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Recently on CNBC, Goldman made its position on gold very clear:

• CNBC: "You would fade this whole gold hike?"
• Goldman's Jeff Currie: "Absolutely"

h/t @RudyHavenstein

Translation: "sell your gold to us" because as usual things are not working out quite as expected for Goldman's clients who listened:

 

And today BofAML's Stephen Suttmeier confirms the bank's constructive view on the precious metal, viewing the breakout above 1,201 as a significant reason to believe Gold may have formed a technical bottom on a longer-term basis…

Gold forms a technical bottom, breaks out of channel

The 61.8% Fibonacci measured move target and an extrapolated 200wk average align at 1,315 and is followed by a full measured move target of 1,375.

 

Silver makes a sputtering breakout

Silver also broke up through resistance provided by a channel and 50wk SMA, though it has since begun to reverse and did so in a less convincing way. Gold made the decisive breakout, not silver, and so we suspect gold may outperform silver overall.

 

And Suttemeier's shorter-term view confirms this…

Gold & Silver: Bullish from Bearish on tactical absolute & relative bottoms

For the first time in a long time, the Philadelphia Stock Exchange Gold and Silver Index (XAU) has broken out on an absolute and relative price basis to put in what appears to be a meaning bottom that is bullish for gold and silver mining stocks.

We will maintain this bullish view as long as the absolute and relative price trends hold above the weekly moving averages, which should provide support on pullbacks. Quite a few Gold and Silver stocks have had 90-day price and volume breakouts.

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

On the heels of the shocking exposure of “Crowds on Demand” – supplying ‘actors’ to various Presidential campaign townhalls (so was this who was booing Trump at the last debate?) – we were inundated with confirmations of such activity. The following letter, to a female actress on Spanish TV was the most blatant…

 

*  *  *

How perfect. We are of course not naive enouigh to be totally surprised by this, but the blatantness in the new normal of bread and circus distraction merely extends a
bothersome trend that seems quite fitting for the smoke and mirrors
driven, celebrity obsessed, hologram society that America has become.

[Various companies are] actually in the business of
providing fake protesters for causes, fake entourages for wanna be
celebrities and seemingly even fake supporters for [Presidential nomination campaigns].

 

“I have worked with dozens of campaigns for
state officials, and 2016 presidential candidates,” Swart told NBC4,
adding that he won’t name any names.

 

“I can’t go in to detail… if I did, nobody would hire us.”

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

Over the weekend, we presented what according to Bank of America was perhaps the last remaining bullish catalyst for a big market move higher when Bank of America’s Michael Hartnett said that “we remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations and credit conditions.”

More importantly, Hartnett warned that a “weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord.” He was envisioning the various key meetings in the coming weeks such as the G20 Shanghai (February 26-27); ECB (March 10), BoJ (March 15) & FOMC (March 16), with an emphasis on the first one as the clearest possible source of “surprise” risk upside.

The BofA strategist laid out a chart showing the relative performance of financial stocks to Treasurys, which has dropped to levels which in the past has always been accompanied by major policy interventions, implying that “the time has come” for another coordinated risk bailout:

As we explained, “Hartnett expects a “Shanghai Accord” to be unveiled next weekend, one where like the Plaza Accord three decades earlier, the Yuan will be massively depreciated, which ironically would halt all piecemeal Yuan devaluation on expectation of future devaluation (as it will have already happened), and reset global monetary policy stability if only for a few more months.”

We concluded that “if next weekend the G-20 disappoints and unveils nothing, the next big leg down in the selloff will have arrived” and as BofA implied, the market could then sell off to the next support level, below the 1,812 which has proven so stable since August.

The only question left was whether or not the G-20 would actually go ahead and satisfy this expectation, or said otherwise, whether the market drop was sufficiently big to force the G-20’s hand.

This morning we got the answer from Jack Lew who in an interview with Bloomberg “downplayed expectations for an emergency response to global market turbulence when Group of 20 finance chiefs and central bankers meet this week in China, calling on nations to do more to boost demand without pursuing unfair currency policies.”

“Don’t expect a crisis response in a non-crisis environment,” Lew said in an interview broadcast Wednesday with David Westin of Bloomberg Television. “This is a moment where you’ve got real economies doing better than markets think in some cases.”

Policy makers from the world’s biggest economies are unlikely to make the kind of detailed national commitments to restore growth they did to at the height of the global financial crisis, Lew said. Instead, the group, which meets in Shanghai Feb. 26-27, may put more “meat on the bones” of the principles it has advocated in recent years, such as by strengthening the pledge that nations will refrain from competitive currency devaluations, he said.

In other words, instead of another monetary policy sugar fix, the US Treasury Secretary is demand that world governments focus on a fiscal boost, one which may have already taken place in China courtesy of the unprecedented surge in loan issuance, which the rest of the world remains deeply mired in political contention which would make a coordinate response highly unlikely.

Lew went on: “While the world economy isn’t in a moment of crisis”, Lew said that “I don’t think it’s unreasonable to have the expectation that coming out of this will be a more stable understanding of what the future may look like.” But don’t expect too much.

Lew’s comments discount the prospect of a coordinated agreement to boost lackluster global growth and restore confidence after a selloff in world stocks to start the year. Some analysts and investors have called for a modern-day Plaza Accord, the 1985 deal among major economies to weaken the dollar and stabilize currency markets.

 

The world’s cloudy growth outlook and policy makers’ potential response will dominate the agenda in Shanghai, according to people familiar with the talks. It’s unlikely to produce the kind of action that came out of the G-20 meeting in London in April 2009, when countries collectively pledged more than $1.1 trillion in stimulus to rejuvenate a then-hobbled global economy.

Instead of a coordinate response, Lew will instead push for a more serious commitment from other G-20 countries to use monetary policy, fiscal measures and structural reforms to stoke demand.

“You can’t count on the United States providing all the demand for the world. You can’t be the consumer of first and last resort,” he said, adding that China can do more to stimulate consumer demand and Europe and Japan can use fiscal policy to boost growth.

In other words, it’s fingerpointing time, with the US now clearly demaning more from China. However, “more” does not mean a devaluation as that would unleash another round of major instability if the recent past is any indication. Lew made that quite explicit:

He said the U.S. will be pushing for a firmer commitment by nations not to try to boost their economies by depreciating their currencies.

 

“If the conversation were to go the other way, and you were to see some reticence to make the commitment to refrain from competitive devaluation and not take it a little bit of a step further, that would be a cause of real concern,” Lew said.

Once again, all attention on China. “While the challenges facing China’s economy are “really quite significant,” Lew said, “they’re being interpreted in a way that is unduly negative.”

Still, he said a lack of communication about the country’s currency policy has “made it very hard for anyone to really understand what they were trying to accomplish.”

Lew reiterated the U.S. position that China needs to let the yuan go both “up and down with markets.”

Yes, down, but not too much down as that would be seen as “competitive devaluation.” Perhaps the irony was lost on the Treasury secretary: “When there is pressure to appreciate, it has to be appreciating,” he said. “When there’s pressure to depreciation, we can’t complain if it depreciates.”

As a result, with the G-20 deus ex machina taken away, risk assets will scramble to find what the next major catalyst will be in the coming month, especially if the US has made it clear it will frown on more aggressive action by either the ECB or the BOJ in the next 30 days.

Clip below:

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

In the lead up to elections last June that saw Turkish President Recep Tayyip Erdogan and the ruling AKP lose their absolute majority in Parliament, Turkey had long been criticized for not doing enough to assist in the fight against ISIS.

In fact, there was quite a bit of evidence to suggest that Ankara was cooperating with the group. For instance, an official familiar with a large cache of intelligence seized in a raid last summer told the Guardian that “direct dealings between Turkish officials and ranking ISIS members was now ‘undeniable.’” Similarly, a former ISIS fighter once told Newsweek that Turkey was allowing ISIS trucks from Raqqa to cross the “border, through Turkey and then back across the border to attack Syrian Kurds in the city of Serekaniye in northern Syria in February.” ISIS members, the source said, would “freely travel through Turkey in a convoy of trucks,” and stop “at safehouses along the way.”

But after last summer’s elections in Turkey, everyone seemingly forgot about Ankara’s apparent complicity when Erdogan granted the US access to Incirlik from which Washington was henceforth allowed to fly combat missions. That, combined with Erdogan’s promise to step up the war on “terror,” was supposed to be “proof” of Turkey’s commitment.

Despite numerous reports to suggest that Turkey wasn’t striking ISIS at all, but rather simply targeting the PKK (Kurdish insurgents with whom Turkey has been at war for years), the mainstream media generally stuck to the script that said Ankara had officially joined the war on Islamic State.

And then, in November, Vladimir Putin put Turkey’s cozy relationship with ISIS back to the spotlight following Ankara’s move to down a Russian warplane near the Syrian border. Since then, the world has begun to question whose side the Turks are really on, especially in light of the evidence Moscow has presented linking Erdogan to Islamic State’s illicit oil trade.

Eyebrows were also raised when Erdogan jailed several generals who dared to inspect a weapons-laden MiT trucks crossing the border with Syria.

This week, we get the latest evidence that Turkey is Islamic State’s number one state sponsor as Cumhuriyet released transcripts of phone calls that allegedly took place between Turkish military officers and Mustafa Demir, the ISIS commander in charge of the Syria-Turkey border.

The transcripts are part of a court case on ISIS at the Ankara 3rd High Criminal Court. “The issues alleged in the case came to light because of an investigation launched following information given by six Turkish citizens whose relatives joined ISIL,” Today’s Zaman reports. “Upon the application by the relatives, monitoring of the communications of 19 people started, and a prosecutor named Derda Gökmen reportedly filed a claim against 27 suspects.”

Below, find the transcripts.

*  *  *

Date: Nov. 25, 2014; 8:26 p.m.

A.A.: Was that you, the ones with a torch?

Mustafa: Well, with a little torch, where are you big brother? At the place where I told you to be?

A.A.: Yeah. We also saw you, your men…

Mustafa: Is it possible for you to arrange that I talk with the commander here, regarding the business here? What if we could establish a contact here as we helped you…

A.A.: Okay. If there are any needs [as far as your request is concerned], [tell them] to inform me here.

Mustafa: If it will be enough to contact you [to settle the issue], no problem.

A.A.: I’ll pass this now. I have two military posts [at the border] there. If worse comes to worst, I’ll tell that to the commander of the station and have him take a look…

**** ****

Time: 7:12 p.m.

Communication made by the telephone registered in the name of A.B.

A.B.: We’re where you gave [him] the vehicle, we are in the mine [field]. We’ve put on a light. We have stuff; come here from that side, the men are here…

Mustafa: Okay, big brother, [I’m] coming.

A.B.: Come urgently; I’m in the mine [field] with a torch. Come running.

Mustafa: Well, big brother, is it the place where I gave First Lieutenant Burak a car?

A.B.: Yeah, just a little further down from that place. Our two vehicles are on the Turkish side [of the border].

Mustafa: Okay.

A.B.: We are also in the mine.

Mustafa: I’ll right be there, big brother.

*  *  *

As a reminder, Erdogan recently threw Can Dundar, editor in chief of Cumhuriyet, and Erdem Gul, the newspaper’s capital correspondent in Ankara, in prison for a controversial story about an alleged arms shipment from Turkish intelligence to Syrian rebels.

We shudder to think what fate awaits the Cumhuriyet employee responsible for leaking these transcripts.

via Zero Hedge http://ift.tt/1LbOX1l Tyler Durden

Three weeks into January things were looking rather grim.

Plunging crude, jitters about the ongoing (and increasingly unpredictable) yuan devaluation, and spillovers to global risk assets stemming from an ill-fated attempt by Chinese regulators to implement a stock market circuit breaker got US equities off to one of their worst Januarys in history.

Compounding the problem, it seemed that the market had all of the sudden woken up to two very important (and very interconnected) facts: 1) central banks are desperate, and 2) sluggish global growth and trade look to have become structural and endemic rather than cyclical and transitory.

All of this weighed heavily on risk appetite and the bears stood by and watched as a kind of slow motion panic spread through markets. Since then, things have stabilized. Sort of. Oil is still a huge question mark and barring a Saudi production cut (which oil minister al-Naimi made clear on Tuesday isn’t going to happen) will likely continue to fuel the global disinflationary impulse. Meanwhile, markets are asking more questions about negative rates and central banker omnipotence every day.

For those wondering whether we’ll be riding the short squeeze euphoria wave higher, Goldman’s answer is definitively “no.” In a note out this morning, the bank says short covering and positioning have fueled the bounce and that a sustained rebound is exceptionally unlikely until either valuations get significantly more attractive or inflation expectations stabilize.

*  *  *

From Goldman

Over the past couple of weeks, it would appear that many of the worries that beset the markets through January have faded. But we think it is risky to read too much into price action currently. Volatility remains very high and much of the moves may reflect positioning rather than a genuine change of view about fundamentals. Remember that at the heart of the correction there has been a growing concern about growth and, with it, the risks of deflation.

The rally in the equity market has occurred despite further declines in inflation expectations (and bond yields). In Europe 5 year-5 year forward inflation swaps (which Mr. Draghi has emphasized in the past) have recently hit an all-time low.

Even in the US the market is pricing core CPI inflation to turn negative in 1-years’ time, an outcome that did not occur even in 2008-2009; the 5-year/5-year inflation breakeven rate is only at 1.45% – well below the Fed’s target. Ironically the stabilization in oil prices and EM assets that has been at the core of recent short covering and recovery in risk appetite was probably explained initially more by the fear of weaker data than confidence in a genuine economic recovery. Concerns about a broadening out of the manufacturing downturn in January to the broader economy, together with falling inflation expectations and tightening financial conditions, pushed out the expected timing of interest rate rises. This, in turn, has capped the rise in the US dollar thereby alleviating some pressure on commodity prices and EM currencies.

Another critical ingredient of the rebound in risk assets has been the strengthening of the CNY since February and the narrowing gaps between CNY and CNH. Some would also point to a more stable price for oil which likely led to some short covering and resulted in mining and oil moving to the top of the best performing sector list year to date. However, this may be premature. Hopes of an OPEC deal explained some of the stability in oil prices, but our commodity team expects oil prices to remain volatile and oscillate between $20/bbl and $40/bbl in the near term.

But there has been a roughly 8% rally since the trough – does this mark the start of a sustained recovery in the index?

On the valuation front the picture is complicated. Anything that compares equites to bonds makes equities look very cheap. But on the other hand absolute valuations are not yet cheap – prices have fallen but so have earnings expectations.

As a result, most valuation measures have increased in recent years, leaving equities vulnerable to perceived increases in risks. It is for this reason that we think a continued meaningful rise in markets is not likely unless either valuations have fallen further first, or the macro data shows more meaningful signs of improvement and the fears about deflation shift towards fears of missing the leverage to inflation.

For equities to move meaningfully higher from here, we think valuations would need to be cheaper first (around 11x or 12x forward earnings compared with 14x currently). Without this, the market is likely to remain volatile, but tread water until there is a clear shift in inflation expectations.

*  *  *

In other words, Goldman thinks stocks need to fall some 20% from here before the buyers come out in earnest.

Goldman’s conclusion: there will be no sustained rally until at least one of the following three things occurs: 1) Valuations become cheap; 2) The broad macro data stabilizes enough to shift up inflation expectations and/or; 3) Policy action becomes more supportive.

Put simply, number 2 isn’t going to happen. At least not for the foreseeable future. Oil prices would need to rise dramatically, the global deflationary supply glut would need to moderate on the back of a sustained uptick in aggregate demand, and China would need to stop exporting deflation.

As for number 3, monetary policy can’t get any more supportive. Literally. Rates are so low that the cash ban calls are rolling in and for a variety of reasons, policy makers across the globe have been reluctant to embark on massive fiscal stimulus programs. 

Finally, as for number 1, either earnings would need to rise or else stocks need to fall. Considering the fact that the world looks very likely to careen into recession just as primary market appettite for the bond deals that are fueling bottom line-inflating buybacks dissipates, we know which alternative seems more likely to us.

via Zero Hedge http://ift.tt/24oYjgR Tyler Durden

• Shares fall with oil prices, yen in demand (Reuters)
• Trump’s third straight win has rivals looking for answers (Reuters)
• How Marco Rubio Blunted Ted Cruz—and Boosted Donald Trump (BBG)
• Donald Trump Seals GOP Front-Runner Status With Nevada Win (WSJ)
• Fischer says no Fed plan to move to negative interest rates (Reuters)
• Lew Says Don’t Expect `Crisis Response’ From Group of 20 Meeting (BBG)
• Solid support for Apple in iPhone encryption fight (Reuters)
• This Year’s Biggest IPO Is a Blank Check for the Oil Business (WSJ)
• Another Oil Crash Is Coming, and There May Be No Recovery (BBG)
• Goldman Sachs Banker Who Had Ties to 1MDB Leaves Bank (WSJ)
• Chesapeake Energy shares tumble after company’s loss widens, unveils drastic capex cuts (MW)
• French special forces waging ‘secret war’ in Libya (Reuters)
• China Inc.’s Nuclear-Power Push (WSJ)
• How Low Could Pound Go in a `Brexit’? Economists See 1985 Levels (BBG)
• Chesapeake to Cover $500 Million Debt Tab as Asset Sales Swell (BBG)
• AIG Says Goodbye to Guy Who Knew Where the Bodies Were Buried (BBG)

 

Overnight Media Digest

WSJ

– Honeywell International Inc kept the pressure on rival United Technologies Corp to engage in merger talks, saying there were no major regulatory obstacles to a combination of the two industrial conglomerates (http://on.wsj.com/1oFa9mR)

– Western Digital Corp said a Chinese company backed out of a $3.78 billion deal to invest in the disk drive maker, citing a decision by U.S. authorities to investigate the transaction on national security grounds. (http://on.wsj.com/21cBzkY)

– Same-day delivery startup Deliv Inc. is getting a funding boost from an unlikely source: United Parcel Service Inc. (http://on.wsj.com/1R06nuE)

– The chief executive of leading Canadian oil producer Suncor Energy Inc said on Tuesday that his company will increase output even if crude prices weaken further, while vowing it will emerge stronger than ever from the current commodity industry downturn.(http://on.wsj.com/1OtyqAO)

 

FT

Deutsche Boerse and the London Stock Exchange are making a third attempt at a merger that would create a European trading powerhouse that could better compete against U.S. rivals encroaching on their turf.

British luxury carmaker Aston Martin said it chose St. Athan in Wales as its second manufacturing site for the new crossover DBX car as part of its 200 million pound ($280.32 million) investment in new products and facilities.

Mars Inc has recalled chocolate bars and other products in 55 countries, mainly in Europe, due to choking risk after a piece of plastic was found in a Snickers bar in Germany.

 

NYT

– The Justice Department is demanding Apple’s help to unlock at least nine iPhones nationwide, in addition to the phone used by one of the San Bernardino, California attackers. (http://nyti.ms/1p2HNTm)

– Saudi Arabia’s petroleum minister on Tuesday ruled out the possibility that a recently announced oil production freeze by several countries might lead to cuts to reverse the plunge in oil prices. (http://nyti.ms/1QZZDNk)

– More than a year after defective Takata airbags led to recalls and at least two fatalities, company officials in Japan presented falsified test data about a new component’s design to Honda, their largest customer, according to internal documents.(http://nyti.ms/1RmcZpO)

– Viacom announced on Tuesday that it was pursuing a deal to sell a minority stake in its Paramount Pictures film and television studio after being approached by several strategic investors.(http://nyti.ms/1KJ09T9)

 

Canada

THE GLOBE AND MAIL

** Shoppers Drug Mart Corp, Canada’s biggest drugstore chain, is exploring the possibility of getting into medical-marijuana sales in a move that would dramatically alter the landscape of the new industry, bringing one of the country’s best-known retailers into the business if the strategy went ahead. (http://bit.ly/1LFfQWs)

** Canada’s spy agencies have tracked 180 Canadians who are engaged with terrorist organizations abroad, while another 60 have returned home. (http://bit.ly/1STm9gM)

** The Liberal government will introduce climate legislation on Wednesday, and on Thursday it will unveil detailed regulations for its long-promised cap-and-trade regime that aims to hit an aggressive 2020 greenhouse gas emissions target.(http://bit.ly/1Qc1xKY)

NATIONAL POST

** Finance Minister Bill Morneau’s federal budget in March is set to include C$1 billion ($723 million) in targeted relief for oil-producing provinces that are coping with a severe economic downturn. (http://bit.ly/1TyAkGI)

** Fares on an express train from downtown Toronto to Pearson international airport are being slashed by more than half because of lower-than-expected ridership. Since Union-Pearson Express launched in June, the one-way fare was decried by many as too expensive. (http://bit.ly/1WInaGx)

 

Britain

The Times

* Time Inc, the owner of world-famous magazines including Time, People, Sports Illustrated and Fortune, is understood to be exploring a bid for the core businesses of Yahoo Inc (http://thetim.es/1PXuTyQ)

* The London Stock Exchange Group PLC confirmed yesterday that it is in talks with a German rival over a 20 billion pounds ($27.99 billion) merger to create one of the largest market operators. Shares in the FTSE 100 company closed up by more than 13 per cent as investors bet on a possible bidding war for the LSE, which has had detailed negotiations with the Frankfurt-based Deutsche Börse. (http://thetim.es/1TxPYlP)

The Guardian

* Britain is setting a dangerous precedent by undermining human rights and contributing to a worldwide “culture of impunity”, Amnesty International has said in its annual report on the state of human rights. Plans to scrap the Human Rights Act, the UK’s absence from EU refugee resettlement schemes, proposed new spying laws and the alleged downgrading of human rights as a Foreign Office priority in favour of commercial deals are all cited by the group as evidence of a trend. (http://bit.ly/1QwSDXJ)

* George Osborne’s pension overhaul could trigger the next major wave of mis-selling claims, according to a report by the public spending watchdog. The National Audit Office has highlighted concerns that freedoms introduced last April, which allowed pensioners to cash in their savings, could lead to widespread exploitation. (http://bit.ly/1S02dHR)

The Telegraph

* London’s greatest strength is its access to the single market of the European Union, according to the capital’s business leaders. 95 percent of bosses polled by the Confederation of British Industry (CBI) and real estate firm CBRE said that London’s access to European markets was its biggest strength. The surveyed business leaders represented companies with around 471,000 employees. (http://bit.ly/1oFUqDU)

* Britain must stay in the European Union so it can protect itself from “grave security threats” caused by Isil and Russia, some the country’s most senior former military commanders say. In a letter to The Telegraph, 13 former Armed Forces chiefs say that they “believe strongly that it is in our national interest to remain an EU member”. (http://bit.ly/1ozSegv)

Sky News

* The maker of Mars and Snickers has recalled chocolate bars in 55 countries after pieces of plastic were found in its products. In the UK, Mars Funsize and Milky Way Funsize bars, Snickers Miniatures, some variety packs and Celebrations boxes with best before dates ranging from 8 May 2016 and 2 October 2016 are affected by the recall, and should not be eaten. (http://bit.ly/1QvPhEi)

* Johnson & Johnson has been ordered to pay $72 mln to the family of a woman whose death from ovarian cancer was linked to the company’s talc-based baby powder.(http://bit.ly/1ozZdpP)

The Independent

* Britain is a deeply Eurosceptic country but voters are still likely to decide to remain in the European Union when forced to choose in June’s referendum, the most representative polling on the issue so far has found. In research highlighting the dilemma for the Leave campaign, the National Centre for Social Research found that two-thirds of the electorate were unhappy with Britain’s current membership terms. (http://ind.pn/1RZSUrx)

* Scotland’s budget will be protected for the first six years after the devolution of major new tax and welfare powers from Westminster, under a historic deal agreed by the Scottish and UK Governments following almost a year of negotiations. The agreement, which was announced simultaneously in Edinburgh by Scotland’s First Minister Nicola Sturgeon and in London by the Chancellor George Osborne, will require both governments to observe a transitional period lasting until March 2022, during which time the Scottish Parliament’s budget cannot be cut. (http://ind.pn/1KIwYQ6)

 

via Zero Hedge http://ift.tt/1T6AcQn Tyler Durden

Back in December we warned that Brazil faced a “disastrous downgrade debacle” that would eventually see the beleaguered South American nation cut to junk by all three major ratings agencies. 

S&P had already thrown the country into the junk bin and just six days after our warning, Fitch followed suit.

Between the country’s seemingly intractable political crisis and worsening public finances, the outlook is exceptionally dire and just moments ago, Moody’s cut Brazil to junk as well.

• MOODY’S DOWNGRADES BRAZIL’S ISSUER, BOND RATINGS TO Ba2 W/ A
• BRAZIL’S ISSUER & BOND RATINGS CUT TO Ba2 BY MOODY’S
• DETERIORATING DEBT METRICS WILL RESULT IN A MATERIALLY WEAKER CREDIT PROFILE IN THE COMING YEARS

Watch the BRL and the Bovespa. Things likely won’t be pretty.

Below, find the rationale.

*  *  *

From Moody’s

Moody’s downgrades Brazil’s issuer and bond ratings to Ba2 with a negative outlook

The downgrade was driven by

• The prospect of further deterioration in Brazil’s debt metrics in a low growth environment, with the government’s debt likely to exceed 80% of GDP within three years; and
• The challenging political dynamics, which will continue to complicate the authorities’ fiscal consolidation efforts and delay structural reforms.

The negative outlook reflects the view that risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil’s debt profile over the rating horizon.

RATIONALE FOR THE DOWNGRADE

Brazil’s credit metrics have deteriorated materially since the Baa3 rating with a stable outlook was assigned in August 2015. That deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period. The downgrade to Ba2 is intended to captures that ongoing deterioration, while the negative outlook contemplates the risks of further deterioration to Brazil’s credit profile emanating from macroeconomic shocks, deeper political dysfunction or the need to support government-related entities.

FIRST DRIVER — DETERIORATING DEBT METRICS WILL RESULT IN A MATERIALLY WEAKER CREDIT PROFILE IN THE COMING YEARS

Macroeconomic and fiscal developments over the next two to three years are expected to produce a materially weaker credit profile. The government debt burden will continue to increase during 2016-18 and will likely exceed 80% of GDP before stabilizing. Growth dynamics will remain weak in the coming years increasing the pressure on fiscal policy. We expect GDP growth to average a negative 0.5% over the period 2016-18. Additionally, we expect interest rates to remain elevated in real terms, which will contribute to low debt affordability with interest payments accounting for more than 20% of government revenues.

SECOND DRIVER — CHALLENGING POLITICAL DYNAMICS WILL COMPLICATE FISCAL CONSOLIDATION EFFORTS AND DELAY STRUCTURAL REFORMS

The rise in government debt will partly reflect the slow progress expected in achieving meaningful fiscal consolidation. Addressing Brazil’s fiscal challenges will require significant political will and consensus to reverse the upward trend in public spending and stabilize the debt trajectory. The government is working to garner support in Congress for key reform bills, including to raise the minimum retirement age, improve fiscal flexibility, and reduce revenue earmarking. However, while discussion of structural reforms is a positive development, their approval by Congress will be difficult given the government’s limited support in Congress and ongoing political challenges facing the President. And weak political support for the President and her administration offers little prospect of more far-reaching reforms over the rating horizon.

RATIONALE FOR THE NEGATIVE OUTLOOK

In Moody’s view, progress in fiscal consolidation will be slow, and economic growth anemic, for the next two to three years. The Ba2 rating level builds in the assumption that the credit profile will deteriorate over that period. However, the negative outlook reflects the uncertainty surrounding the interaction between political, economic and financial dynamics in Brazil and in consequence the potential for additional shocks materializing, which would put further downward pressure on the sovereign credit profile. Additional shocks might relate to the impact of investor sentiment on the recovery in growth; to political events which lower still further the government’s capacity to make progress on structural reforms; and/or to the crystallization of contingent liabilities on the government’s balance sheet.

via Zero Hedge http://ift.tt/1p3PbOo Tyler Durden