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Moments ago Fitch added some more fuel to the Italian bank fire when it announce it has changed its outlook on Italian banks to negative, a reflection of “its increased vulnerability to shocks following the asset-quality deterioration in legacy portfolios. A step-up in pressure from authorities and market participants on the sector to reduce the very high levels of impaired loans has increased urgency and risks for Italian banks”

From the press release

Italian Banks Outlook Negative as Bad Debts Persist

Fitch Ratings-Milan/London-06 December 2016: The Negative Outlook for the Italian banking sector reflects its increased vulnerability to shocks following the asset-quality deterioration in legacy portfolios, Fitch Ratings says. A step-up in pressure from authorities and market participants on the sector to reduce the very high levels of impaired loans has increased urgency and risks for Italian banks.

Profitability in the sector is frail. Disposals of non-performing loan portfolios could lead to losses that require additional capital. These are some of the factors driving the 2017 Outlook to Negative from Stable. Problems for a small number of distressed banks raising capital have added to these pressures.

The “No” vote at the constitutional referendum has further heightened political uncertainty and possibly reduced the capacity to implement economic reforms. The risks from political instability were one factor that contributed to our revision of the Outlook on Italy’s ‘BBB+’ sovereign rating to Negative in October.

The referendum result could also damage the recapitalisation plans of some Italian banks, most notably Banca Monte dei Paschi di Siena and UniCredit, and have negative implications for the broader banking sector, whose attractiveness with investors has already reduced significantly during 2016. The sector’s ability to access the institutional markets for funding and capital, which has become more difficult and expensive this year, could deteriorate further.

Asset-quality ratios in Italy have reached levels that are much worse than averages in other eurozone countries. The gross impaired loan ratio reached above 15% for most rated Italian banks, with the unreserved amount often multiples of their Fitch Core Capital. Provisioning costs are likely to remain high as “unlikely to pay” exposures migrate to the doubtful category.

Banks are stepping up efforts to shrink doubtful loans and have included reduction targets in strategic plans. Several banks are working on portfolio disposals, some of which may be finalised this year. Some may use the government guarantee on senior securitisation transactions. Atlante, the rescue fund that is undertaking its second fundraising, is likely to invest in mezzanine tranches of some of these transactions.

Significant disposals that materially improve asset quality could be positive for ratings. However, the disposals are likely to result in further provisioning and possibly more capital shortfalls for the banks involved. Portfolio sales could also result in risk-weighted assets rising for the remaining loans if the sales affect loss-given-default estimates at banks using internal rating models.

Capitalisation will remain under pressure in 2017 with a weak earnings outlook limiting banks’ ability to build capital. Low interest rates, tepid economic growth and fierce competition for healthy borrowers are challenges for earnings. Profitability could also be dented by restructuring costs as banks focus on cost-cutting.

We also believe regulators could require higher capital buffers from Italian banks to compensate for the risk in their large non-performing loan portfolios and for the large portion of Italian sovereign debt held. This could result in additional capital requirements at some banks.

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Submitted by Irina Slav via OilPrice.com,

OPEC’s historical deal to cut production has been sealed, and oil prices have jumped as a result, comfortably above the $50 per barrel mark. According to Lukoil’s vice president, Leonid Fedun, the average price of crude in 2017 could reach US$60 a barrel, thanks in no small part to that agreement.

According to some observers, the effect won’t be so noticeable, and prices will continue to hover around US$50.

In any case, Russia will certainly benefit from the cut agreement, as the chief of VTB, one of the country’s largest banks, said recently. Andrey Kostin said that the decision to cut production will, on the one hand, prop up international prices, which of course is good news for Russia, and on the other hand, it will benefit the ruble, an outcome which was also to be expected given the central place crude oil occupies in Russia’s export mix.

What’s perhaps more interesting is that Russia did not, in fact, obligate itself to cut from essential production. It surfaced last week that the country’s total output had reached a new post-Soviet record of over 11.2 million barrels per day. The precise figure, according to Deputy Energy Minister Kirill Molodtsov, was 11.231 million barrels, and it is from this production level that Russia will take off the 300,000 bpd it agreed to cut to help OPEC in its market rebalancing efforts.

Incidentally, Libya, which has been granted an exemption from the agreement, plans to ramp up its own output by 300,000 bpd by the end of 2016.

To compare, Saudi Arabia pumped 10.6 million bpd in November, and now has to cut 486,000 bpd from that figure. Its friends in the region, including Iraq, Kuwait, Qatar, and the UAE, will cut a combined 510,000 bpd from their output.Iran was actually allowed to increase its output by 107,000 bpd (based on secondary sources from October figures as reported by OPEC), which will bring its daily production close to the target of 4 million barrels of crude set earlier this year at 3.797 million bpd.

Russia will continue to produce crude at the rates it did when prices were lower than they are today – a level that still allowed its oil companies to turn a profit. They might not be too happy about the stronger ruble, as this would negatively affect production costs, but it’s uncertain exactly how big the ruble’s rally will turn out to be.

Russia’s 2017 draft budget had US$40 per barrel as a base scenario for oil prices, according to economist Natalia Orlova from Alfa banking group. Every US$1 above this level translates into around US$2 billion in budget revenues. The budget is currently being discussed.

The country’s budget deficit for 2016 was estimated at over 3 percent by PM Dmitry Medvedev earlier this year, in case oil fell below US$50 again and stayed there long enough. It didn’t, so the budget for the year could be 3 percent or less.

Saudi Arabia, on the other hand, has a deficit that is 20 percent of its GDP for this year despite massive spending cuts. So does Iraq. Kuwait’s deficit is 12 percent and UAE’s is 9 percent. And yet, these four countries will shoulder the bulk of the OPEC cut.

Russia, along with Iran, could turn into the big winner of the agreement, enjoying high output and higher prices, which would allow it to further expand its global market share. Unless, of course, OPEC lies, as former Saudi Oil Minister Ali al-Naimi plainly said at a media event for the promotion of his memoir. “Unfortunately,” he said, “we tend to cheat,” commenting on how OPEC handles its only tool of market rebalancing: production cuts.

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With concerns that Italy may proceed with early elections as soon as January or February of 2017 slamming the Euro in early trading, which taking place so soon to the Renzi referendum would likely assure anti-establishment forces a victory (whether or not they can form a coalition cabinet is a different topic), moments ago Reuters reported that Italy’s constitutional court said it would hold a hearing on the legitimacy of a new electoral law on Jan. 24, in a case which has major implications for when parliamentary elections might be held, and if reaching a quick verdict would greenlight an early 2017 vote.

From Reuters:

It is not clear when the court will make a definitive ruling on the disputed law, which only relates to the lower house of parliament and is known as the Italicum.

 

Prime Minister Matteo Renzi is due to resign this week after losing a referendum on Sunday over constitutional reform. Many politicians are pushing for early elections, but Italy’s president will almost certainly hold off on any such decision until there is clarity over the status of the Italicum.

While the news of an early election, at least relative to expectations is hardly bullish for Italy, for the time being Italian banks are unconcerned and have soared in Milan afternoon trading, rising over 5%, with even Monte Paschi suddenly surging after being unhalted.

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In the last 12 months, the editorial boards at three of the biggest mainstream media outlets (Bloomberg, The Financial Times, and The New York Times) have all penned articles supporting the banning of physical cash.

In every circumstance, the argument has been that doing this would

A)   Help stop crime such as money laundering or drug dealing.

B)   Generate major economic growth.

Regarding #1, we know this claim is complete bunk. Consider the case in India where the Government recently banned ALL currency denominations above 500 Rupees.

The argument from the Government was that doing this would quickly reveal that most of the money would stay in circulation as part of the “Black Market”… thereby justifying the move (those using cash were criminals).

Instead, physical cash has poured into India banks. As we write this, 82% of ALL physical cash in the denominations that were banned has been deposited… and that was in less than THREE weeks.

I want to emphasize here that 500 rupees comes to roughly $7. And these denominations represent roughly 86% of ALL of India’s cash.

Put another way, India effectively banned ALL physical cash claiming that the money would remain in the economy because it was being used illegally. And instead, the money poured into banks.

So… we know that cash bans aren’t really about cracking down on crime. India has proved this to be total bunk.

But what about #2: the claim that banning cash would generate major economic growth?

This is the argument being proposed in the West, particularly amongst financial elites such as Ken Rogoff

The problem with this claim however is that a cash ban simply represent yet another attempt to go below the “zero bound” or ZIRP. The view here is that as long as Central Banks can force interest rates low enough, the economy will come roaring back.

The only problem is that there is ZERO evidence of this. The US maintained ZIRP for seven years, spent over $3.5 TRILLION in QE and generated the weakest recovery in the last 80 years.

In Europe, FOUR NIRP cuts (going well below the zero bound) and $1 TRILLION in QE failed to generate significant growth.

And in Japan 16 YEARS of ZIRP combined with QE programs equal to 50% of GDP failed to generate a sustained recovery.

So the idea that somehow getting rid of cash will prove to be the lucky charm at which point growth will come roaring back is misguided at best.

But will this stop the elite from banning cash in the US?

No way.

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Chief Market Strategist

Phoenix Capital Research

 

 

 

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In what the local press has dubbed an “astonishing U-turn”, during a 77 minute speech by Angela Merkel, interrupted by minutes of standing ovations, the German chancellor pledged to strengthen the forces of law and order while speeding up the sclerotic deportation process of failed asylum seekers. But what stunned listeners was Merkel’s pledge toban the burka saying “show your face. The full covering is not permissible and should be banned wherever it is legally possible.”

The German Chancellor told delegates at the Christian Democratic Union (CDU) two-day party congress held in the western German town of Essen, where moments ago she was reelected with 89.5% of the vote, that German law “takes precedence” over the Islamic code of Sharia.

Merkel was presenting her political program and also launched her bid for another term as CDU leader and German chancellor.

She went on to call “security and order, justice and law” some of the pillars of the CDU’s political agenda, and stressed that “all Germans who always lived here as well as those who just arrived” should observe the law.

Angela Merkel at the CDU conference said she wanted to ban the burka

“Here in Germany … the laws of our country… are applied equally to everyone without any exception,” the chancellor stressed. There should be no parallel societies, Merkel added, emphasizing that “German law takes precedence over Sharia.” The chancellor also promised that she would do her best to avoid a recurrence of the 2015 refugee crisis. “We have repeatedly stated that that situation that occurred in late summer, 2015, cannot, should not, and will not be repeated,” she told party delegates. 

Merkel assured the CDU members that “not everyone out of the 890,000 people who came here last year can and will stay.” At the same time, she said that every refugee case should be regarded as an isolated instance “and not as a part of some crowd.” She also defended the refugee deal between the EU and Turkey that has provoked controversy in Europe. This agreement remains “decisive” for successful reconciliation of the refugee crisis, the chancellor said, stressing that the deal “saves lives every day.”

Merkel criticized other European countries for not doing enough to resolve the refugee crisis. She said she is not satisfied with the level of cooperation between the EU members in dealing with the challenge, and called for “more solidarity” within the bloc.

In her congress speech, Merkel also sharply criticized the various anti-immigrant, anti-Islamist and right-wing populist movements that have gained traction in Germany amid the refugee crisis (which many say she unleashed). She also criticised the groundswell of internet hate against migrants and said that often had the opinion that those who wrote them needed an “integration course” more than the newcomers.

Merkel said she had “an impression that it is those who live in Germany for a long time who urgently need to attend some integration courses,” rather than the migrants. She also called on everyone in the country to make an effort and reach “a certain level of culture of discussion.”

She particularly slammed “aggressiveness” and “hate messages” posted online, adding that the internet “must not become a space free of legal regulation” and repeated a call for online internet media companies to better police hate speech.  She added that tasteless online attacks shocked and sickened her. 

Merkel went on to condemn the aspirations of some anti-immigrant movements to act as the “representatives of the German people.” She particularly attacked the ‘We are the people!’ slogan used by the German ‘anti-Islamization’ movement Pegida (Patriotic Europeans Against the Islamization of the West).

“It is only the whole nation that can decide who ‘the people’ are. We all decide it and not some marginal groups, irrespective of how vocal they are,” Merkel said.

Finally, she said she recognized that the general election of next year was like “none other” and that it would not be “like swallowing a sugar drop.” She pledged a stronger Europe, a stronger economic base for Germany and a stronger commitment to achieving peace in Syria.  At the end of it she was rewarded with a standing ovation of over 11 minutes.

* * *

Moments after the speech, Merkel was re-elected as CDU party chairwoman with 89.5% support from delegates, which nonetheless was the lowest of Merkel’s chancellorship: her support fells from 96.7% during the last such vote in 2014. According to Bloomberg, Merkel’s lowest-ever support was 88.4% in 2004, the year before she took office; highest level was 97.9% in 2012.

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For the 22nd straight month, US durable goods order (ex-transportation) declined on a year-over-year basis in October. This is the longest non-recessionary streak in US history bar none.

 

 

But it’s probably nothing, because this was pre-election and since then everything (survey-wise) has been soaring… we are yet to see “hard data” items.

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By Chris at http://ift.tt/12YmHT5

• Headwinds to gold in the short to medium term.
• What a strong dollar means for gold.
• Good inflation vs. bad inflation. Or at least the market perception of this.
• Why NOT owning gold is simply foolish.
• And other juicy titbits.

(click on the image to listen to the podcast)

Enjoy!

– Chris

“The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice.” — Henry Hazlitt   

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Despite all the uncertainty, all the chaos, all the headlines, and all the media angst, Factory Orders in America surged by the most in 16 months in October ahead of the election.

Factory Orders rose 2.7% MoM (ahead of the 2.6% rise expected) led by am 11.9% spike in Capital Goods orders…

 

In case this seems odd to anyone, we remind them of what we wrote previously about the election cycle surge in government spending…

Some pretty good economic reports have energized various parts of the financial markets lately. Consumer spending is up, GDP is exceeding expectations and even factory orders, that perennial downer, popped this morning.

In response the dollar is soaring and interest rates are at breaking
out of their multi-decade down-channel. The economy is clearly
recovering, implying a return to normality. Right?

Nah, it’s just the usual election year illusion.

When the presidency is at stake the party in power always
pumps up spending in an attempt to put people back to work and create
the impression of a well-run country whose leaders deserve more time in
the spotlight. After the election, spending returns to trend and the resulting bad news gets buried in “political honeymoon” media coverage.

*  *  *

So don’t hold your breath; don’t extrapolate this… we suspect Trump is being set up for a big fall as the impulse from this surge in government debt/spending fades ahead of his inauguration.

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