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• Pressure Is on Mario Draghi to Show ECB Has Tools to Boost Low Inflation (WSJ)
• Euro dips as ECB sets sights on deeper negative rates (Reuters)
• Ohio’s ‘dirty little secret’: blue-collar Democrats for Trump (Reuters)
• Irish Economy Expanded 7.8% in 2015, Fastest Pace Since 2000 (BBG)
• Too Many Boats for Too Little Cargo Leaves Shippers High and Dry (BBG)
• Abe pledges to boost tourism in tsunami-ravaged region, maintains nuclear policy stance  (Xinhua)
• Amazon Finds Air Freight Partner (WSJ)
• Obama committed to Pacific trade deal, even as opposition spreads (Reuters)
• Dividend Cuts Show Pain of Cheap Oil in Emerging Markets (BBG)
• Norway’s Big Bet on London Property (BBG)
• At least five killed, several hurt in shooting near Pittsburgh (Reuters)
• Men’s Wearhouse Owner to Close Hundreds of Stores as Sales Slide (BBG)
• The corrosive dangers lurking in America’s private wells  (Reuters)
• Goldman Sachs Hire Came as Bank Pitched 1MDB (WSJ)
• UK energy suppliers face price freeze for some customers  (Reuters)

 

Overnight Media Digest

WSJ

– Saudi Arabia is looking to borrow up to $8 billion from international banks and could also issue foreign bonds, said people familiar with the matter, to plug the kingdom’s widening fiscal deficit from cheap oil. (http://on.wsj.com/1RAYGeC)

– Moody’s Investors Service has agreed to pay $130 million to Calpers to end a prominent lawsuit alleging crisis-era misconduct, a record settlement for the world’s second-largest ratings firm. (http://on.wsj.com/1RB2M6n)

– Amazon.com Inc is taking to the air with a fleet of planes, as part of a broader effort to reduce its inflated shipping costs. The Seattle retailer plans to shuttle merchandise around the U.S. using as many as 20 Boeing Co 767 aircraft it will lease from Air Transport Services Group Inc . (http://on.wsj.com/1TuNtlD)

– Shared-office-space startup WeWork Cos has raised about $430 million in a new round of financing led by Chinese investors, making it one of the world’s most valuable startups and clearing the way for a push into Asia. (http://on.wsj.com/1TuNDtl)

– After decades in which successive Republican and Democratic presidents have pushed to open U.S. and global markets, resentment toward free trade now appears to have an upper hand in both parties, making passage this year of a sweeping Pacific trade deal far less likely, and clouding the longer-term outlook for international economic exchange. (http://on.wsj.com/1TuCetA)

– A Senate committee Wednesday approved a slate of bills that would relax requirements for approval of medical devices by the U.S. Food and Drug Administration, part of a larger effort aimed at speeding up the regulatory process and boosting medical research. (http://on.wsj.com/1TuDixx)

– New Jersey officials shut off water fountains at 30 Newark Public Schools in the state’s largest school district Wednesday after tests showed elevated levels of lead. (http://on.wsj.com/1TuDqgH)

 

FT

* Amazon.com Inc is opening its first large warehouse in the northwest of England which will generate 1,000 jobs in over three years.

* Exchange operator Nasdaq Inc said on Wednesday it would buy International Securities Exchange from Deutsche Boerse AG for $1.1 billion. The deal with Nasdaq excludes ownership interests in BATS Global Markets and Digital Asset Holdings, which will continue to be owned by Deutsche Boerse, Deutsche Borse said.

* UBS and Deutsche Bank AG lost a legal challenge brought on by HM Revenue & Customs regarding two offshore schemes which were conceived to avoid paying tax on bankers’ bonuses.

* Moody’s Investors Service has decided to withdraw all national scale ratings for Russian issuers for the rest of the year in light of recent legislative changes in Russia, the rating agency said in a press release on Wednesday.

 

NYT

– The head of Volkswagen AG’s American operations, a central figure in the carmaker’s effort to repair relations with dealers and customers after an emissions scandal, unexpectedly stepped down on Wednesday. (http://nyti.ms/1RB6xsE)

– The European Central Bank is expected on Thursday to increase the penalty it charges banks to store money in its virtual vaults, hoping to force lenders to pump that money into the eurozone economy instead. (http://nyti.ms/1RB6BIU)

– David Grim, who leads the U.S. Securities and Exchange Commission’s asset management division, is pushing to increase funds’ liquidity cushions so investors can sell out quickly. (http://nyti.ms/1RB6QUn)

– Nasdaq Inc agreed to buy the International Securities Exchange for $1.1 billion from Deutsche Boerse AG of Germany, in yet another deal among exchange operators as even bigger takeovers loom. (http://nyti.ms/1RB6WLy)

– John Gutfreund, whose aggressive leadership of Salomon Brothers and extravagant lifestyle personified the meteoric rise and fall of Wall Street moguls in the heady 1980s, died on Wednesday in Manhattan. He was 86. (http://nyti.ms/1RB7kd5)

 

Canada

THE GLOBE AND MAIL

** Crescent Point Energy Corp slashed its dividend by 70 percent and said it would defer some spending to later this year, underscoring wariness in the industry that a hoped-for price recovery is at hand. (http://bit.ly/1UULo1W)

** Transport Minister Marc Garneau says he’s “not happy” with the financial situation of his department and is vowing to fix the problem without sacrificing the department’s key role in protecting the safety of Canadians. (http://bit.ly/1UhaFmv)

** The economic pieces are starting to fall into place for the Bank of Canada and its Governor Stephen Poloz, giving the central bank latitude to keep its key interest rate unchanged.(http://bit.ly/1M8utld)

NATIONAL POST

** Toronto Mayor John Tory’s signature $7-billion SmartTrack plan edged somewhat closer to reality on Wednesday – or what remains of it, anyway. The Executive Committee approved a staff recommendation to focus on two possible options that fall well short of what Tory stumped for during his election campaign. The plan will go next to city council. (http://bit.ly/1XewVg0)

** Ontario Premier Kathleen Wynne has taken an important stand on the issue of unnamed donors paying thousands of dollars for private meetings with her and her staff. She’s in favor of it. “It’s part of the democratic process,” she says, of the $6,000-a-head cocktail reception and three-course dinner at Toronto’s Four Seasons Hotel scheduled for Thursday. (http://bit.ly/1RSv2Eh)

Britain

The Times

Deutsche Boerse raises $1.1 bln in Nasdaq deal

Deutsche Boerse AG is to sell one of its businesses for more than $1 billion days before it is expected to announce a deal with the London Stock Exchange Group Plc . Nasdaq Inc, America’s technology-heavy exchange, announced in New York last night that it had agreed to buy International Securities Exchange, an operator of three exchanges, from Deutsche Börse, for $1.1 billion. The deal, could be completed by the end of the year. (http://thetim.es/1ph82pr)

Former MPC member warns of Brexit upset

A former member of the Bank of England’s monetary policy committee has said that leaving the European Union would cause significant disruption to the British economy. Andrew Sentance told a conference in Edinburgh that “leaving the EU would disrupt the trade and investment that has underpinned the UK and our economy for over 40 years. I believe that quite a big shock would flow through.” (http://thetim.es/1TMQApz)

The Guardian

Michael Horn, VW’s US president, resigns ‘effective immediately’

The head of Volkswagen AG in the United States resigned ‘effective immediately’ on Wednesday night as the company struggles to agree on a settlement with the U.S. government over its emissions cheating scandal. (http://bit.ly/1QMUyIL)

The Telegraph

Google’s Eric Schmidt says driverless cars could hit UK streets

Google Inc is considering trialling its driverless cars in the UK, the chairman of its parent company has revealed. Eric Schmidt said that officials had proposed bringing self-driving cars to a city in Britain and that “eventually we will all be in self-driving cars”. (http://bit.ly/1QN4MJc)

Sky turns to Vice to draw in millennials

Sky Plc has agreed a deal with the youth media company Vice to launch Viceland, its first European television channel, later this year. (http://bit.ly/1R8mUTh)

Sky News

Warburg Pincus In Talks To Try On 250 mln stg Reiss

The founder of Reiss, the high street fashion chain, is close to selling a stake in the company in a deal valuing it at close to 250 million pounds ($355 million). Warburg Pincus, one of the world’s biggest private equity groups, has entered exclusive talks to buy a substantial stake in Reiss. (http://bit.ly/1RAgeYd)

Ryanair For Hire As Corporate Jet Launched

Ryanair Holdings Plc has stepped up its efforts to secure more business passengers by launching a corporate jet for charter. The airline, known for its no-frills approach, said it had customised a Boeing 737-700 – fitting it with 60 business class seats. (http://bit.ly/1nxASQP)

 

 

via Zero Hedge http://ift.tt/1QJsh9f Tyler Durden

2016 has been the year that investors turned bearish on central banks.

Something snapped in the market’s collective psyche when Kuroda went NIRP and things haven’t been the same since. It’s as though everyone suddenly realized just how utterly insane this global monetary experiment has become.

In all likelihood, fiscal policymakers (i.e. elected officials) will also come to the conclusion that this has gone (way) too far – but not soon enough. Monetary authorities should have been reined in long ago, but they weren’t, and as a consequence, we are all guinea pigs in a global experiment that, if no one intervenes, is going to end with the abolition of physical banknotes and the possible imposition of deeply negative deposit rates.

Today we’ll get what may turn out to be the last gasp for previously unassailable central banks as Mario Draghi is widely expected to announce a flurry of easing measures including a further cut to the depo rate and both an extension and expansion of PSPP.

We documented how to trade the ECB announcement on Wednesday evening, but from a longer-term perspective, the record suggests equity markets are Fed up. “Mario Draghi is having no success convincing stock investors that the European Central Bank has the firepower to reignite growth,” Bloomberg notes. “In the first year of quantitative easing, the Euro Stoxx 50 Index fell 17 percent, and volatility reached levels not seen since 2008. The gauge has dropped in each month but one following an ECB meeting since April.”

As it turns out, “reality” trumps central bank fiction. Here’s the visual:

But that likely won’t stop the ECB from “trying.” This (hopefully) temporary descent into insanity still has a few more rounds to go. But Draghi will face his Waterloo on Thursday. There’s no way he can exceed expectations. In order to “impress” markets, he would need to cut by at least 20 bps, expand PSPP by €20 billion per month, and extend QE by at least six months. That’s a tall order, to say the least. Here’s what economists think: 

On top of that, Draghi will need to devise some manner of tiered deposit scheme if he cuts the depo rate further. Europe’s banks are already under siege in the market and a further cut to the depo rate isn’t going to do them any favors from a NIM perspective. The last thing the ECB needs is a swift sell-off in euro bank stocks. Here’s a look at predictions for today’s ECB announcement: 

Expectations for today’s ECB meeting are high, but without consensus http://pic.twitter.com/7psqOvIciG

— Bond Vigilantes (@bondvigilantes) March 10, 2016

And here’s WSJ’s preview:

1. The rate decision

No rate cut would be a major disappointment for markets. Most analysts expect the ECB to cut the deposit rate by 10 basis points to take it further into negative territory, to minus 0.4%. The refinancing rate is expected to stay at 0.05%.

Negative interest rates have recently been sharply criticised for escalating a so-called global currency war, squeezing bank earnings and actually tightening credit conditions rather than improve them. Analysts at JP Morgan said in a note on Monday that negative interest rates overall have been counterproductive for equities, with eurozone, Swiss and Japanese stock markets all having fallen since they were introduced.

2. Two-tiered deposit system and/or cheap loans

Negative interest rates means banks have to effectively pay to hold cash on their balance sheets, while at the same time making less money on their loans. To mitigate the effect of yanking rates further into negative territory, the ECB is expected to introduce a two-tier deposit facility. This means some of the excess liquidity banks would deposit at the ECB will be placed at a rate above the deposit rate.

“This reduces the costs to the banking sector of a lower deposit rate and hence opens the way for additional deposit rate cuts.”Analysts at Danske Bank said in a note

Another possibility is for the ECB to offer banks generous long-term loans, such as the long-term refinancing operation (LTRO) introduced in 2012 and the targeted LTROs launched in 2014.

3. Changes to QE

One of the big disappointments at the December policy meeting was the absence of an expansion of the €60 billion-a-month asset-purchases program. This time around, analysts are again optimistic, speculating that the central bank will increase its QE purchases by €10 billion to €20 billion to take the monthly buys to as much as €80 billion.

Analysts at HSBC, however, said a QE expansion is unlikely this month, as the ECB still battles with technical constraints surrounding the program, such as simply finding enough bonds to buy.

4. New staff projections

The ECB will be in no shortage of reasons to act on Thursday. The updated staff projections are expected to be lowered significantly to reflect the weaker inflation and growth outlook that have resurfaced over the past months.

Holger Schmieding, chief economist at Berenberg, forecasts at least a 0.2 percentage point cut in 2016 growth projections to 1.5% and at least a 0.3 percentage point cut in 2016 inflation forecasts to 0.7%. The ECB has an inflation target of close to, but below, 2%.

5. Yet another disappointment?

The ECB destroyed a hoped-for Santa rally in stock markets in December, when its rate cut and QE extension massively disappointed investors.

With traders again seeming to bank on a substantial round of easing measures, several analysts have warned that we could see a repeat of the December carnage.

“Although we do believe that a larger cut or a drastic change in the QE-package is possible, we have to bear in mind that this week’s policy easing package is unlikely to be the last one and that the ECB will need to keep some measures on the back burner.”

*  *  *

So Mario Draghi is staring down an impossible communication task. Grab the popcorn and stay tuned to see how he handles the pressure.

Out this morning from Goldman

via Zero Hedge http://ift.tt/1pz3Cdq Tyler Durden

Global stocks and U.S. equity futures are mostly higher this morning (despite China’s historic NPL debt-for-equity proposal) as traders await the main event of the day: the ECB’s 1:45pm CET announcement, more importantly what Mario Draghi will announce during the 2:30pm CET press conference, and most importantly, whether he will disappoint as he did in December or finally unleash the bazooka that the market has been desperately demanding.

Recall that for the past month, it has been a case of deferred expectations when first the Shanghai G-20 meeting let traders down, then it was the Chinese Congress last weekend, and now it is all up to the ECB: it is all downhill from here, as next week we get the BOJ, which after the NIRP fiasco won’t do anything, and the Fed which if anything, may be unexpectedly hawkish.

All economists in a Bloomberg survey expect a rate cut, and 73 percent forecast the ECB will boost the amount of money put into the financial system through bond purchases. “We are waiting in anticipation of what Draghi will say– there is a good chance that the market could rally a bit on that,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “There has been some positioning ahead of the ECB meeting but there are also investors waiting on the side-lines. So there will be more cash ready to put to work if the ECB actually delivers on both a the rate cut and an increase of QE.”

Below, courtesy of @bondvigilantes, is a summary of what the major investment banks expect today from the European Central Bank:

 

As Bloomberg notes, stocks have become more and more responsive to ECB updates, with the moves in the Euro Stoxx 50 Index on rate-decision days exceeding the monthly average since last July. In December, when investors were disappointed by the extent of additional stimulus, the gauge swung 4.9 percent intraday, the most since at least 2012.

 

In other words, Draghi better not disappoint or a replay of the December market reaction is almost assured.

Aside from US futures which are modestly up, Europe trades little changed ahead of ECB meeting, Asian equities gain for first day in four. Oil, copper, gold, most food commodities fall.

The Stoxx Europe 600 Index is up 0.1% as of this moment. It earlier erased a gain of as much as 0.4 percent to fall 0.2 percent. The benchmark has rebounded 12 percent from a 2013 low reached last month, helped by a rally in miners and speculation of further ECB stimulus, a possibility signaled by Draghi in January.

Below is a snapshot of where key markets stood before the ECB:

• S&P 500 futures up 0.3% to 1985
• Stoxx 600 down less than 0.1% to 339
• FTSE 100 down 0.4% to 6122
• DAX up less than 0.1% to 9725
• German 10Yr yield down 3bps to 0.22%
• Italian 10Yr yield down 2bps to 1.39%
• Spanish 10Yr yield down 2bps to 1.54
• MSCI Asia Pacific up 0.5% to 126
• Nikkei 225 up 1.3% to 16852
• Hang Seng down less than 0.1% to 19984
• Shanghai Composite down 2% to 2805
• S&P/ASX 200 down 0.1% to 5150
• US 10-yr yield down 2bps to 1.86%
• Dollar Index up 0.19% to 97.35
• WTI Crude futures down 0.9% to $37.94
• Brent Futures down 1% to $40.64
• Gold spot down 0.4% to $1,249
• Silver spot up less than 0.1% to $15.30

Looking at regional markets, we start in Asia where the Nikkei 225 (+1.2%) outperformed as exporter names benefitted from JPY weakness, while ASX 200 (-0.1%) failed to hold onto its early energy-led advances amid profit-taking in defensive stocks. Chinese markets traded mixed following the latest inflation data where CPI rose to its highest in 19 months but PPI declined for the 48th consecutive month, with the Shanghai Comp (-2.0%) pressured after the PBoC kept its inter¬bank liquidity injections reserved and reports that China is seeking to rein in on property prices. 10yr JGBs initially traded with mild gains amid short-covering following yesterday’s significant declines and ahead of the 5yr auction. However, prices then returned flat on resumed selling following a relatively in-line auction.
Chinese CPI (Feb) Y/Y 2.30% vs. Exp. 1.80% (Prey. 1.80%); highest in 19-months. – PPI (Feb) Y/Y -4.90% vs. Exp. -4.90% (Prey. -5.30%); 48th consecutive monthly decline.

Top Asian News

• Shanghai Authorities Said to Discuss Ways to Cool Housing Market: Possible steps weighed incl. tightening mortgage policies for 2nd-home buyers
• How Global Investors Turn Negative Japan Yields Into Big Returns: Discount offered to yen borrowers reaches record 102.5 basis points this week
• Abe Aide Honda Says BOJ Will Add Easing Soon, But Not Next Week: Etsuro Honda says BOJ should use negative rate, asset purchase “combination”
• Swire Properties Sees Weaker Demand for Retail Space, Housing: Drop in tourist spending, falling retail sales at Hong Kong malls hurt developer
• Lenders Seek to Claw Back $1 Billion From India Beer Tycoon: Court case to bar flamboyant former billionaire’s travel abroad comes days too late
• Daewoo Shipbuilding Says Worst Is Over, Sees Profit This Quarter: World’s second-largest shipbuilder is aiming to win $10.8b in orders this year

European trading has seen a slow start, as many would have expected given the heavy focus on the ECB rate decision later today with European equities trading relatively mixed/flat. In terms of a sector specific basis, materials and energy names lead the way lower with Asian equity markets failing to inspire sentiment overnight. Fixed income markets illustrate the tentative sentiment felt today, as Bunds trade around 162.50 after drifting higher throughout the morning amid particularly light newsflow. In a similar fashion, with many remaining on the sidelines for now.
 
Top European News

• Draghi Marks a Year of QE With Suspense of ‘No Limits’ Stimulus: Investors expect at least a 10 basis-point cut in deposit rate to minus 0.4 percent, as indicated by swaps on the euro overnight index average.
• Merkel Threat Lurks in Baden-Wuerttemberg From AfD Party: Having made her case for open borders in Europe, Merkel faces test of her stance Sunday when 3 states vote.
• Carrefour Maintains Plan for IPO of Property Unit Carmila: Unit still plans an IPO, CFO Pierre-Jean Sivignon said on a call to reporters.
• Apple’s Privacy Fight Could Be Even Worse in Europe: Law enforcement has generally counted on cooperation from the private sector in obtaining data for police investigations.

In FX, ahead of the key ECB meeting today, few were expecting any fireworks in the market, with the EUR pairs notably quiet as pre decision positioning extremely light. EUR/USD continues to hold the upper 1.0900’s, with 1.1000+ levels clearly too rich under the circumstances, The is market ready for some disappointment, and will be looking for more than the 10bp cut in the deposit rate, though changes to the APP are unquantifiable. EUR/GBP has also been resisting .7700 on the downside, which in turn is limiting Cable upside, though not for the want of trying. NZD/USD has recovered some ground after the surprise RBNZ rate cut, though topping out around .6680-85 for now. AUD/USD is holding off .7500 in the meantime. The JPY pairs have all eased off better levels, though the lead USD rate still looking comfortable on a 113.00 handle. Oil steady, so CAD ranges kept tight accordingly.

In commodities, price action in Oil has been choppy this morning but Brent crude has managed to stay above the pivotal USD 40/bbl level with WTI staying above USD 37/bbl respectively. Gold has moved lower by USD 3.00/oz but many traders will be looking ahead to the ECB rate announcement and meeting later today. Iron ore is still extending its gains after a minor reprieve yesterday with many analyst citing profit taking as for that brief decline.

In addition to the ECB announcement, today on the US calendar we have the latest US initial jobless claims data along with the February Monthly Budget Statement.

Bulletin Headline Summary From RanSquawk and Bloomberg

• European markets have seen a tentative start to the session with all eyes firmly fixated on the ECB
• Overnight saw mixed inflation data from China with CPI rising to its highest level in 19 months but PPI declining for the 48th consecutive month
• Looking ahead today’s highlights include ECB Rate Decision, ECB’s Draghi’s (Dove) press conference and US Initial Jobless Claims
• Treasuries higher in overnight trading; global equity markets mostly lower ahead of ECB rate announcement; week’s auctions conclude with $12b 30Y bonds, WI 2.65% vs 2.50% in Feb., was lowest 30Y auction stop since record low 2.430% in Jan. 2015.
• Given the pressure on current 10Y, 30Y in repo, it’s likely “both issues will trade special even after their auction settlements on March 15,” according to Stone & McCarthy
• The ECB is forecast to ease policy via measures including an interest-rate cut and an expansion of its quantitative easing, according to economists surveyed by Bloomberg. That would add to a wave of global monetary stimulus this year
• The euro weakened, cementing its position as the world’s worst-performing major currency over the past month, as traders braced for the European Central Bank’s decision on whether to expand stimulus
• China’s central bank is preparing new regulations to allow commercial banks to directly swap non-performing loans with firms for shares in their cos, Reuters reports, citing 2 unidentified people with direct knowledge of the new policy
• New Zealand’s central bank unexpectedly cut interest rates to a fresh record low and said further easing may be needed, joining global counterparts in adding stimulus to an economy struggling to generate inflation
• Foreign banks including HSBC and Deutsche Bank are pushing back against the Federal Reserve’s proposals on implementing rules designed to end too-big-to-fail, saying they are burdensome and unfair to the U.S. units of the world’s biggest lenders
• Goldman Sachs hired the daughter of an ally to Malaysian Prime Minister Najib Razak around the time the firm’s bankers were pitching business to the country’s government investment fund, the Wall Street Journal reported, citing unidentified people
• The Sao Paulo state prosecutor’s office on Wednesday charged Luiz Inacio Lula da Silva on allegations of hiding assets, delivering a second blow to the former president in less than a week
• John Gutfreund, who was proclaimed the “King of Wall Street” in 1985 for harnessing the egos and fiefdoms of Salomon Brothers into one of the most profitable investment- banking firms, has died. He was 86
• $8b IG corporates priced yesterday; WTD $40.895b, 4th straight week to top $40b; MTD $82.72b, YTD $376.97b
• Sovereign 10Y bond yields mixed; European, Asian markets mixed; U.S. equity-index futures rise. WTI crude oil, copper drop, gold rises

US Event Calendar

• 8:30am: Initial Jobless Claims, March 5, est. 275k (prior 278k)
• Continuing Claims, Feb. 27, est. 2.250m (prior 2.257m)
• 8:45am: Bloomberg March U.S. Economic Survey
• 9:45am: Bloomberg Consumer Comfort, March 6 (prior 43.6)
• 12:00pm: Household Change in Net Worth, 4Q (prior – $1.232t)
• 2:00pm: Monthly Budget Statement, Feb., est. -$196.3b (prior -$192.4b)

Central Banks

• 7:45am: European Central Bank refinancing rate, est. 0.05% (prior 0.05%)
• ECB deposit facility rate, est. -0.4% (prior -0.3%)
• 8:30am: ECB’s Draghi holds news conference
• 4:15pm: Bank of Canada’s Poloz speaks in Ottawa

Supply

• 11:00am: U.S. to announce plans for auction of 3M/6M bills, 10Y TIPS
• 1:00pm: U.S. to sell $12b 30Y bonds in reopening

DB’s Jim Reid concludes the overnight event wrap

As we head into the big event, the last 24 hours or so have proven to be relatively constructive for risk, with price action yesterday a bit of a mirror image relative to that risk-off move which had swept over Tuesday’s session. In line with the recent trend, much of the focus was on the resumption of gains across the energy space after we saw WTI (+4.90%) more than wipe out the prior day losses to surge above $38/bbl and in the process settle at the highest level since December 4th. A greater than expected decline in gasoline stockpiles last week was attributed to the move. It was a positive day across much of the metals space too with Copper (+1.38%), Zinc (+2.10%) and Nickel  (+3.49%) all in rebound mode. Iron ore (-8.82%) did however manage to give up some of those huge gains from Monday while the FT ran an interesting/amusing story suggesting that a horticultural show in the Chinese industrial city of Tangshan was the major cause of that rally as steel mills rushed to buy before being forced to close in order to keep skies blue for the show!

By the closing bell last night the S&P 500 had edged up +0.51% meaning this month the index has closed higher on six of the seven trading days so far. European equity markets closed up similar amounts with the Stoxx 600 announcing the 1y anniversary of the start of ECB QE with a +0.49% gain. Unsurprisingly some of the more volatile moves came in the form of the Euro which was at one stage down 0.6% versus the Dollar, before paring all of that move into the close to finish more or less unchanged around 1.10 (although it is a touch softer this morning). Rates markets were weaker on the whole, although that appeared to reflect a reversal in the price action for JGB’s after that big rally the day prior. 10y Bund yields in particular closed nearly 6bps higher yesterday and are hovering around 0.239%.

Flipping our focus over to the latest in Asia now where the attention this morning is on China with the latest inflation numbers having been released. Last month saw an uptick in prices with CPI printing at +1.6% mom. That’s helped nudge the YoY rate up to +2.3% (vs. +1.8% expected) and by fivetenths relative to January, with the print now the highest since July 2014. The move higher does however appear to be driven by a big surge in food prices (+7.3% yoy vs. +4.1% in January) with much of the commentary attributing this to the timing of Chinese New Year. Services inflation on the other hand slowed last month. Encouragingly PPI also saw an uptick to -4.9% yoy (as expected) from -5.3% in the prior month.

Bourses in China have seemingly reacted negatively to the data with the Shanghai Comp (-0.48%) and CSI 300 (-0.39%) both down just after the break, although we warn that markets there have been especially volatile again recently post the midday break that occurs as we go to print. Elsewhere markets are largely following the lead from the US last night and trading with a positive tone. The Nikkei (+1.42%), Hang Seng (+0.57%) and Kospi (+1.18%) in particular all up, while Oil markets are little changed.

There’s also been some focus on New Zealand after a surprising rate cut out of the RBNZ late last night (25bps cut to 2.25%). That caught the vast majority of commentators by surprise with only 2 of 17 economist estimates on Bloomberg forecasting a cut. The Kiwi Dollar is down 2% (vs. the Dollar) from the moments prior to the cut, with the bond curve rallying in tune. This comes after the Bank of Canada left rates unchanged yesterday (as expected). In terms of yesterday’s data, the January wholesale inventories report for the US saw an unexpected +0.3% mom rise, after expectations had been for a – 0.2% decline. That said, trade sales were much weaker than expected during the month (-1.3% mom vs. -0.3% expected) which has pushed the inventoryto- sales ratio to the highest since April 2009. Meanwhile, during the European session yesterday we saw the January industrial production data from the UK modestly undershoot expectations with a +0.3% mom rise (vs. +0.4% expected), although manufacturing production (+0.7% mom vs. +0.2% expected) was markedly better than consensus.

Taking a look at today’s calendar, this morning in Europe we’ll be kick off in Germany where we’ll get the January trade numbers including the export and import data. Swiftly following this will be the January industrial production data out of France before market attention turns towards the ECB meeting at 12.45pm GMT. As a reminder we’ll also hear from ECB President Draghi shortly after. Away from that the latest US initial jobless claims data is due along with the February Monthly Budget Statement.

via Zero Hedge http://ift.tt/1LTmNZl Tyler Durden

In what may be the biggest news of the day, and certainly with far greater implications than whatever Mario Draghi will announce in a few hours when we will again witness the ECB doing not “whatever it takes” but “whatever it can do”, moments ago Reuters reported that China is preparing for an unprecedented overhaul in how it treats it trillions in non-performing loans.

Recall that as we first wrote last summer, and as subsequently Kyle Bass made it the centerpiece of his “short Yuan” investment thesis, the “neutron bomb” in the heart of China’s impaired financial system is the trillions – officially at $614 billion but realistically anywhere between 8% and 20% of China’s total $35 trillion in bank assets – in non-performing loans. It is the unknown treatment of these NPLs that has been the greatest threat to China’s just as vast deposit base amounting to well over $20 trillion, which has been the fundamental catalyst behind China’s record capital flight as depositors have been eager to move their savings as far from China’s domestic banks as possible.

As a result, conventional thinking such as that proposed by Bass, Ray Dalio, KKR and many others, speculated that China will have to devalue its currency in order to inflate away what is fundamentally an excess debt problem as the alternative is unleashing a massive debt default tsunami and “admitting” to the world just how insolvent China’s state-owned banks truly are, not to mention leading to the layoffs of tens of millions of workers by these zombie companies.  

However, China now appears to be taking a surprisingly different track, and according to a Reuters report China’s central bank is preparing regulations that would allow commercial banks to swap non-performing loans of companies for stakes in those firms. Reuters sources said the release of a new document explaining the regulatory change was imminent.

According to Reuters, the move would represent, “on paper, a way for indebted corporates to reduce their leverage, reducing the cost of servicing debt and making them more worthy of fresh credit.”

It gets better.

It would also reduce NPL ratios at commercial banks, reducing the cash they would need to set aside to cover losses incurred by bad loans. These funds could then be freed up for fresh lending for investment in the new wave of infrastructure products and factory upgrades the government hopes will rejuvenate the Chinese economy.

It is certainly possible that this is merely a trial balloon, one which as was the case repeatedly during Europe’s crisis uses Reuters as a sounding board to gauge the market’s reaction, however the reality is that China may truly be desperate enough to pursue this option.

Because what is lacking in the Reuters explanation is that this proposal entails nothing short of a nationalization on a grand scale, one which gives China’s impaired commercial banks – all of which are implicitly state controlled – the “equity keys” to the companies to which they have given secured loans, loans which are no longer performing because the underlying assets are clearly impaired, and where the cash flow generated can’t even cover the interest payments.

In effect, the PBOC is proposing the biggest debt-for-equity swap ever seen. What it also means is that since the secured lender, which is at the top of the capital structure will drop all the way down, it wipes out the existing equity and unsecured debt, and make the banks the new equity owners, and as such China’s commercial banks will no longer be entitled to interest payments or security collateral on their now-equity investment.

Finally, while this move does free up loss reserves, it essentially strips banks of their security and asset protection which they enjoyed as secured lenders.

So why is China doing this?

As Reuters correctly noted, by equitizing trillions in bad loans, it frees up the corporate balance sheets to layer on fresh trillions in bad debt, the same debt that pushed these zombie companies into insolvency to begin with.

What this grand equitization does not do, is make the underlying business any more profitable or viable: after all the loans are bad because the companies no longer can generate even the required cash interest payment – as a result of China’s unprecedented excess capacity and low commodity prices which prevent corporate viability. It has little to do with their current balance sheet.

That, however, is irrelevant to the PBOC which is hoping that by taking this step it can magically eliminate trilliions in NPL from commercial bank balance sheets in what is not only the biggest equitization in history, but also the biggest diversion since David Copperfield made the statue of liberty disappear, as instead of keeping the bad loans on the asset side as NPLs, thus assuring at least some recoveries, the banks are crammed down and when the next NPL wave hits, their exposure will be fully wiped out as mere equity stakeholders.

So why are banks agreeing to this? Because they know that as quasi (and not so quasi) state-owned enterprises, China’s commercial banks are wards of the state and when the ultimate impairment wave hits and banks have to write down trillions in “equity investments”, Beijiing will promptly bail them out.

Essentially, in one simple move, Beijing is about to “guarantee” trillions in insolvent Chinese debt.

In short, as pointed out earlier, what the PBOC has proposed is the biggest “shadow nationalization” in history, one which will convert trillions in bad loans in insolvent enterprises into trillions in equity investments in the same enterprises, however without any new money actually coming in! Which means it will be up to new credit investors to prop up these failing businesses for a few more quarters before the reorganized equity also has to be wiped out.

Going back to the Reuters, it reports, that “the new regulations would be promulgated with special approval from the State Council, China’s cabinet-equivalent body, thus skirting the need to revise the current commercial bank law, which prohibits banks from investing in non-financial institutions.”

Of course the reason why commercial bank law prohibited banks from investing in non-financial institutions is precisely because it is a form of nationalization; only this time it will be worse – China will be nationalizing its most insolvent, biggest zombie companies currently in existence.

Reuters also observes that in the past Chinese commercial banks usually dealt with NPLs by selling them off at a discount to state-designated asset management companies. “The AMCs would turn around and attempt to recover the debt or resell it at a profit to distressed debt investors.” That China has given up on this approach confirms that there is just too much NPL supply and not nearly enough potential demand to offload these trillions in bad loans, hence explaining what may be the biggest nationalization in history. 

Finally, Reuters concludes that “the sources did not have further detail about how the banks would value the new stakes, which would represent assets on their balance sheets, or what ratio or amount of NPLs they would be able to convert using this method.” Which is to be expected: in this grand diversion the last thing China would want is to reveal the proper math which would show how both China’s commercial banks, and the government itself, are about to guarantee trillions in insolvent assets.

While this is surely good news for the very short run, as it allows the worst of the worst in China’s insolvent corporate sector to issue even more debt, in the longer run it means that China’s total debt to GDP, which is already at 350% is about to surpass Japan’s gargantuan 400% within a year if not sooner.

via Zero Hedge http://ift.tt/1nyXsZ5 Tyler Durden