales for April, along with Germany’s ZEW survey for June. Meanwhile in the US, we’ll get the trade balance and job openings for April, as well as the NFIB small business optimism index for May. Finally, central bank speakers include BoE Chief Economist Haldane.

Blain’s Morning Porridge, by Bill Blain

Will the agreement on global tax ever become a reality? and the real threat of financial asset inflation!

“The stock market is a very expensive place to discover you know nothing…”

This morning: The G7 agreement is being hailed as a great step forward, but will it ever happen? Janet Yellen’s call for higher rates is a clear sign the problem of financial asset inflation will finally be addressed – the question is how painful the treatment and taper tantrum will be? Not addressing financial asset inflation is a far bigger risk than the debt crisis many monetary traditionalists perceive has grown from government pandemic spending.  

Welcome to another week of consequences, mayhem and fun on global markets…

What a great time to be a tax-accountant! The G7 agreement on a “minimum corporate rate of 15%” will have accountants, tax-planners and bankers in a euphoric state as they anticipate dissecting the deal’s underpinnings with a fine comb, look for the back doors, engage lobbyists to push for advantageous clauses, and get set to arbitrage every facet of it – if it ever happens and becomes a reality.

If any European country ever receives anything close to a check for 15% of the profits made by a big digital tech company selling in their borders, I shall eat my hat. I’ve already heard there is a note from an accounting firm suggesting Amazon can wriggle out because of the marginal cost calculations… whatever… something to with governments getting “the right to tax 20% of profits exceeding a 10% margin” – which sound much less than 15% of profits to my mind.

But, of course, it’s a win/win for everyone.

The Sherpas of global finance – like Janet Yellen – are on the wires saying it’s a revival of “multilateralism” as nations come back together in the post-Trump era to solve “critical challenges facing the global economy”.

The Politicians are all over it like a rash – looking forward to all that loverly US tech money to spend… while claiming to have righted a massive historical wrong in the lack of cash paid by many firms. The French, of course, are complaining 15% is not enough; Macron looking to demonstrate his fraternity with the working class voters by pushing for more.

And the corporates…? They will be delighted.. A chance to show they support the good cause, while behind the scenes they keep emptying our wallets.

National tax agencies won’t bat an eyelid. They know better than to go for the big tech firms. To heavily tooled up with the best tax-lawyers.. much easier to go from small businesses who tend to cave quicker to HMRC threats…

But will the agreement ever happen?

On the face of it, the Irish should not be happy. They aren’t even a G20 member – except as being part of the EU. They are putting a brave face on it, with comments like their low-tax economy will continue to attract jobs, and why would any already established there leave? Many corporates won’t feel any urgency to move their operations. Many may decide to beef them up in the expectation any tax deal is still years away from full ratification by all the members of the OECD, and that it may not happen at all… ever. Dublin office space may still be a good bet…

The reality is the new G7 minimum tax proposal is going to struggle to get through the slough of despond that is deepening US political gridlock. The Republicans are already parroting Trump that such a deal can’t be good for US Company revenues, therefore should be rejected.

What will the G7 tax deal mean for markets?

It’s going to be a busy time for the credit agencies, figuring out if the shock horror of corporate’s actually paying taxes in countries where they sell stuff, pushes a few names down a credit notch or two because paying taxes comes before paying bondholders. I’d be surprised if they find many lame ducks – but the credit agencies won’t miss the opportunity to be relevant, and will no doubt start pumping out research for bond managers to fall asleep over.

What about company profits – the stuff that (once) so excited Equities? As one wag once pointed out: “if you’re paying taxes on profits, you ain’t doing it right.” Better spend the money on acquisitions, on infrastructure, etc… heaven forbid paying staff better. But company spending is an economic multiplier – so it’s a good thing.

That leaves an interesting thought: what about all the US Tech firms now sitting on enormous cash piles, built up from untaxed profits channelled through corporate headquarters in nations willing to charge zero taxes – like Ireland? Retroactively taxing these untaxed gains isn’t on the agenda, and will never ever happen….

Meanwhile, a much larger issue looms in terms of taper-time….

Over the weekend we had a very interesting intervention from Janet Yellen as she toed the President Biden line, supporting $4 trillion of infrastructure spending – even if it does trigger inflation, and called for higher interest rates. “If we end up with a slightly higher interest rate environment it would actually be a plus from society’s point of view and the Fed’s point of view.”

Yellen’s comments struck me as a very Significant Moment. It’s an acknowledgement the Biden Administration understands the need to taper the monetary excesses of the past few years. Sure, that will trigger a taper-tantrum – which everyone believes is nailed on when rates edge higher. A market collapse would cause a massive blink in confidence – but … so what? Everyone knows markets are overpriced – so why not acknowledge rates should normalise to levels where it might make sense for investors to start buying US treasury bonds, rather than just the Fed?

The reality of the last 12 years is there has already been massive and uncontrolled inflation in financial assets on the back of experimental monetary policy. Zero interest rates and essentially unlimited money via QE and pandemic money, has pushed up stocks and bonds to massively elevated levels – levels which now spell danger for market stability, yet continues to drive the massive game of “chicken” that the markets have become.

(By “chicken” I mean the explosion in speculative investment; in names unlikely to ever make significant profits, in meme stocks, in zeitgeist funds, and fantublations like Bitcoin – every single one of them is founded not in future investment values and profits, but the belief that a greater fool will emerge to buy them at a higher price.)

Meanwhile, we’ve got monetary traditionalists screaming foul at the apparent fiscal excesses that have occurred since the Pandemic began last year. Governments and Central banks correctly understood the need for massive fiscal stimulus and handouts to sustain economies in immediate crisis, and built springboards for the spectacular growth we are now seeing in the UK economy and US jobs. The fiscal carpet bombing has worked saving the economy, but debt has ballooned.

But what do we hear from the Right? That all that debt is crushing confidence in fiat money, that state handouts are causing lazy workers to withdraw their labour, and the devaluation of currencies will cause the collapse of the west. It’s become the clarion call of Libertarian Cryptocurrency supporters – who perceive that their mythical digital asset’s being free of government control is it major advantage…

Markets love to panic about the worst possible outcomes – which never ever occur. The reality is global markets, interest rates, currencies and dent levels are in an awful mess – but that’s not unusual. It’s just the way it is.. We will undoubtedly muddle through. … but it might be bumpy at times.

Rather than the amount of national debt, the massive inflation we’ve seen in financial assets has become the real major problem – because its thrown so many aspects of the economy out of line. Because financial assets are now so expensive they cause investors to seek better returns from cheaper assets, pushing up the prices of real assets as a result.

We can see that clearly in property markets where is it now inconceivable that a normal worker can ever afford a house. That then changes economic behaviours – millennials and GenZ give up on acquiring homes, and without the pressure of mortgage payments or kids, don’t see the need to work as hard… etc etc.. That has consequences for the future in terms of demographics – who pays?

I don’t particularly fear the debt-driven monetary apocalypse many observers increasingly fear. All countries have been fiscal inflating their economies to drive pandemic recovery. If confidence in a particular currency is rocked it will occur because of reasons like political failure – which is my concern about the US. Meanwhile, there is no shortage of capital to fuel growth – it’s a question of how much of its squandered on things like stock buybacks and other drivers of inequality.

My concerns are much more about real threats; like just how deeply entrenched financial inequality across society has become because of financial asset inflation – and how that eventually damages and destabilises societies. The instability is being fueled by polarisation magnified by social media – which is what’s fueling all the libertarian conspiracy theories about mind-stealing aliens, big-government failure, and the safety of the crypto-con.

Downdetector users report Reddit is experiencing issues and or outages nationwide. Besides Reddit, there are other websites that are down. 

A search for “Reddit.com” comes up with “Error 503 Service Unavailable” 

Problems at Reddit began around 0600 ET. 

Downdector also reports multiple websites are down. 

This is terrible news for wallstreetbets traders waking up Tuesday morning, unable to pump meme stocks like AMC and GME.