Month: August 2023

Forgive us if you’ve heard this one before… but China tried (and failed again) to re-ignte animal spirits in its equity market overnight.

Having strong-armed funds into ‘not selling’ stock last week, then strongly-suggesting that companies escalate their share buyback programs (and then bullying banks into buying yuan to support the currency against the green back), and then clearly stepping with a ‘National Team’ panic bid (that didn’t work) Beijing was faced with the reality that nothing was working with Chinese stocks tumbling still.

Then on Friday, announced property stimulus measures prompted a notably brief pump (and dump) making the 4th attempt in a week to stop the freefall in the struggling nation’s stock market.

So, having achieved nothing, Beijing tried once more with authorities announcing a slew of measures over the weekend, including a slashing of the stamp duty on stock trading and limits on the amount that major shareholders can sell.

It seemed to work as the CSI 300 Index exploded over 5% higher at the open, its largest rise at the open since July 2015.

BUT…just as we warned…

*CHINA’S CSI 300 INDEX JUMPS 5.5% AFTER MEASURES TO BOOST MARKET

this should last about 15 minutes

— zerohedge (@zerohedge) August 28, 2023

The initial euphoria faded into the session, with the index ending just a little over 1% higher.

Most notably, it was foreign funds that reportedly accelerated their selling through the day, poised to take this month’s outflows to the biggest on record.

Which in turn sent the yuan lower against the greenback…

As Bloomberg notes, today’s reversal in stocks is extremely rare, looking at historical data since 2002.

The only other time something similar occurred was on November 27, 2008, immediately after the gauge had formed a major trough following the Great Financial Crisis.

For context on how poor the price-action was, the ChiNext Index saw its largest intraday drawdown in more than two years, and the biggest ever pullback seen on an overall up-day.

This chart measures the percentage change from intraday highs to closing prices:

Cutting stamp duty is designed to increase market turnover, especially among retail punters.

“The China authorities are clearly stepping up efforts to rebuild confidence in Beijing’s policy commitment to achieve growth and support the market,” said Xiaojia Zhi, chief China economist at Credit Agricole.

“But then a fundamental growth improvement as well as tangible policy action onshore is needed to really turn the mood around, and therefore more time could be needed.”

Convincing the retail crowd to believe in the recent slew of China stimulus measures will make a big difference to daily volumes.

Having seen those measures fail, Beijing tried again, rolling out China’s Minister of Finance who pledged to prevent and resolve local government debt risks and step up fiscal discipline.

The official Xinhua news agency reported that the MoF said it will ramp up and implement active fiscal policies, and improve the transfer of payments to localities.

Additionally, China will enhance adjustments of macro policies to expand domestic demand, the National Development and Reform Commission said in a separate report to the National People’s Congress Standing Committee.

So, if at first (or fifth) you don’t succeed, try, try, again?

By Jan Nieuwenhuijs, writer at GainesvilleCoins.com

An important change has unfolded in the global gold market. The East has been driving up the gold price, predominantly in late 2022 and the first months of 2023, breaking the West’s long standing pricing power.

Until recently, Western institutional money was driving the price of gold in wholesale markets such as London, mainly based on real interest rates. Gold was bought when real rates fell and vice versa. However, from late 2022 until June 2023 gold was up 17% while real rates were more or less flat, and Western institutions were net sellers. Most likely, Eastern central banks, and Turkish and Chinese private demand, lifted the price of gold.

Introduction

For about ninety years, up until 2022, there was a pattern of above-ground gold moving from West to East and back, in sync with the gold price falling and rising. Western institutions set the price of gold and bought from the East in bull markets. In bear markets the West sold to the East. For more information read my article: The West–East Ebb and Flood of Gold Revisited.

If we zoom in on the period from 2006 through 2021 the main reason for Western institutions to buy or sell gold was the 10-year TIPS rate, which reflects the 10-year expected real interest rate (“real rate,” in short) of US government bonds.

The physical gold price was predominantly set in the London Bullion Market and to a lesser extent Switzerland. Gold trade in London can be divided in three categories:

1. Institutions buying and selling “large bars” (weighing 400 ounces) outright.
2. Trading in large bars via Exchange-Traded Funds (ETFs).
3. Arbitragers buying and selling in London to profit from price discrepancies between the COMEX futures price and London spot. In this sense London serves as a warehouse for the COMEX futures exchange.

As we will see below, the TIPS rate, UK net gold import (positive or negative), Western ETF holdings, and the COMEX open interest were all correlated to the price of gold. Until the war in Ukraine broke out late February 2022, that is, and things started to change.

Because customs data lags a few months, and the World Gold Council’s supply and demand data is published quarterly, we will cover the global market until June 2023 in this article. We will examine how gold is becoming less sensitive to real rates, and how London is losing its gold pricing power.

The West is Losing its Gold Pricing Power

Let’s start by reviewing the correlation between real rates and gold. Note, the TIPS yield axes in the charts below are inverted because higher rates caused lower gold prices and vice versa.

From March until September 2022 the TIPS yield rose dramatically (down in the chart), but the price of gold reacted less bearish than the “rates model” previously prescribed. As London was still a net exporter over this time horizon, I conclude the West was still in charge of the price. But then came the third quarter of 2022.

From late October 2022 until June 2023 the TIPS rate was barely down while gold was up 17%. Remarkably, the West wasn’t driving up the gold price, as demonstrated by UK net exports, declining Western ETF inventory, and falling COMEX open interest.

First, the UK’s monthly net flows. Obviously, the price wasn’t set in London, as the UK was a net seller while the price was up. In Chart 1 and 4 you can see this is unprecedented.

Also taking into account gold flows through Switzerland, the second largest Western physical gold market and largest refining hub globally, shows a similar picture. For the first time since monthly data is available, the gold price has been rising over several months while the UK and Switzerland combined are net exporters.

Not surprisingly, Western ETF inventory, of which the majority is stored in London and Switzerland, has declined over the past three quarters.

Western institutions that trade gold outright or use ETFs are dominant on the COMEX futures exchange as well. At the COMEX we see the same development: gold’s open interest has fallen over the period in question.

The East on a Gold Buying Spree

If the UK and Switzerland were net exporters, who did they sell to? The UK mainly exported gold to Switzerland, so to answer this question all we have to do is find out which countries Switzerland exported to and check if these countries didn’t sell the metal on.

The Swiss customs department lets users track the flow of goods per continent. Apparently, Switzerland was a huge net exporter to Asia when the gold price went up.

Let’s see which of Switzerland’s main buyers in Asia could have pushed up the gold price.

It wasn’t India, as the Indians, like most people in the East, are price sensitive. From October through June India’s net gold imports declined, with the exception of June when the price reverted.

Possibly, Chinese private demand somewhat lifted the gold price. Although the Chinese are usually price sensitive, net imports into the mainland were surprisingly strong in November and December 2022, and in February and March 2023.

Turkey’s net import reached an all-time high in January 2023 when the Turkish lira continued to devalue and the Turks fled to real estate, durable goods and, needless to say, gold. After January the Turkish central bank began blocking imports and sold 156 tonnes of its official gold reserves domestically to defend the lira. No doubt that Turkish private demand, mainly up until January, has had an impact on the gold price.

A proper indicator of a trend reversal is the net flows to Eastern trading hub Hong Kong. Normally Hong Kong would be a net importer when the price declines (and vice versa). Recently, however, Hong Kong was a net importer while the price was up. Possibly, central banks are buying in Hong Kong, monetize the gold locally, and repatriate the metal outside the scope of public customs data. Gold owned by central banks (“monetary gold”) is exempt from being reported in customs data.

The tonnages recently net imported by Hong Kong may not be very impressive, but they could be a sign of a larger development. If central banks are buying in Hong Kong they can be buying anywhere.

Major suspects are non-Western central banks secretly buying gold, as dollar assets have become riskier to hold since the US seized Russia’s official dollar reserves in 2022. These central banks have an incentive not to make public rushing into gold or the price would spike excessively giving them less bang for their buck.

Every quarter the World Gold Council (WGC) publishes an estimate, based on field research by Metals Focus, that reflects how much they think central banks have bought. Since the Ukraine war these quarterly estimates are much higher than what central banks in aggregate report to the IMF. Most likely covert central bank purchases have boosted the price.

Conclusion

The most logical explanation for gold’s recent behavior is a combination of surreptitious buying by central banks from emerging markets, and strong private demand in Turkey and China. It’s possible the WGC’s estimates of covert central bank buying are too low, given these estimates were falling during the price spike at the end of 2022 and the beginning of 2023.

As some of you might have noticed the US dollar gold price has been declining in the last months of the period of our investigation, and London was still a net exporter. Perhaps the West will regain control over the price again. I don’t expect the gold price to fall to levels previously suggested by the rates model though.

Central bank buying is likely to stay strong. “We still believe that the official sector will remain a sizeable bullion buyer for the foreseeable future …, as factors that encouraged reserve managers to add gold reserves in recent years are expected to persist,” Metals Focus wrote this August.

We will have to wait and see if the East is able to further push up the price of gold and weaken the West’s control over the price. If so, gold will become less of a dollar derivative, and take more center stage in the international monetary system. Any developments will be reported on these pages accordingly.

Hawaiian Electric Industries Inc. surged as much as 43% in premarket trading in New York after the utility released a statement: their power lines were de-energized for more than six hours in Lahaina when the “Afternoon Fire” broke out on Aug. 8 that ultimately leveled the resort town in West Maui.

Just last week, Maui County slapped Hawaiian Electric with a lawsuit, accusing the utility of negligence that sparked the devastating wildfire that leveled Lahaina and killed more than 100 people, with hundreds still missing. 

“We were surprised and disappointed that the County of Maui rushed to court even before completing its own investigation,” said Shelee Kimura, president and CEO of Hawaiian Electric. 

Kimura said, “We believe the complaint is factually and legally irresponsible. It is inconsistent with the path that we believe we should pursue as a resilient community committed and accountable to each other as well as to Hawaiʻi’s future. We continue to stand ready to work to that end with our communities and others. Unfortunately, the county’s lawsuit may leave us no choice in the legal system but to show its responsibility for what happened that day.”

Shares of Hawaiian Electric surged as much as 43% in premarket trading. 

But still well down from the start of the fire…

Hawaiian Electric outlines important facts about what happened on Aug. 8: 

• A fire at 6:30 a.m. (the “Morning Fire”) appears to have been caused by power lines that fell in high winds.

• The Maui County Fire Department responded to this fire, reported it was “100% contained,” left the scene and later declared it had been “extinguished.”

• At about 3 p.m., a time when all of Hawaiian Electric’s power lines in West Maui had been de-energized for more than six hours, a second fire (the “Afternoon Fire”) began in the same area.

• The cause of the devastating Afternoon Fire has not been determined.

The utility provided more details about the fire: 

• The records conclusively establish that Hawaiian Electric power lines to Lahaina were not energized when the Afternoon Fire broke out shortly before 3 p.m. on Aug. 8, in a field near Lahaina Intermediate School. Power had been out for more than six hours by that time. There was no electricity flowing through the wires in the area or anywhere else on the West Maui coast. Hawaiian Electric has informed ATF investigators of the availability of records that demonstrate these facts.

• The small Morning Fire, seen in videos taken by local residents, began more than eight hours earlier. Those videos show that power lines had fallen to the ground in high winds near the intersection of Lahainaluna Road and Hoʻokahua Street at approximately 6:30 a.m. A small fire that can be seen by the downed lines spread into the field across the street from the Intermediate School.

• The Maui County Fire Department responded promptly to the Morning Fire. According to the Department’s public statement that morning, by 9 a.m. the Morning Fire was “100% contained.” The Maui County fire chief subsequently reported that the Fire Department had determined that the Morning Fire was “extinguished,” and the Fire Department left the scene by 2 p.m.

• Once the fire was out, Hawaiian Electric emergency crews arrived at Lahainaluna Road in the afternoon of Aug. 8 to make repairs; they saw no fire or smoke or embers. All lines to Lahaina remained de-energized and all power in the area remained off.

• Shortly before 3 p.m., while the power remained off, our crew members saw a small fire about 75 yards away from Lahainaluna Road in the field near the Intermediate School. They immediately called 911 and reported that fire.

• By the time the Maui County Fire Department arrived back on the scene, it was not able to contain the Afternoon Fire and it spread out of control toward Lahaina.

“The county’s lawsuit distracts from the important work that needs to be done for the people of Lahaina and Maui,” said Scott Seu, president and CEO of Hawaiian Electric.

What distraction could that be? 

More Lahaina, Maui, Hawaii Victims Speak Out. They Are Telling The World What Happened Was NOT Natural, NOTHING That Happened Was A “Coincidence” 🚨
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“Jeff Bezos, you got what you wanted. Oprah, you got what you wanted. — F*** us all over”
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“We busted our ass and this is what… pic.twitter.com/c9APLLsBoy

— Wall Street Apes (@WallStreetApes) August 27, 2023

Here are the following eight questions that we should all be asking about the fires in Hawaii right now…

#1 How did the fires start?  Governor Green is convinced that they were caused by a confluence of factors.  Do you buy his explanation?…

Echoing wildfire experts, Gov. Green said Friday that he believes a confluence of weather conditions contributed to the ignition and spread of the blazes.

“It is a product, in my estimation, of certainly global warming combined with drought, combined with a super storm, where we had a hurricane offshore several hundred miles, still generating large winds,” Green told CNN.

#2 How did the fires spread so rapidly?  According to multiple news reports, people were literally jumping into the ocean to escape because the fires were moving so rapidly…

With fires raging on Maui, two men felt there was nowhere to escape the flames – except for the ocean.

The two men live in Lahaina, a historic part of Maui loved by tourists, which appears to be heavily damaged by this week’s raging fire. They described a terrifying scene as they evacuated from Prison Street, right in the heart of Lahaina.

“I saw a couple people just running, I heard screams out of hell … explosions. It felt like we were in hell, it really was. It was just indescribable,” one of the men told Nexstar’s KHON.

#3 How did a fire that was supposedly “out” end up causing the most damage of all?  According to  Governor Green, the Lahaina fire was supposedly given new energy “by far-off Hurricane Dora”…

After first erupting early Tuesday, the fire was initially deemed to be out, but winds whipped up by far-off Hurricane Dora that reached up to 81 mph fanned the flames and spurred the blaze to travel about 1 mile every minute, Green said.

#4 According to U.S. Representative Jill Tokuda, the alarm system that is supposed to warn residents that a disaster is happening appears to have failed.  How is that possible?…

We know everybody who’s ever lived in Hawaii knows the warning sirens. It goes off once a month at the beginning of the month at 12 noon, and it blares and if it doesn’t, it gets fixed, because that is our first line of defense. Unfortunately, in this situation, sadly, tragically in this situation, those sirens likely did not go off. The warning signals that were on cell phones, we had no cell coverage or electricity in some of these areas. And the reality is with those warning signs, it tells all of us to turn on the television or look at our phones or turn on the radio. The reality is was how fast this burn was. And you could see it in the videos that survivors were showing me. You could see it in the wreckage. If you turned on your phone, you turned on a radio, if you even could. Remember things were out at that particular point, you would not know what the crisis was.

#5 Why are emergency supplies not getting to the people that desperately need them?  It is being reported that a “telecommunications blackout” has been one of the factors that has been hampering relief efforts…

But an enduring telecommunications blackout hampered government and grassroots efforts to distribute those supplies in the worst-affected neighborhoods, especially for an unknown number of survivors waiting out the aftermath in the few buildings still standing in the historic town of Lahaina and neighborhoods on the outskirts.

With their vehicles burned to a crisp, some sheltering at home have no way to drive to distribution centers miles away, or their cars have run out of gas. Others simply don’t know where to go for help. Toxic fumes and downed power lines with live wires make venturing outdoors dangerous.

#6 Why are people that have just had their homes burned down in the fires already being bombarded with calls with offers to purchase their properties?

The vultures are circling, and it appears that there are some people out there that are extremely interested in scooping up land inexpensively.

#7 Why has the FBI moved a “mobile refrigerated morgue” into Lahaina?…

A mobile refrigerated morgue has been brought to the devastated town of Lahaina as Maui officials continue their search for victims of the worst U.S. wildfire in 100 years.

The death toll on Sunday rose to 96, but Hawaii officials said it was likely to rise significantly.

John Pelletier, the Maui police chief, said only three percent of Lahaina – home to more than 9,000 people – had been searched so far.

#8 Why is Joe Biden lounging on the beach while all of this is happening?…

Outraged Americans blasting President @JoeBiden after he said ‘no comment’ when asked about the catastrophic Maui wildfire, now the deadliest US blaze in over a century. Despite the death toll climbing to about 100, Americans were outraged that Biden remained sunbathing on a beach near his Delaware home.

Before the fire, locals feared billionaires would transform their town into a “Satellite City” for elites. How the elites would acquire the land remained a mystery, but now not so much. 

Authored by Simon White, Bloomberg macro strategist,

Rates markets have begun to accept the higher-for-longer mantra from central bankers. But it may soon come undone if economies are nearer to recession than surface data implies.

Central bankers at last week’s Jackson Hole symposium did nothing to disabuse the notion that their intention is to keep interest rates elevated for an extended period.

In the US, the real peak SOFR rate has remained over 2% since June. Short-term real yields are also historically elevated, with 2yr TIPS yields close to highs going back to 2004 (outside of their GFC spike).

Real rates in the UK and Europe are fast catching up to the US, but remain below zero. Indeed, based on where expected short rates and CPI fixing swaps are, the real policy rate of the both the BOE and the ECB will be positive by October.

The ECB’s real rate is expected to then remain around +1%, while in the UK it is expected to keep rising to well over +3% in the first half of next year. In the US the real rate is expected to remain at 2-3% over the next 12 months. The market is buying the higher-for-longer mantra for now.

But such tight conditions are about to collide with more recessionary-looking economies, testing central bankers’ resolve to keep rates elevated. Poor PMIs in Europe and the UK are a reminder that economies are very fragile. The problem with growth being so near to zero is that it doesn’t take much for the economy to be flipped into a recession.

Recessions happen suddenly, and typically when things look superficially OK.

Take the US.

Soft-landing talk is rife, but there are a number of reliable indicators that continue to be consistent with a near-term recession.

The chart below shows the percentage of US states with unemployment claims rising sharply on an annual basis for this year, and the median over recessions going back to 1990. The path for the last year or so (black line) is similar to the recessionary path (brown line).

That’s not to say a recession is a shoo-in. But such an indicator should also not be dismissed as it a) captures the pervasive nature of recessions (things get bad in lots of places at the same time); and b) it captures their phase-shift nature (things look fine…until they don’t).

Ironically the Fed at al may have to jettison higher-for-longer right at the time they have managed to get its message across.

US futures ticked up Monday in a muted session with the UK on holiday, after China unveiled a raft of modest stimulus measures meant to lift its equity market (it worked… for a few hours) and as the market looked set to build on gains made Friday on Powell’s cautious Jackson Hole comments on future interest rate moves. S&P futures climbed 0.2% while contracts on the Nasdaq 100 rose 0.3% by 7:42 a.m. ET; stocks also advanced in Europe and in China, where the government announced support for equity markets; however what was the biggest rally in 5 years quickly fizzled as a gain of over 5% in the CSI300 quickly faded to just 1%. Both the S&P 500 and Nasdaq are set for their first monthly decline since February amid concerns that the Fed could keep a hawkish policy outlook given the resilience of the US economy.

In premarket trading, 3M gained 4% after Bloomberg News reported it tentatively agreed to pay more than $5.5 billion to resolve lawsuits claiming it sold the US military defective combat earplugs. Hawaiian Electric surged as much as 43% in US premarket trading Monday, after subsidiary Hawaiian Electric released a statement on the fires, saying its power lines to Lahaina were not energized when an afternoon fire broke out on Aug. 8. Xpeng’s shares advance 4.5% after it agreed to buy Didi Global Inc.’s smart-car development arm in a deal that both eliminates a potential competitor in the crowded electric-vehicle market and gives it a tech-savvy partner in a new venture.

Chinese stocks listed in the US will be closely watched after Chinese authorities asked some mutual funds to avoid selling equities on a net basis a day after financial regulators announced a slew of measures to boost the local stock market.

In his Friday speech in Jackson Hole, Wyoming, Powell did not break new ground, and reiterated that the Fed will proceed “carefully,” leaving room for the Fed to hold rates steady at its next meeting in September without committing in either direction. He also signaled rates will stay high and could rise even further should the economy and inflation fail to cool.

Powell stuck to the script in his Jackson Hole speech, saying that the Fed is “prepared to raise rates further if appropriate,” even as he stressed that the central bank would “proceed carefully,” guided by economic data. Lagarde, likewise, said the ECB would set borrowing costs as high as needed to keep inflation in check but stopped short of signaling an increase at the next meeting.

“Not much was said that changed our outlook for US equities,” RBC Capital Markets strategist Lori Calvasina wrote in a note. “Equity investors have already been wrapping their heads around the idea that rates may be higher for longer, that it’s possible the Fed’s job may not be done just yet, and that they are data dependent. That message seemed reinforced Friday.”

Echoing what we said, John Stoltzfus, chief investment strategist at Oppenheimer, said that there were no real surprises from Powell’s comments on Friday, and despite some progress on the inflation front, uncertainty regarding the next monetary policy moves remains high.

“We remain positive on stocks at this juncture recognizing that some volatility and market chop are likely to be expected as the process of arresting inflation remains a work in progress,” he said, noting that “exiting a crisis or a period of high inflation are never easy nor overnight achievements”.

European stocks also rose on Monday as China’s stimulus to lift its equity market boosted risk sentiment, while investors considered the outlook for interest rates after cautious remarks from Federal Reserve Chair Jerome Powell. The Stoxx 600 Index was up 0.7% tracking a rally in Asian peers as China cut stamp duty on stock trades for the first time since 2008 and pledged to slow the pace of initial public offerings. Technology and construction stocks led the gains in Europe as all industry sub-indexes advanced. With UK markets closed for a bank holiday, trading volumes were two-thirds lower than the 30-day average for this time of day. Here are the most notable European movers:

• Deutsche Pfandbriefbank shares gain as much as 2% after Warburg initiated coverage of the German real estate lender with a buy recommendation, saying its outlook is promising amid rising rates in a “challenging environment”
• Valneva jumped as much as 6.9% in early trade after the French biotechnology company reported positive initial Phase 3 safety data in adolescents for its single-dose chikungunya virus vaccine candidate
• BW Offshore falls as much as 12%, the most since March 2022, after the Norwegian offshore vessel operator reported a disappointing 2Q, according to analysts, with the impact of cost inflation on its Barossa gas project the key negative

Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, said that while the new stimulus measures from China should boost stocks in the short term, US labor market data this Friday will have a strong bearing on the market. “Central banks remain data-dependent, which makes the outlook more uncertain,” Urbahn said.

Trading could also be more volatile as, starting Monday, Deutsche Boerse AG’s Eurex will list Euro Stoxx 50 0DTE derivatives that expire every weekday, following US peers who introduced the now-booming contracts tied to the S&P 500 last year. Every trading session, investors in Europe will be able to buy and sell derivatives expiring the same day, known as zero-days-to-expiration contracts.

Earlier in the session, Asian markets rose after Beijing reduced the levy charged on stock trades, among other measures. Chinese stocks pared most of their early gains, however, showing once again that efforts to boost its markets are falling flat in the face of economic worries. The MSCI Asia Pacific Index advanced as much as 1.7%, on course for its best day this month, with Tencent and Alibaba among the biggest boosts. China’s key mainland stock gauge and a measure of Hong Kong-listed tech stocks each soared more than 5% in early trading before paring gains to almost nothing as foreign funds accelerated their selling through the day, poised to take this month’s outflows to the biggest on record.

“The China authorities are clearly stepping up efforts to rebuild confidence in Beijing’s policy commitment to achieve growth and support the market,” said Xiaojia Zhi, chief China economist at Credit Agricole. “But then a fundamental growth improvement as well as tangible policy action onshore is needed to really turn the mood around, and therefore more time could be needed.” China Evergrande Group slumped as much as 87% in Hong Kong trading

China was the main focus of attention after Beijing announced a series of steps to shore up investor confidence, including lowering a stamp duty on stock trades for the first time since 2008 and pledging to slow the pace of initial public offerings. Some brokerage and property stocks rose by their daily limits on the government’s efforts.

• Japan’s Nikkei 225 was supported by its energy sector, with the index eventually surging above the 32k mark seeing some early resistance around the level.
• ASX 200 was supported by the energy and gold sectors whilst the broader mining sector was subdued by Fortescue Metals Group, which missed on net expectations and reported an impairment charge.
• Stocks in India advanced on Monday, tracking gains in most regional peers. The small-sized companies’ gauge extended yearly gains to more than 25%, helped by a rally in capital goods and industrial stocks. The S&P BSE Sensex rose 0.2% to 64,996.60 in Mumbai, while the NSE Nifty 50 Index advanced by a similar measure. S&P BSE Smallcap Index rose 0.6% to its record.

In FX, the Bloomberg Dollar Index was little changed, with the Swiss franc 0.1% higher and outperforming G10 counterparts while the Norwegian krone lagged peers. The Aussie dollar rose on leveraged demand in view of sharp gains in Chinese stocks, according to Asia-based FX traders, who added an estimate beat in Australian retail sales also helped. Currencies in the Central European region turned weaker after central bankers from the Fed and the ECB indicated the possibility of higher core interest rates.

In rates, 10-year Treasuries rose for a second day, with the yield dropping 2bps to 4.22%. The yield curve was flatter and 2-year yields near YTD high ahead of a compressed auction schedule that includes both 2- and 5-year note sales Monday. Current 2-year touched 5.102%, highest since July 6, when YTD high 5.118% was reached. WI yield exceeds 2-year auction results since 2006. 10-year yields little changed at ~4.23% with 2s10s and 5s30s spreads flatter by 2bp-3bp on the day; bunds underperform slightly and UK markets are closed for bank holiday. Compressed auction schedule begins with $45b 2-year at 11:30am followed by $46b 5-year sale at 1pm. Money markets raised peak Fed wagers, pricing 17bps of hikes by year-end compared to 16bps on Friday.

In commodities, WTI held a gain as China announced measures to boost its stock and property markets, helping offset concerns about increased supply and monetary tightening in the US and Europe.Gold was unchanged around $1915, while bitcoin was as usual lower.

 

Market Snapshot

• S&P 500 futures up 0.2% to 4,423.75
• MXAP up 1.0% to 159.62
• MXAPJ up 0.7% to 500.83
• Nikkei up 1.7% to 32,169.99
• Topix up 1.5% to 2,299.81
• Hang Seng Index up 1.0% to 18,130.74
• Shanghai Composite up 1.1% to 3,098.64
• Sensex up 0.5% to 65,202.12
• Australia S&P/ASX 200 up 0.6% to 7,159.84
• Kospi up 1.0% to 2,543.41
• STOXX Europe 600 up 0.6% to 454.32
• German 10Y yield little changed at 2.57%
• Euro little changed at $1.0800
• Brent Futures up 0.2% to $84.68/bbl
• Gold spot down 0.0% to $1,914.01
• U.S. Dollar Index little changed at 104.17

Top Overnight News

• Foxconn founder Terry Guo formally entered the Taiwanese presidential race on Monday (Guo is in favor of conducting talks with China to preserve peace). FT
• China confirmed recent media reports and said it would slash the stamp duty on stock trading by 50%, a move aimed at restoring market confidence. China also said it would slow the pace of IPOs in an effort to bolster its stock market. BBG
• Evergrande shares reopened for trading for the first time in nearly 1.5 years and the Chinese property developer saw its stock collapse ~80%. FT
• BOJ’s Ueda says Japan’s underlying inflation is still a bit below the central bank’s target, which is why the present monetary policy framework remains appropriate. Nikkei
• Germany’s ruling Social Democratic party will propose a three-year rent freeze in a bid to clamp down on inflation and provide relief on soaring housing costs. FT 
• President Volodymyr Zelensky of Ukraine said on Sunday that he believes Washington will offer his country security guarantees similar to those Israel enjoys in its relationship with the United States, a durable partnership that does not depend on which party controls the White House. NYT
• The FTC suspended its challenge of Amgen’s $27.8 billion acquisition of Horizon Therapeutics giving the agency time to weigh a settlement that would allow the deal to close with conditions. WSJ
• Trucking industry is set to see a pickup in demand as retailers end their aggressive destocking cycles and begin preparing for the holidays. RTRS
• The US will release a list of 10 drugs this week that Medicare will be able to negotiate prices for, potentially saving taxpayers billions of dollars and squeezing profits for pharma companies. Analysts expect J&J’s Xarelto blood thinner and Eli Lilly’s Jardiance for diabetes to be among the medications chosen. BBG

A more detailed look at global markets courtesy of Newsquawk

 

APAC stocks kicked off the week in the green, following a similar lead from Wall Street, whilst the focus overnight was on Chinese stocks after Friday’s support measures announced by authorities. ASX 200 was supported by the energy and gold sectors whilst the broader mining sector was subdued by Fortescue Metals Group, which missed on net expectations and reported an impairment charge. Nikkei 225 was also supported by its energy sector, with the index eventually surging above the 32k mark seeing some early resistance around the level. Hang Seng and Shanghai Comp were boosted at the open with the Mainland posting gains north of 3% as markets reacted to Friday’s measures to boost investor confidence. In Hong Kong, China Evergrande slumped 80% after resuming trade following a 17-month hiatus.

Top Asian News

• China’s Finance Ministry said China will cut stamp duty on stock trading by half from August 28th, according to Reuters.
• The Chinese Securities Regulator said China will slow the pace of IPOs and further regulate share reductions. The regulator added that exchanges will also lower margin requirements, according to Reuters.
• China today suspended some quantitative T+0 algorithmic trading via brokers amid concerns that T+0 may encounter one-sided market conditions and lead to risk exposure, STCN media reported
• China Evergrande (3333 HK) H1 2023 (CNY): Net -33bln (prev. -64.2bln YY). Revenue 128.2bln (prev. 89.3bln). Co. said its ability to continue will depend on a successful implementation of an offshore debt restructuring plan, and successful negotiations with the rest of the lenders on repayment extensions, according to Reuters.
• China has asked some funds to refrain from net equity sales in order to boost the market, according to Bloomberg News.
• PBoC injected CNY 332bln via 7-day reverse repos with the rate at 1.80% for a CNY 298bln net injection, according to Reuters.
• Foxconn (2317 TT) founder Terry Gou is to run for the Taiwanese presidency, according to Reuters.
• New Zealand said it is to trim budget allowances and measures amid a deterioration in the global economy and particularly in China, according to Reuters.
• BoJ Governor Ueda said underlying inflation is still below 2%, which is a reason to stick to the current monetary policy approach. He added that domestic demand is still on a healthy trend, although this needs to be confirmed by Q3 data, according to Reuters. He added that for Japan, the US strength is offsetting some of China’s weakness, and the weakness in China appears to be centred on the property market.
• Japan raises view on exports in August for the first time in 3 months says the trend is “picking up recently”; Overall view on economy, saying it is “recovering moderately”.

European bourses are in the green, Euro Stoxx 50 +0.6%, as the region derives impetus from APAC strength in holiday-thinned trade on a UK Bank Holiday. Sectors post similar performance and feature outperformance in Tech names after SCMP reports Chinese demand for ASML’s lithography machines has already eclipsed the 2023 projection. Real Estate names lag after reports that Germany is to vote on a proposal to lower rent increase limits. Stateside, futures are incrementally firmer, ES +0.2%, taking cues from the above narrative with fundamentals light otherwise. The US session features commentary from Fed’s Barr.

Top European News

The UK Metropolitan Police is on high alert following a significant security breach that led to officers’ and staff’s details being hacked. All 47k personnel have been notified about the potential exposure of their photo, names, and ranks, according to Sky News. Germany’s ruling Social Democratic Party will vote on a proposal to lower limits on rent increases in a bid to tackle inflation. The proposal calls for a three-year residential rent cap of 6%, according to Bild citing a draft resolution. EU Council President Michel says the EU must be prepared to accept new member states by 2030, via FT citing written remarks. ECB’s Holzmann (Hawk) sees case for rate hike if no surprises turn up; says should start debate on ending PEPP reinvestments, according to Bloomberg; behind the curve, can start assessing policy when at 4.0%. Fitch affirms the Czech Republic at “AA-“; outlook Negative.

FX

• DXY dips below 104.000 and further from Friday’s 104.440 best, but the Buck retains a firm underlying bid.
• Euro regroups after losing 200 DMA, but is capped by decent option expiry interest extending from 1.0795 to 1.0900.
• Yen hovers near circa 146.63 lows as BoJ Governor Ueda underlines reasons to remain ultra-accommodative.
• Aussie fades amidst hefty option expiries vs. Greenback just above 0.6400 after a brief boost from better-than-expected retail sales data and Yuan rebound.
• Sterling sags in UK holiday-thinned trade and irrespective of BoE’s Broadbent saying rates may have to stay restrictive for some time.
• Cable unable to hold above 1.2600
• PBoC sets USD/CNY mid-point at 7.1856 vs exp. 7.2854 (prev. 7.1883)

Fixed Income

• Bonds back to bearish path of least resistance and pick-up in trading volumes infers more conviction on the sell-side.
• Bunds have moved convincingly below Friday’s low at 86, now at the trough of 132.33-131.72 parameters.
• T-note a tad more resilient within 109-19/10 range ahead of Dallas Fed manufacturing survey, 2- and 5-year auctions.

Commodities

• Crude benchmarks are a touch firmer with the broader macro narrative deriving impetus from Chinese stimulus, though brief pressure was seen as the USD printed a fresh intra-day peak; currently, WTI & Brent Oct’23 are holding around USD 80.00/bbl and USD 84.50/bbl respectively, within relatively narrow sub-1/bbl parameters
• Gas is in the green though only modestly so as the Offshore Alliance now has the mandate from workers for potential strike action, but is yet to give notice for protected industrial action.
• An oil leak has been found in a transmission pipeline linking Kharg Island to Iran’s Genaveh port, according to Tasnim. The magnitude of the spill was not specified, according to Reuters.
• Chevron (CVX) Australia LNG workers at Wheatstone offshore have voted to authorise the union to call strike action if needed; the Offshore Alliance says protected industrial action notices against Chevron (CVX) will be filed shortly.
• NHC says Tropical Storm Idalia about 125 miles south of the western tip of Cuba has maximum sustained winds of 65mph; expected to become a hurricane today.
• Spot gold is unchanged at the midpoint of USD 1913-1917/oz bounds and similarly to the USD is struggling for clear and lasting direction, base metals are firmer given Chinese stimulus.

Geopolitics

• Russia’s Investigation Committee confirmed Wagner leader Prigozhin was among those who died in the plane crash, according to Reuters.
• Russian SU-30 plane escorted a US drone Reaper over the Black Sea, according to Ria.
• Russian Foreign Minister Lavrov and the Turkish Foreign Minister are to hold discussions in Moscow, Russia soon, via Tass.
• US Trade Secretary Tai reportedly raised concerns with India over its new order mandating licenses for the import of some tech products such as personal computers, laptops, and tablets, according to a statement cited by Reuters.
• Three US marines have died and five have been seriously injured after a helicopter crashed during a military exercise in Australia, according to Sky News.
• China will hold the third China-Africa peace and security forum between August 28th and September 2nd, according to the Chinese Defence Ministry cited by Reuters.
• The Taiwan Defence Ministry said 6 Chinese aircraft crossed the Taiwan Strait median line in the past 24 hours.
• Chinese Commerce Minister met with US counterpart Raimondo on Monday; Raimondo said the US wants healthy competition with Beijing, does not intend to hinder Chinese progress, and sees many areas they can work with China, according to Bloomberg.

US Event Calendar

• 10:30: Aug. Dallas Fed Manf. Activity, est. -19.0, prior -20.0

3M shares gained in premarket trading in New York after Bloomberg reported the company “tentatively agreed” to pay $5.5 billion to settle the largest mass tort in US history, with 300,000 lawsuits by veterans that claim earplugs made for combat failed to protect them from hearing loss. 

Under the discussed terms, people familiar with the settlement said 3M would pay $5.5 billion, resolving the massive lawsuit overhang, which is half of the $10 billion some Wall Street analysts predicted. Shares are up 6% because of this. 

“Sounds like 3M negotiated a pretty good deal for itself, given this litigation has been weighing on them for the better part of a decade,” Carl Tobias, a University of Richmond law professor who teaches about product liability cases, told Bloomberg. 

Bloomberg Intelligence projected the possibility that 3M would have had to pay out around $9.5 billion, whereas Barclays analysts estimated $8 billion. 

Commentary from Wall Street analysts was favorable regarding the smaller settlement (list provided via Bloomberg): 

Citi (Neutral, PT $111) 

• The potential settlement is smaller than some investors expected, analyst Andrew Kaplowitz writes in a note; could mark another step in 3M alleviating its legal burden and moving away from litigation noise that has been weighing on the valuation and could be received favorably by investors
• Notes 3M still faces uncertainty regarding its per- and polyfluoroalkyl substances related exposure

RBC (Underperform, PT $100)

• News of any settlement is typically initially seen as good news, since it represents some tangible progress toward resolving what is still expected to be a long litigation road ahead for 3M along multiple fronts, writes analyst Deane Dray
• Positive stock reaction is due to a combination of slightly lower than expected settlement figure and a positive reaction associated with the potential alleviation of one of its two legal headwinds

Bloomberg Intelligence (No rating) 

• Analysts including Joel Levington say, “3 M’s $5.5 billion agreement to resolve 300,000 lawsuits over military earplugs, as reported by Bloomberg News, may not stop the A2/A- rated company’s ratings from being downgraded further”

Bloomberg noted, “3 M’s board still must sign off on the deal.” And comes as the company faces thousands of other lawsuits over PFAS “forever chemicals.” 

Authored by Jack Phillips via The Epoch Times (emphasis ours),

A U.S. federal official suggested in a recent interview that Americans may be told by officials that they are recommended to have no more than two alcoholic drinks, or beers, per week.

Director of the National Institute on Alcohol Abuse and Alcoholism (NIAAA) George Koob told the Daily Mail on Thursday that the United States could follow how Canada handles its alcohol guidelines.

The NIAAA’s guidelines currently recommend males up to age 65 limit themselves to two drinks per day, while women up to age 65 should limit themselves to one. Recommendations published under the U.S. Department of Agriculture’s Dietary Guidelines for Americans (pdf), which are not mandates or requirements, are slated to be reviewed in 2025.

For the NIAAA’s “heavy” drinking limits, it says that men should drink no more than four per day, and no more than 14 beverages per week. For women, according to the guidelines, they should drink no more than three drinks per day and seven per week.

Meanwhile, Canada’s current guidelines recommend people have only two drinks per week. A drink is defined as containing 0.6 fluid ounces of alcohol, or equivalent to one beer, one glass of wine with 12 percent alcohol, or one shot of hard alcohol.

“If there’s health benefits, I think people will start to re-evaluate where we’re at [in the U.S.],” Mr. Koob told the Daily Mail.

When asked about whether the guidelines would change in 2025, he said that it’s likely officials will not recommend that people drink more per day or week, as compared with the current guidelines.

“I mean, they’re not going to go up, I’m pretty sure,” Mr. Koob said. “So, if [alcohol consumption guidelines] go in any direction, it would be toward Canada.”

Mr. Koob added that he believes that there are no health benefits to drinking alcohol. However, he did say that it has social benefits and called it a “social lubricant.”

“Most of the benefits people attribute to alcohol, we feel they really have more to do with what someone’s eating rather than what they’re drinking,” Mr. Koob told the outlet. “So it really has to do with the Mediterranean diet, socio-economic status, that makes you able to afford that kind of diet and make your own fresh food and so forth. With this in mind, most of the benefits kind of disappear on the health side.”

Some industry groups responded to his comments to the Daily Mail, accusing him of trying to make a dramatic change to the dietary guidelines.

“Dr. Koob’s comments calling for a drastic change to the federal recommendations on alcohol before the review of alcohol research has even begun undermines the scientific rigor and objectivity of the entire Dietary Guidelines process,” Distilled Spirits Council vice president of science and health Amanda Berger told Fox News.

Read more here…