Month: June 2023

By Bas van Geffen, Senior Macro Strategist at Rabobank

Reports focusing on financial stability often make for some grim reading. Then again, I guess that these reports don’t do their job if the authors conclude that everything is humming along just fine. The ECB’s bi-annual Financial Stability Review is no different. Yesterday’s release warned that “as financial conditions normalise, this may expose fragilities and fault lines in the financial system.” The report goes on to note that “tighter financial conditions are testing the resilience of euro area firms, households and sovereigns,” particularly pointing out their ability to service debt.

The ECB’s rapid hiking cycle is already affecting new borrowing. Yet, so far, the impact on debt servicing costs has remained relatively muted, owing to the decade of low rates that encouraged households and corporates to lock these low rates in for long periods. This shields a substantial part of the outstanding debt from such rising costs – at least until the rate reset date. But that debt also serves as a potential time bomb. The longer the ECB has to hike and/or keep rates at high levels, the larger the share of debt that becomes subject to rate resets or has to be refinanced, under less favorable conditions besides higher rates.

From that perspective, the Eurozone inflation data will probably offer some relief today. After the mixed inflation reports from Belgium (an unexpected and substantial increase that reminded markets of the shocker UK CPI print) and Spain (a much shaper drop than anticipated) on Tuesday, French and German data both supported the latter narrative. With three of the major Eurozone countries showing improvement in the inflation outlook, the Eurozone HICP print may slow more than the 0.7 percentage point deceleration that is anticipated. That will not immediately wipe ECB rate hikes off the table, but it might limit pressure on the central bank to continue hiking for too much longer. Indeed, upside inflation surprises in both Italy and the Netherlands underline that the jury is still very much out on underlying price dynamics.

But the ECB may not be the only villain: “If the Bank of Japan decides to normalise its policy, this might influence the decisions of Japanese investors who have a large footprint in global financial markets, including the euro area bond market.“ Yet, as data compiled by Bloomberg reveals, that trend may actually be ongoing already. In 2022, Japanese investors unwound some ¥5.4 trillion (€39 billion) in Eurozone bond holdings. That’s still only a drop in the ocean that is the European bond market, but if Japanese monetary policy were to further discourage overseas investments, the lack of Japanese buying interest would add to the ECB’s intentions to fully halt APP reinvestments from July onwards.

Whether it’s the ECB’s own tightening or external spillovers, the monetary cycle is certainly making it gradually more expensive for sovereigns to borrow. While this is imperative to slow the inflation momentum, it may also make Europe’s strive for strategic autonomy –which requires large investments in various areas– harder to achieve.

Nonetheless, the Italian government passed a bill to set up a strategic fund that supports Italian firms in key strategic sectors. Its aims are to help the procurement of critical raw materials and may invest in domestic non-financial corporations in order to bolster domestic production. The fund will receive €1 billion in start-up cash from the government, and seeks to raise another €500 million from investors – perhaps somewhat ironically, Prime Minister Meloni is trying to raise this additional cash from non-Eurozone funds.

Speaking of bills passing, the US House of Representatives voted in favor of the Fiscal Responsibility Act that suspends the debt limit until January 2025. This only leaves a nod of approval of the Senate, but that hurdle seems to be lower than garnering enough bipartisan support in the House. The time to avert a default is still very short, but the House vote should bolster risk sentiment and equities in today’s session.

Tesla’s relationship with China continues to look cozy heading into the second half of 2023, with Shanghai party chief Chen Jining reportedly encouraging Elon Musk to expand his business in China.

At the conclusion of a trip through China for Musk, on Thursday Bloomberg reported in a wrap-up that Musk was told to expand his investment and businesses in Shanghai, citing an official government statement. 

The city is reportedly seeking “deepening cooperation with Tesla on electric vehicles and energy storage sector”. Tesla “hopes to keep deepening cooperation” with the city, Bloomberg noted. 

Recall, we wrote days ago how Musk was visiting China for the first time in three years. We reported yesterday that Musk told Chinese Foreign Minister Qin Gang in Beijing that Tesla opposes “decoupling” and is willing to invest more in China.

Dan Ives, an analyst at Wedbush, shared his thoughts on Musk’s first visit to China in three years yesterday. He said the visit comes amid a worsening EV price war and stressed the importance for Tesla to capture a greater market share in China versus domestic competitors. 

 “Playing nice in the sandbox in Beijing is something the Street is laser-focused on to make sure there are no disruptions to Tesla’s expansion,” Ives wrote in the note. 

Elon Musk’s tour of the country started earlier this week, on Tuesday. As we noted then, Tesla’s second-biggest market, after the US, is China, where the company operates a massive factory in Shanghai. The world’s second richest person met top Chinese officials and visited Tesla’s Shanghai factory. 

CCP’s mouthpiece Global Times tweeted earlier this month, “Shanghai will further deepen cooperation with Tesla, pushing its layout on autonomous driving, robots and other business sectors in the city.” 

#Shanghai will further deepen cooperation with #Tesla, pushing its layout on #autonomous driving, #robots and other business sectors in the city, said an official from the Shanghai Municipal Commission of Economy and Informatization. pic.twitter.com/1xmnD7Oco5

— Global Times (@globaltimesnews) May 12, 2023

Despite souring relations between China and the US, Musk appears to be betting big on Shanghai production while other companies are rejiggering supply chains out of the world’s second-largest economy to other friendlier countries. 

By Michael Msika, Bloomberg markets live reporter and strategist

With alarm bells sounding in various corners of China’s economy, European stocks with high exposure to its markets are counting on further policy support from Beijing to reinvigorate their gains. Trouble is, the prospects of major stimulus appear poor.

The rally in China-facing stocks has fizzled. Since the Lunar New Year holidays in late January, baskets of European shares with sizable income from the country have lagged behind the benchmark Stoxx 600. That gap widened on Wednesday after a surprisingly weak reading of manufacturing activity in the world’s second-largest economy. Today’s Caixin positive reading offered some modest relief, but suggests recovery remains uncertain and more evidence is needed to gauge the outlook.

This is a big deal for European large caps. The Euro Stoxx 50 generates one fourth of its revenue in Asia, according to Goldman Sachs strategists. For the broader Stoxx 600, the figure is 21%. To certain sectors, China is a vital source of demand — some miners and tech companies rely on it for as much as half their revenue. Among industrial, auto and luxury stocks the share is 15% to 30%.

Almost all the latest data points indicate that China’s economic comeback is sputtering. Industrial output, retail sales and fixed investment grew much slower than expected in April, housing market sales are regressing again, and demand for raw materials from copper to glass has been weak. The services sector has been a bright spot so far, but record-high youth unemployment begs the question of how sustainable that strength will be.

Tepid metals demand from China has helped entrench miners as the worst equity performers this year. But the malaise is spreading, with appliance maker SEB, insurer Prudential, elevator manufacturer Kone, industrial technology company OC Oerlikon, and luxury giants like LVMH and Burberry all taking a hit. Another wave of Covid infections has added to the selling momentum.

“We believe that China exposure baskets might keep disappointing,” say JPMorgan strategists led Mislav Matejka, citing the faltering recovery there as a key reason to downgrade euro-area stocks weeks ago. That message was echoed by Barclays strategist Emmanuel Cau, who recommends clients selectively reduce exposure to China.

Bets that luxury brands, airports and airlines will benefit from a return of Chinese customers come with risks. The number of outbound flights from China has stagnated at around 40% of pre-pandemic levels, with capacity to countries like Spain and France still low, according to Nomura economists led by Ting Lu. International travel is just too expensive for ordinary households, they say. 

Hopes for a return of China-inspired equity gains now hinge on a sweeping stimulus package from Beijing. But most strategists say that won’t come easily at a moment when the government is watchful about rising debt loads and stretched fiscal positions. For its part, China’s central bank has vowed to avoid major monetary easing in the wake of the turmoil in US regional banks crisis.

“We fear that the bar for fiscal support is relatively high,” says JPMorgan’s Matejka. Citigroup strategists led by Dirk Willer say China does need additional stimulus measures to prop up growth, and they may eventually come, but they are “far from imminent.”

Some are willing to look through the near-term hurdles. Morgan Stanley analysts say job gains will drive the next stage of a rebound in Chinese consumption. While the retail sales recovery has been bumpy, it should accelerate by the end of this year. Within the luxury sector, they prefer owners of brands with an ultra-premium position in China, such as LVMH and Richemont. They see spirits maker Pernod Ricard as another beneficiary.

China-exposed baskets also appeal to investors nervous about raising their direct bets on the country’s stocks when geopolitical tensions are high. “Some investors consider investing in China through European stocks as a lower risk way of doing that,” HSBC strategist Edward Stanford says in an interview. “One of the beauties of investing in China through Europe is you’ve got the reassurance of a European corporate infrastructure, disclosure and regulatory environment for listed investments.”

With overall macro data serially surprising to the downside in May, it is no surprise that expectations were for sub-50 (contractionary) prints for ISM & PMI Manufacturiung surveys this morning.

• Manufacturing PMI slipped from its flash 48.5 level to 48.4 final in May, down from 50.2 in April (the 6th month below 50 of the last 7)

• ISM Manufacturing also disappointed, falling from 47.1 to 46.9 (below 47.0 exp) – the 7th straight month below 50.

Source: Bloomberg

The good news – prices paid plunged back into contraction.

The bad news – new orders plunged to their biggest contraction since COVID lockdowns…

Source: Bloomberg

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“May saw a renewed deterioration of business conditions in the US manufacturing economy which will add to concerns about broader economic health and recession risks.

“Although a record improvement in supplier delivery performance helped manufacturers fulfil back orders in May, generating a third successive monthly rise in output, the overall rate of production growth remained disappointingly meagre thanks to a further drop in new order inflows.

“Unless demand picks up, production growth will move into decline seen as it is clearly unsustainable to rely solely on backlogs of orders, which are now being depleted at the fastest rate for three years. Hence companies are cutting back sharply on their input buying and seeking to minimise inventory, tightening their belts for tough times ahead.

“All of this is of course disinflationary, with manufacturers and their supply chains having seen pricing power shift rapidly from the seller to the buyer over the course of the past year, resulting in a dramatic cooling of industrial price pressures.

“We are likely to see further downward pressure on both output and prices for goods in the coming months, thanks to the demand environment which has been hit by higher interest rates, the increased cost of living, economic uncertainty and a post-pandemic shift in spend from goods to services.

Finally, Williamson notes that the one area of resilience is the labour market, “as firms continued to take on more staff to fill long-empty vacancies, though we should bear in mind that employment is typically a lagging indicator. It does nevertheless point to some upward pressure on wages.”

Project Veritas, known for its undercover investigations and whistleblower disclosures, is suing its founder James O’Keefe months after he was ousted from the organization.

In a Wednesday filing against O’Keefe in the southern district of New York’s federal court, Veritas claims the board begcame aware of “serious allegations by Project Veritas employees about incredibly troubling workplace and financial misconduct by O’Keefe,” including screaming at coworkers, “targeting” female employees and creating “strained” relationships with donors, the Daily Caller reports.

“Being known as the founder of an organization does not entitle that person to run amok and put his own interests ahead of that organization,” reads the suit.

The organization has also accused O’Keefe of misusing funds from Project Veritas for things such as personal errands, laundry, and cleaning his boat.

The suit comes after board members weighed O’Keefe‘s removal in February and placed him on paid leave, according to a previous report. Employees claimed they were dissatisfied with O’Keefe’s management and alleged he wasted money and was “outright cruel” to his staff, The Daily Beast reported.

Project Veritas claims they had “no intention of terminating Mr. O’Keefe when the Board convened February 6, 2023.”

“In fact, he wasn’t terminated until May 15, 2023. Rather, the goal was always to achieve an amicable solution to the personnel mismanagement and expenditures for the organization experiencing significant recent growth.” -Daily Caller

Veritas also claims O’Keefe missed several board meetings.

In a statement following his ouster, O’Keefe told staff that he was leaving over a conflict in vision between himself and the board in a poignant video.

Following his ouster, O’Keefe launched the O’Keefe Media Group (OMG) with essentially the same mission.

“We’re going to be sending cameras into the hands of hundreds of people,” O’Keefe said on Real America’s Voice. “We’re going to be creating a citizen army of journalists.”

Project Veritas staffers and its board had maintained that O’Keefe could return to the organization, but O’Keefe is instead forging a new path.

The Project Veritas founder said that a “small, tight-knit group” of “elite journalists” has remained by his side and is joining in the new venture.

“They have awakened a sleeping giant,” O’Keefe said in a promotional video. “I’m back.”

Authored by Bryan Jung via The Epoch Times,

Meta, the parent company of Facebook and Instagram, is threatening to pull news feeds on its platforms for California residents if the state legislature passes the Journalism Preservation Act.

In a statement posted on Twitter on May 31, Meta expressed its opposition to the proposal AB 886, which requires big tech companies to pay news outlets a journalism usage fee, is made into law.

The proposed law is aimed at reversing a decline in California’s local news sector.

The statement was Meta’s first official comment specifically addressing AB 886.

Support for Local News Industry

Democrat State Assemblywoman Buffy Wicks, who sponsored the California bill, tweeted that Meta’s threat was “a scare tactic that they’ve tried to deploy, unsuccessfully, in every country that’s attempted this.”

“It is egregious that one of the wealthiest companies in the world would rather silence journalists than face regulation,” Wicks said.

“If the Journalism Preservation Act passes, we will be forced to remove news from Facebook and Instagram rather than pay into a slush fund that primarily benefits big, out-of-state media companies under the guise of aiding California publishers,” Meta policy communications director Andy Stone said in a statement on Twitter.

“The bill fails to recognize that publishers and broadcasters put their content on our platform themselves and that substantial consolidation in California’s local news industry came over 15 years ago, well before Facebook was widely used.”

The California bill would also require publishers to devote 70 percent of the proceeds from these fees to create and maintain positions in journalism throughout the state.

“It is disappointing that California lawmakers appear to be prioritizing the best interests of national and international media companies over their own constituents,” Stone added.

Social Media Companies Face Similar Fight in Congress

The social media giant has been waging a fight over similar compensation for news publishers at the Federal level in Congress and in countries overseas.

Stone posted to Twitter a similar threat to Congress on Dec. 5, that Meta would remove news entirely from its platform in the United States if the Journalism Competition and Preservation Act (JCPA), which closely resembles the California legislation, was passed.

“If Congress passes an ill-considered journalism bill as part of national security legislation, we will be forced to consider removing news from our platform altogether,” he said.

He added that federal legislation had failed to recognize that publishers and broadcasters put content on the platform because “it benefits their bottom line—not the other way around.”

“Publishers and broadcasters benefit from our free services,” Meta told the Daily Caller, adding, “people do not come to Facebook for news, and it is not a significant portion of users’ feeds.”

The News Media Alliance, a trade group representing newspaper publishers, pressured Congress to insert the measure into the Omnibus spending bill in December, arguing that “local papers cannot afford to endure several more years of Big Tech’s use and abuse, and time to take action is dwindling. If Congress does not act soon, we risk allowing social media to become America’s de facto local newspaper.”

However, the JCPA failed to make it into the spending bill in the end. But on March 31, Sens. Amy Klobuchar (D-Minn.), chairwoman of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights, and John Kennedy (R-La.) reintroduced the JCPA.

The JCPA was written to give small news publications collective negotiating power against Big Tech companies, the senators said in a press release.

“Local news is facing an existential crisis, from ad revenues plummeting and newsrooms across the country closing to artificial intelligence tools taking content,” Klobuchar said.

“To preserve strong, independent journalism, news organizations must be able to negotiate on a level playing field with the online platforms that dominate news distribution and digital advertising.”

Over two dozen groups, including the American Civil Liberties Union, Public Knowledge, and the Computer & Communications Industry Association, opposed the Congressional bill, arguing that it would “create an ill-advised antitrust exemption for publishers and broadcasters” and that it does not ensure that the “funds gained through negotiation or arbitration will even be paid to journalists.”

Battle Over News Usage Fees Becoming an International Fight

Meta is also is threatening to withdraw news in Canada over similar proposed legislation, with backing from its rival Alphabet, which said it would remove links to news articles from its search engines across the country.

In 2019, France ratified a copyright law that forced social media companies like Meta and Google to pay for content, unless they came to distribution agreements with publishers in France.

When the Australian federal legislature passed its news usage fee legislation in 2021, the two firms threatened to curtail services there. But both eventually struck deals with local media companies, after a brief standoff forced a shutdown of news feeds in the country, forcing the government to make amendments to the law.

Last month, Meta and Twitter won a fight over the upholding of Section 230, in Twitter v. Taamneh, after the United States Supreme Court avoided a ruling on the case.

The federal statute protects social media networks from a multitude of liability issues, leaving them off the hook if bad actors use them.

The Mexican government has been waging war against drug cartels for over a decade with limited success. These cartels illegally procure modern military equipment from Western countries, making the fight comparable to those in Middle Eastern warzones. 

On Wednesday, Mexican TV channel Milenio published an article titled “Mexican cartels prepare for a war; they have military grade ROCKET LAUNCHER” that shows a video of a Gulf Cartel (Cartel Del Golfo, CDG) member carrying a “military-grade grenade launcher during a checkpoint in Matamoros, Tamaulipas.” 

Milenio’s Azucena Uresti identified the rocket launcher as a Raytheon-made FGM-148 Javelin. She noted the rocket launcher on the black market fetches anywhere from $20,000 to $60,000. 

#AzucenaALas10 | En #Tamaulipas, un presunto miembro del Cártel del Golfo fue grabado portando una de las armas más exclusivas y poderosas, un “javelín”, que ha sido utilizado durante la invasión a Ucrania con un valor de entre 20 mil y 60 mil dólares pic.twitter.com/2BGtJMc2Xl

— Azucena Uresti (@azucenau) May 31, 2023

After further review, the rocket launcher might be an AT-4, a Swedish-made disposable anti-tank launcher, which was also sent to Ukraine with Javelins. Nevertheless, these military-grade weapons are turning up in Mexican border towns during the worst US southern border crisis in history. 

Matamoros directly borders Brownsville, Texas. 

But don’t worry because the Biden administration repeatedly states everything is fine on the border.

Authored by Simon White, Bloomberg macro strategist,

The huge outperformance of AI stocks is obscuring the increasingly recessionary message coming from an indicator based on cyclical stocks inspired by investor Stan Druckenmiller. Equity indices are now wholly reliant on AI-hype persisting and compensating for the decline in cyclical sectors.

AI ebullience is supercharging the market. But this is masking the increasingly voluble message from cyclical stocks. Druckenmiller once said “the inside of the stock market is the best economist I know”.

Based on previous comments he has made, we can build a “Druckenmiller indicator” of highly cyclical sectors such as housing, autos and retail.

As the chart below shows, this indicator has been turning down and is closing in on a zone that has previously preceded a recession.

But you might not know it given the steroidal impetus from AI stocks. If we add an AI ETF to the last few years of the above chart, shown below, we can see the regime change in AI began in early 2022, when AI stocks kept falling despite the rise in cyclical sectors.

Semiconductor firms especially were getting bogged down in the US’s clampdown on semis’ technology and know-how going to China, while tech firms in general suffered from being high duration in an elevated-inflation environment.

But late last year, OpenAI publicly launched Chat GPT 3.5 in a “Sputnik moment” that shook rivals and galvanized a race to catch up. AI stocks bottomed and accelerated higher, while cyclical stocks started to turn down, reflecting the weakening pulse of the broad economy.

The Druckenmiller indicator is not standalone given it has had false positives in the past. Instead it should be used with a broad range of recession indicators, as encapsulated by the Recession Gauge shown in the chart below.

This, along with the deterioration in the Druckenmiller indicator, is consistent with the US economy entering a recession in the very near future (if it is not already in one).