Just over two weeks ago, JPM’s Marko Kolanovic, whose unprecedented ability to predict short-term market moves is starting to seem a little bizarre, warned that the next “significant risk for the S&P500” was the bursting of the “macro momentum bubble.” Specifically, he said that there is an emerging negative feedback loop that is “becoming a significant risk for the S&P 500” adding that “as some assets are near the top and others near the bottom of their historical ranges, we are obviously not experiencing an asset bubble of all risky assets, but rather a bubble in relative performance: we call it a Macro-Momentum bubble.”

In retrospect, following tremendous valuation repricings of several tech stocks, last week’s LinkedIn devastation being the most notable, he was once again right. And over the weekend, he did what he has every right to do: take another well-deserved victory lap.

This is what he said in his February Market Commentary: “Tech Bubble Burst?”

In our 2016 outlook and recent reports, we identified a macro momentum bubble that developed over the past years. We explained its drivers (central banks, passive assets/momentum strategies, etc.) and called for value to outperform momentum assets. We also highlighted the risk of a bear market and recommended increasing exposure to gold and cash as well as increasing exposure to nondollar assets relative to the S&P 500 (EM Equities, Commodities, Value Stocks, etc.). Our view was that a likely catalyst would be the Fed converging toward ECB/BOJ (rather than proceed with planned ~12 rate hikes by end of 2018). In line with these published forecasts, the best performing assets YTD have been Gold (+9%) and VIX (+20%) while S&P 500 and DXY are down (-7%, and -2%, respectively). Momentum stocks are down more than 10% with an acceleration of the selloff in last days. Emerging Market and Energy stocks are starting to outperform the S&P 500 (MSCI Latin America by +5% and Energy by +1% vs. S&P 500 YTD). This specific pattern of asset moves is consistent with a Value-Momentum convergence. We think the outperformance of value assets over momentum assets is likely to continue.

Investors often ask us how significant are distortions and risks in equity sectors that are related to a “macro momentum bubble.” Specifically, the question is that of valuations in the Technology sector, i.e., “is there a Tech bubble”? Before we share our views, let’s first review how passive investing and momentum strategies may have impacted performance of various equity sectors.

Imagine a world in which most of the assets are passively managed and investors are focused on liquidity and short-term risk/reward. Companies that increased in size recently would keep on increasing, and those that got smaller would see further outflows. Past winners would also be considered low-risk holdings compared to past losers. The most successful managers would be those that replace fundamental valuation with a simple rule: buy what went up yesterday and sell what went down. Passive funds would do the same. It is hard to imagine this makes economic sense long term, but it is close to what equity markets experienced over the past several years. In 2013, the Sharpe ratio of the S&P 500 was ~2.7. Assuming a normal distribution of active asset returns, one could (incorrectly) conclude that being just an average (passive) investor one will outperform ~95% of all active investors. In 2014 and 2015, various momentum strategies delivered Sharpe ratios >2. The winning strategy was not just to go with the crowd, but to do what the crowd did yesterday. This type of trend following does not only apply to extrapolating price trends, but also extrapolating trends in fundamental stock data such as growth and earnings. Beyond a certain point, passive investing and trend following are bound to result in distorted equity valuations and misallocation of capital.

While some parts of the Technology sector certainly have reasonable and even low valuations (see our US equity strategy outlook), segments of the Tech sector disproportionally benefited from momentum investing as well as investing based on extrapolation of past growth rates. For instance, a popular group of stocks held by investors is known by the abbreviation “FANG” (Facebook, Amazon, Netflix, Google). We use these stocks as an illustration for a broader group of similar stocks that have the highest rankings according to momentum and growth metrics (and surprisingly in some cases even low volatility metrics). Given that traditional value metrics look expensive when applied to this group, one can compare these momentum/growth companies on a new set of metrics. For instance, one  can look at the ratio of current price to earnings that the company delivered over all of its lifetime (instead of just the past year). Another metric could be a ratio of CEO or founder’s net worth to total company earnings delivered during its lifetime (see below):

Aggregating all FANG earnings since these companies were listed, one arrives at a ratio of current price to all earnings since inception of ~16x. This can be contrasted to a ratio of price to last years’ earnings for all other S&P 500 companies also at ~16x. We think this is extraordinary given that FANGs are neither small nor new companies. In fact, these are some of the largest companies in the S&P 500 and among the largest holdings of US retirees. Given that the three largest FANG stocks are now twice more valuable than the entire US S&P small-cap universe (600 companies), a legitimate question to ask would be “is such a high allocation by long-term investors to these stocks prudent?” Statistically, over a long period of time smaller companies outperform mega-caps ~75% of times. Note also that the current size ratio of mega-cap stocks to small-cap stocks is at highest level since the tech bubble of 2000. Furthermore, such allocation is also questionable from a risk angle. For example, the idiosyncratic risk of holding three stocks in one sector is certainly much higher than the risk of owning, e.g., ~1,000 medium- or small-cap companies diversified across all sectors and industries.

Investors in high-growth stocks expect innovations to drive growth and sustain high valuation. They may even put their hopes in moonshot projects such as cars built by electronics makers, car makers building spaceships, or internet companies building drones. While many of these could result in important technological breakthroughs, they may also be signs of excess and destruction of shareholders’ capital in the future. Recent examples of capital impairment in the tech sector are illustrated here and here, and more peculiar examples of past excess can be found here and here. In addition to extrapolated and often optimistic growth forecasts, some of the tech sub-industries have high idiosyncratic risks that are likely underappreciated by the market. Standard valuations models incorporate revenue, growth, and profit forecasts but often do not discount for the lifecycle risk of a business. To illustrate: while we are still traveling in aircraft designed over 40 years ago, social network users’ preferences have changed drastically over the past decade (e.g., Friendster and Myspace). A shorter lifecycle is related to low barriers to entry and rapid changes in what is deemed fashionable by young generations (e.g., one cannot build a jetliner in a dorm room, and they don’t go out of fashion as apps do).

In summary, we think that the biases of momentum investing and passive indexation have resulted in valuation distortions across assets as well as equity segments including Technology. Over the past years this trend has picked winning assets, sectors, and stocks often with less regard to fundamental valuation and more regard to momentum and extrapolated growth. We believe that 2016 may result in a reversion of this trend that will give an opportunity to active and value investors to outperform passive indices and momentum investors. Even if this rebalancing comes as a result of market volatility and broader equity declines, long term it will benefit capital markets and the efficient allocation of capital.

* * *

Only problem is that this capital reallocation will means countless momentum chasers ‘smart money managers’ will be out of a job in very short notice.

Then again, judging by some initial reactions, even formerly steadfast believers in the FANGs are starting to bail: moments ago CNBC reported that Mark Cuban announced that he purchased options to sell against his entire stake in Netflix, to wit: “For those of following my stock moves, I just bought puts against my entire Netflix position.“

Cuban posted comments on Cyber Dust social media platform on Friday. Result: NFLX already down -4%, with FB and other tech momos hot on its heels.

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Gold is now up over 13% from its pre-Fed rate-hike lows, having surged through its 200-day moving average by the most in 2 years. As bank risk spikes globally, it appears bonds & bullion are the investment of choice once again in the face of systemic fragility concerns. At 4-month highs, gold is nearing a crucial breakout point…

After the heavy volume puke in gold after the jobs data, buyers have stepped back in size…

 

Pushing the precious metal furthest above it 200DMA in 2 years to 4-month highs..

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While the ongoing slaughter in European bank credit, and mostly counterparty risk, is troubling, it is nothing new: we have been showing it for over a month, most recently on Friday in “European Bank Risk Soars To 3 Year Highs, US Risk Rising.”

 

And yet there is a new element to the latest European selloff, one which turned vicious just minutes after Europe opened for trading this morning with not just commercial banks (who are now all subject to bail-ins courtesy of the BRRD) being dumped with the Deutsche Bank water, but peripheral spreads and equity markets have all joined in.

Case in point: Spanish, Portuguese and Italian yields and spreads to Germany are blowing out…

 

… while the Athens stock market just dropped to the lowest level since 1990, as the Greek banking index just crashed over 21% to a new all time low.

Why the sudden and broad revulsion to everything European? Isn’t China’s devaluation and capital outflow enough worries for the shaky stock market? Or does China being offline for the next week demand that the market find something else to obsess over?

Perhaps the reason for the shift in market sentiment, which appears to have realized once more that Europe is not at all fixed, had to do with the following note out of Morgan Stanely’s equity strategist, Graham Secker, which we highlighted yesterday, and which admitted that in addition to everything else, it is time to once again panic about Europe.

One noteworthy aspect in the current risk-off environment is the lack of peripheral spread widening in Europe; this is unusual based on performance patterns during this cycle and most likely reflects the ECB’s substantial QE programme. While the region is often perceived as a relative consensus overweight among equity investors, we are more downbeat and prefer the US and Japan instead. Our European caution primarily reflects the prospect of further earnings disappointment across the region, but we are also wary of any resumption of geopolitical concerns.

 

Recent investor caution tends to focus on fears of excess USD strength, low oil prices and/or China, but we think it is quite plausible that Europe moves back up the pecking order (to its more usual place some would say!) as we move through 2016. The UK’s forthcoming referendum on EU membership, likely to take place in June, may appear the most plausible catalyst in the short term to raise regional risk premia, but the ongoing migrant issue risks eroding political cohesion over the medium term and political uncertainty is rising in the periphery. Greece has a daunting debt repayment due this summer, Spain is currently without a government, new European regulations are preventing Italy from adopting an effective ‘bad bank’ solution and the recently elected socialist government in Portugal is reversing course on prior austerity and competitiveness improvements. During a cyclical upswing, markets are prone to overlook such concerns, but the opposite would be true if growth starts to relapse.

Yesterday, we promptly thanked Mr. Secker for the reminder…

MS: “One noteworthy aspect in the current risk-off environment is the lack of peripheral spread widening in Europe”. thanks for the reminder

— zerohedge (@zerohedge) February 7, 2016

… and, judging by today’s action where Europe is once again not only not fixed, but suddenly very much broken once more, so are all other capital markets.

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For the first time since 2012, Bafin – Germany’s banking regulator, which for a minute looked like it might actually accuse Anshu Jain of lying about LIBOR – has closed a bank.

All financial transactions by Maple Bank of Canada’s German subsidiary have been halted on the grounds the operation has too much debt or, as BaFin put it, there’s “a prohibition on transfer of ownership and payment, due to imminent over indebtedness.”

Maple – which describes itself as having expertise in “equity and fixed income trading, repos and securities lending, deposits, structured products and institutional sale” – has obligations of around €2.6 billion and assets of €5 billion meaning it “has no systemic relevance” – to quote BaFin again.

It is however, “relevant” for National Bank – Canada’s sixth largest financial institution which has a 24.9% stake in Maple. National will now take a full reserve against that stake, the carrying value of which is CAD165 million. “That means National Bank’s CET 1 capital ratio will take a 13-basis-point hit,” WSJ notes, adding that “this isn’t the first time that National Bank has seen its regulatory capital level dented in recent months.”

No, it’s not, and this “isn’t the first time” that Maple Bank has been under the microscope.

As The New York Times reminds us, Maple “played a prominent role in attempts by the Porsche family to take over Volkswagen several years ago [by] helping Porsche lock up Volkswagen shares using a complex combination of derivatives.”

Former Porsche CEO Wendelin Wiedeking and former CFO Holger Härter are on trial in Stuttgart, where the pair face allegations that they purposefully lied to investors in 2008 to inflate VW shares. “Porsche was threatened financially at the time, according to prosecutors, because a sharp decline in Volkswagen shares forced it to post cash to protect Maple Bank from losses,” The Times adds.

In other words, Maple Bank was the institution at the center of the infamous short squeeze that caused VW shares to soar in October of 2008 when the automaker briefly became the most valuable company on the planet. At the time, the company’s market cap was greater than Apple, Philip Morris, and Intel combined.

Maple Bank is also under investigation for tax “irregularities.” Last September, German prosecutors raided the bank’s offices and homes tied to its employees in what Reuters called “a probe of serious tax evasion and money laundering connected to dividend stripping.” Prosecutors alleged that at least 11 people illegally claimed some €100 million in tax paid using an illegal dividend arb. “Previous cases of dividend stripping in Germany have involved buying a stock just before losing rights to a dividend, then selling it, taking advantage of a now-closed legal loophole that allowed both buyer and seller to reclaim capital gains tax,” Reuters said, outlining the circumstances behind the infraction.

Apparently, once Maple Bank made the government mandated provisions for taxes, its financial situation deteriorated meaningfuly. In other words, Germany effectively put the bank out of business. “Frankfurt prosecutors allege that Maple Bank and its business partners have bilked the taxpayer of some 450 million euros,” Reuters added on Sunday. “The bank has an equity capital of just 300 million euros.”

As for National Bank, the lender said on Sunday that it “has advised the German authorities that if it is determined portions of dividends received from Maple Financial Group Inc. could be reasonably attributable to tax fraud by Maple Bank, arrangements will be made to repay those amounts to the relevant authority.” CEO Louis Vachon is “surprised” at the developments, but says his bank’s results will not be materially affected by developments in Germany. 

Now if only BaFin would get serious about investigating Europe’s largest bank which, unlike Maple, has quite a bit of “systemic relevance,” we might be able to take the regulator seriously. 

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• European stocks plunge as Lunar New Year offers no cheer (Reuters)
• European Stocks Fall, Credit Weakens as Signs of Distress Abound (BBG)
• Management trouble at world’s biggest hedge fund: Bridgewater succession plan in flux as heir Greg Jensen steps back (FT)
• U.S. athletes should consider not attending Olympics if fear Zika – officials (Reuters)
• Geithner Gets JPMorgan Credit Line to Invest With Warburg Pincus (BBG)
• Top Clinton Donor Wants a Law Against $1 Million Gifts Like His (BBG)
• Private equity groups under pressure to buy own stock (FT)
• Before New Hampshire primary, Trump campaign shows mellower side (Reuters)
• Big Companies Pull Back After Rough Quarter (WSJ)
• A Dying Breed: Currency Traders Are Left Out of New Wall Street (BBG)
• Bill Clinton Launches Attack on Bernie Sanders in New Hampshire (NBC)
• Consumption Seen Dropping as Japan’s Workers Eke Out 0.1% Rise (BBG)
• Peyton Manning handed Budweiser $3.2 million in free ads after the Super Bowl (MarketWatch)
• Guggenheim’s $240 Billion Man Says Nasdaq to Tumble Below 3,800 (BBG)
• Some Australian asylum seekers to be deported have cancer, terminal illnesses (Reuters)
• High-Value Banknotes Should Be Binned to Fight Crime, Sands Says (BBG)
• Job Site Hired Raises $40 Million and Forecasts Profit by 2017 (BBG)

 

Overnight Media Digest

WSJ

– Turkey’s growing hostility towards Syrian Kurdish fighters on charges of professed smuggling of weapons to members of the Kurdistan Workers’ Party in Syria, has strained U.S.-Turkish relations.(http://on.wsj.com/1mmyjAm)

– North Korea’s launch of a long-range rocket triggered condemnation and prompted Washington and Seoul to formalize talks over deploying an advanced missile shield to South Korea, a move China strongly opposes.(http://on.wsj.com/1nQ4aKG)

– National Bank of Canada warned that its regulatory-capital level would take a hit after Germany’s financial watchdog BaFin effectively shuttered one of its foreign investments, the German unit of Maple Financial Group.(http://on.wsj.com/1ojfxeV)

– After a tough end to 2015, big companies like Johnson & Johnson and Yahoo Inc are starting the new year with a tight rein on capital spending including layoffs, as they seek to cope with sluggish industrial demand and uncertainties about the continued resilience of the American consumer. (http://on.wsj.com/1SXLYL8)

– China’s foreign-exchange reserves fell to the lowest level in more than three years in January, raising questions about how long Beijing can keep burning through the rainy-day funds to defend the yuan without triggering a huge flight of capital.(http://on.wsj.com/1L7fdEG)

– Hedge funds are betting the next bond sector to crack will be the $4.5 trillion market for the safest U.S. corporate debt and it won’t be confined only to energy and junk bonds. (http://on.wsj.com/1Q2paVg)

 

FT

* French banks are now under increased investor pressure reduce branches and push customers to digital platforms to cut costs. “Shareholders are asking for a commitment to slim down branches and cut costs,” David Benamou, head of investment at France’s Axiom Alternative Investments said.

* Network Rail is urging ministers not to privatise the company and sell off large sections of Britain’s rail infrastructure. Network Rail, which is publicly owned, says that breaking it up would make train travel more expensive, because it would undermine its ability to buy material in bulk at a lower price.

* UK government and regulators have initiated a push to change key aspects of the new Solvency II regime for insurers, citing concerns it is making some companies less competitive. The Treasury and the Bank of England highlighted areas that they would want to be altered as the government calls for wide and earlier review of the rules.

* PSA Peugeot Citroen is to give over 400 million euros ($445.60 million) worth of compensation to Iran’s biggest carmaker for losses it incurred when the French carmaker left the country. Iran Khodro said that Peugeot had agreed to the arrangement to make up for problems caused in 2012, when it withdrew from Iran to comply with international sanctions against Tehran over its nuclear programme

 

NYT

– European officials knew that Volkswagen diesels fell short of pollution limits years before the company became engulfed in an emissions cheating scandal, records show. (http://nyti.ms/1Q4pqcI)

– Tidjane Thiam, chief executive of Credit Suisse, has asked the company’s board to reduce his bonus, days after the Swiss bank reported a multi billion dollar loss in the fourth quarter. (http://nyti.ms/1Q4puZV)

– German banking regulator, known as Bafin, said on Sunday that it ordered a halt to financial transactions by Maple Bank, the German subsidiary of Maple Financial Group of Canada, that played a prominent role in attempts by the Porsche family to take over Volkswagen several years ago. (http://nyti.ms/1KAif9E)

– The infighting among lawyers for the plaintiffs suing General Motors over a flawed ignition switch intensified after one who helped uncover the defect, Lance Cooper, sharpened his attacks against another who is heading the case, Robert C Hilliard. (http://nyti.ms/1XcNysZ)

 

Britain

The Times

– The SFO accused Pinsent Masons yesterday of “deliberately” misinterpreting data showing that while the number of whistleblowing reports to the agency had risen last year by 324 to 2,832, only 16 new investigations had been opened. (http://thetim.es/1nRIT3q)

– A partial break-up and privatisation of Network Rail is back on the agenda under a plan being drawn up by Nicola Shaw, the boss of HS1. The chief executive of the high-speed route is considering proposals to spin off individual lines to investors and introduce an agency to oversee the industry at arm’s length from government. (http://thetim.es/1nRIZrP)

The Guardian

– Next has been criticised by a group of heavyweight investors who say the company failed to act on a warning that could have prevented it from breaking company law, forcing the retail group to hold an expensive shareholder meeting this week. (http://bit.ly/1nRIJJr)

– Workers at Google Ireland, the search group’s European sales hub, earn less than half the 160,000 pound average wage of colleagues in London despite the British sales team only providing a supporting role to their Irish counterparts. (http://bit.ly/1nRIQo4)

The Telegraph

– HSBC Holdings Plc’s board is expected to come to a decision on the location of its headquarters in the coming days after an unexpectedly long-running review of the future of the British-based bank. A review was launched last year and initially was expected to reach a conclusion by the end of 2015. Investors are increasingly convinced that the bank will not quit the UK. (http://bit.ly/1nRIAph)

– Business Growth Fund, the nearly five year old equity fund, has reported a record month for investments, backing UK firms with 50 million pounds worth of capital in January alone. The fund, which has a 2.5 billion pound warchest of capital from Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc , Royal Bank of Scotland Group Plc and Standard Chartered Plc, has disclosed two of the investments made during that month. (http://bit.ly/1nRIFJI)

Sky News

– Ministers should sanction the construction of a new runway at Gatwick Airport and end dithering over the crucial issue of aviation capacity, billionaire hedge fund manager Crispin Odey and chief executive of Legal & General Nigel Wilson said. (http://bit.ly/1nRIduS)

– The long-serving finance director of BT Groupm Plc, Tony Chanmugam, is preparing to step down within months of the telecommunications regulator delivering its verdict on the company’s structure. (http://bit.ly/1nRIePk)

 

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The biggest event of the weekend, if not the month, was China’s FX reserve outflow update, which at $100BN was slightly better than the $120BN expected (it pushed China’s reserves to the lowest in nearly 4 years) but it was in the “no man’s land” between the BofA best case scenario ($37.5BN), and the GS worst case ($197BN). And while there was some hope this number, together with China being offline for the next week could lead to some stability across markets, this is what we said yesterday about this indecisive number: “for markets, what this means is that the next month will likely be market by more of the same sharp, illiquid volatility that has characterized 2016 so far.”

So far this prediction has proven to be spot on, because while there was some initial risk on sentiment in the Asian ex-China session, where the Nikkei rose 1.1% on the back of an early ramp in the USDJPY (following the latest abysmal wage data out of Japan), everything went from bad to worse once Europe opened, and things started going “bump in the morning” across the European banking sector, where not only has it been more of the same with CDS spreads for major banks – most notably Deutsche Bank – continuing their surge wider, but also EM spreads to Bunds all following, with the Portugal-Germany Yield spread blowing out above 300 bps for the first time since 2014 and other peripheral nations following, such as Italy shown in the chart below:

Italy – Germany http://pic.twitter.com/XwQOsi2grT

— Guy Johnson (@GuyJohnsonTV) February 8, 2016

Here is a brief summary of the European carnage so far:

• European banks decline, SX7P close to session low as of 11:52am CET (declines 2.6%, previously down as much as 3.3%).
• Greek banks Eurobank Ergasias, Alpha Bank at record low; Monte Paschi follows as 3-worst performer today
  • Eurobank Ergasias sinks ~20% (as much as 21%)
  • Alpha Bank plummets 14% (as much as 18%)
  • Monte Paschi retreats 5.9% (as much as 8%)
• AXIA Ventures notes first round of talks between Greek govt and heads of creditors’ representatives ended on Feb. 5; says all major issues still open, unclear when they’ll return to Athens to continue discussions
• NOTE: Greek Bank Mgmt Review to Start End-Feb: Xenofos in Naftemporiki
• Separately, Italian 10-yr spread with bunds widens for 3rd session; Currently at highest since July

Why the dramatic shift in European risk, where things were relatively stable for months on the heel of Europe’s QE? Perhaps Morgan Stanley’s note flagged last night had something to do with it. To wit:

One noteworthy aspect in the current risk-off environment is the lack of peripheral spread widening in Europe; this is unusual based on performance patterns during this cycle and most likely reflects the ECB’s substantial QE programme. While the region is often perceived as a relative consensus overweight among equity investors, we are more downbeat and prefer the US and Japan instead. Our European caution primarily reflects the prospect of further earnings disappointment across the region, but we are also wary of any resumption of geopolitical concerns.

 

Recent investor caution tends to focus on fears of excess USD strength, low oil prices and/or China, but we think it is quite plausible that Europe moves back up the pecking order (to its more usual place some would say!) as we move through 2016. The UK’s forthcoming referendum on EU membership, likely to take place in June, may appear the most plausible catalyst in the short term to raise regional risk premia, but the ongoing migrant issue risks eroding political cohesion over the medium term and political uncertainty is rising in the periphery. Greece has a daunting debt repayment due this summer, Spain is currently without a government, new European regulations are preventing Italy from adopting an effective ‘bad bank’ solution and the recently elected socialist government in Portugal is reversing course on prior austerity and competitiveness improvements. During a cyclical upswing, markets are prone to overlook such concerns, but the opposite would be true if growth starts to relapse.

Whatever the reason, one look at DB CDS which continue their relentless march into “something is very wrong with this counterparty” territory suggests that things are going from bad to worse for Europe’s banking sector.

 

It is not just DB: as we have been warning for the past month, and especially last Friday, the blow out across the entire European bank sector is starting to resemble Lehman levels:

Can Draghi sell bank cds? Euro bank risk looks systemic. TBTF cds blowing out throughout EZ- most at 52wk wides. http://pic.twitter.com/dUZlhErIYO

— J Pierpont Morgan (@pierpont_morgan) February 8, 2016

To be sure, DB appealing to both the BOJ and ECB to stop their easing, as we noted over the weekend, will hardly help things, and if anything will prompt more questions just how bad DB truly is.

And with Germany’s biggest bank once again on the ropes, and some even starting to casually throw out the “bailout” word, Germany’s stocks fared no better:

• DAX FALLS BELOW 200-WMA
• DAX RSI FALLS INTO OVERSOLD TERRITORY BELOW 3O

Worst of all, there are no near-term catalysts that can help Europe: the slow-motion trainwreck will continue until somehow confidence in eurobank solvency is restored, and now that neither QE nor NIRP can prop up the financial system suddenly Mario Draghi and his Davos “peer-pressuring” company have their jobs cut out for them.

So while the markets stress about the future, and whether Janet Yellen’s semi-annual congressional testimony mid week can achieve anything to shift risk sentiment, here is where we stand now.

Market Wrap:

• S&P 500 futures down 1.1% to 1855
• Stoxx 600 down 2.2% to 318.7
• MSCI Asia Pacific up 0.3% to 121
• US 10-yr yield down 2bps to 1.82%
• Dollar Index down 0.18% to 96.86
• WTI Crude futures down 1.9% to $30.31
• Brent Futures down 2.2% to $33.31
• Gold spot up less than 0.1% to $1,174
• Silver spot down 0.3% to $14.97

Top Global News

• Negative Rates Seen as Option for Fed as BOJ, ECB Pave the Way: probability of negative Fed rate climbs to about 13%
• Casino Says to Sell Big C Stake for EU3.1b to TCC Holding: comments in statement yday
• Qube Group Makes Sweetened A$9b Offer for Asciano: target says revised offer is higher than Brookfield’s bid
• INCJ Said to Argue Its $8.5 Billion Sharp Bid Tops Foxconn’s: Sharp has until Feb. 29 to decide on Foxconn bailout plan
• VW Trucks Chief Open to IPO, Deals in Expansion Strategy: unit eyes growth options, may include acquisitions, IPO
• World’s Largest Energy Trader Sees a Decade of Low Oil Prices: Vitol CEO says crude to stay $40-$60 for 10 years

A quick look at regional markets, we begin in Asian where equities started the week on the front-foot in holiday-thinned trade, despite the sell off on Wall Street after the latest mixed NFP release. As participants digested the US jobs report, the ASX 200 (-0.02%) and the Nikkei 225 (+1.1%) pared initial losses amid a turnaround in sentiment, while the latter had pulled off worst levels amid a softening JPY across the board. JGBs slipped amid spill over selling in USTs with yields rising across the curve, as such notable underperformance in the belly of the curve. As a reminder, markets in China are closed due to the Lunar New Year.  

Asian Top News

• Consumption Seen Dropping as Japan’s Workers Eke Out 0.1% Rise: Total wages haven’t risen more than 1% in any yr since 1997, labor ministry said
• Gold Road Says Major Producers Interested in Gruyere Stake: AU gold explorer is prepared to discuss partnering on gold asset
• Modi Budget Resolve Tested as Bonds Have Worst Start Since 2011: Investors confidence in PM Modi’s ability to meet budget targets dwindling as bonds and stocks posted steepest Jan. losses since 2011
• China Venture Firm Raises $648 Million From Princeton, Duke: Qiming Venture Partners saw largest fund since it was founded in 2006, brings AUM to $2.5b

With much of Asia away from their desks this week for the Lunar New Year, European trade failed to find sentiment early on in the session, before equities began to selloff by mid-morning (Euro Stoxx: -2.4%). However, despite the weakness seen in equities, many of the ‘usual suspects are among the best performers today, with the materials the best performing on a sector breakdown, while the worst performing major European index YTD, the FTSE MIB (-1.9%) the best performing index of the day.

European Top News

• Assa Abloy Profit Meets Estimates Amid Growth in U.S., Europe: Says growth in U.S. offset China sales decline
• Randgold’s 4Q Profit Falls 10% as Gold Prices Drop: Aims to mine 1.25m-1.3m ounces of gold in 2016
• Anglo Platinum Sees More Price Pain as It Halts New Projects: Impairments of 14b rand represents 30% of book value
• BT Confirms Search Process for CFO Successor; No Decision Taken: Co. responds to press speculation
• Linde Says Reitzle Proposed as Chairman of Supervisory Board: Proposes to elect Wolfgang Reitzle as of May 21
• Millicom to Sell its Democratic Republic of Congo Business: Sells 100% of Oasis for total cash of $160m to Orange
• Amundi, Primonial in Talks to Buy EU1.3b Gecina Assets, Figaro says: In exclusive talks to buy 74 clinics, medicalized retirement homes from Gecina for EU1.3b
• Areva CEO to Discuss Possible Gamesa Stake Sale With Govt Echos says: Newspaper cites interview with Areva CEO
• Pimco Sees Biggest Flows in Europe From Yield-Hungry Insurers: Insurance asset management ‘one of the main opportunities’

In FX, a largely consolidative market in FX this morning, with this widely anticipated given the absence of China this week. However, in recent trade, USD/JPY has slipped back under 117.00 with stocks and Oil prices leading the way, and having the inverse impact on EUR/USD which is some 40-45 ticks higher to tip 1.1180. AUD saw some modest catch up play on the upside, but this has been tempered by the broader mood. CAD poised for fresh weakness also, and eyeing a return through 1.3900. EM currencies on the softer side, but only off better levels despite concerns over funding/investment levels highlighted by the BIS numbers. GBP on the soft side, as EU fears starting to bubble up once again — EUR/GBP through .7700.

WTI and Brent crude futures have sold off heading into the North American crossover, with Brent Apr’16 and WTI Mar’16 futures breaking below the USD 34.00 and USD 31.00 levels respectively. This comes in spite of news over the weekend that the Venezuelan and Saudi Oil Ministers had positive discussion in regards to OPEC/non-OPEC cooperation to stabilize oil markets. Such news may have moved oil markets previously, but now the level of scepticism around the chances of such a meeting happening seems to have increased significantly. Furthermore, speculators cut bullish bets on US crude oil in the week to, according to the CFTC.

Gold prices fell over USD 7 shortly after the reopen of the week’s electronic trade amid touted profit taking having posted its best weekly gain since July’13 last week. However there has been strong inflows into gold ETF’s and CFTC says COMEX gold speculators increased their bullish bets in the yellow metal to 3 month highs.

There is no macro news in the US today.

Bulletin Headline Summary from RanSquawk and Bloomberg:

• A largely consolidative market in FX this morning – widely anticipated given the absence of China this week
• WTI and Brent crude futures have sold off heading into the North American crossover, with Brent  Apr’16 and WTI Mar’16 futures breaking below the USD 34.00 and USD 31.00 levels respectively
• Today’s calendar is very quiet in terms of data, however highlights include: Canadian housing  starts and building permits as well as possible comments from BoC Deputy Governor Lane
• Treasuries higher in overnight trading as European equities drop (China closed for holiday) ahead of this week’s Yellen testimony before Congress on Wednesday and Thursday.
• China’s foreign-exchange reserves shrank to $3.23 trillion, the smallest since 2012, indicating that the central bank sold dollars as the yuan’s retreat to a five-year low exacerbated depreciation pressure
• Federal Reserve Chair Yellen is preparing to walk a tightrope when she addresses lawmakers in Washington; she will have to strike a balance between sounding confident on the domestic economy and acknowledging increased risks from abroad
• Signs of distress in financial markets are gathering force as concern over the state of the global economy deepens. European stocks are down for a sixth day, the cost of protecting European banks’ and insurers’ senior debt is on its worst run since March 2013 and yields on Germany’s 10- year bunds are the lowest since April
• Core EGBs bull flatten as credit-spreads widen and stocks selloff; peripherals underperform sharply, wider by 9bps-18bps vs 10Y bunds
• Goldman Sachs is betting “Mr. Market” is wrong in its recession warnings. While sliding stocks, declining long- term bond rates and higher credit yields are sounding the alert, the bank’s economics team is more confident about the outlook for the developed world
• Societe General has turned to the U.K.’s finance regulator as it tries to loosen rivals’ grip on European junk-bond issuance. A lack of competition is harming both issuers and investors by reducing market efficiency, according to the bank
• The investment banking downsizing has been hard on foreign- exchange desks; there were 2,300 people working in currency- market front-office jobs at the world’s biggest banks in 2014, down 23% from 2010
• While investors pulled funds from Pimco in the wake of co- founder Bill Gross’s departure, yield-hungry insurance companies kept faith with the company
• Sovereign 10Y bond yields mixed with Greece +38bp, Portugal +14bp. European stocks lower, Asian stocks mixed (China closed for holiday); U.S. equity-index futures drop. Crude oil and copper lower, gold rises

US Event Calendar

• 10:00am: Labor Market Conditions Index Change, Jan., est. 2.5 (prior 2.9)

DB’s Jim Reid concludes the overnight wrap

So after what can only be described as a pretty noisy US employment report on Friday in which a disappointing headline payrolls number was shrugged off in favour of some unexpected improvement in the details, economists and investors will get another opportunity to sharpen (or blunt) Fed expectations this week when Fed Chair Yellen addresses the House Financial Services Committee on Wednesday and the Senate on Thursday at her semi-annual testimony (also formerly known as the ‘Humphrey-Hawkins Testimony’). While Friday’s data has seen futures markets since price in a slightly better than 50% chance of a hike this year (currently 53%), that put in the perspective of the four hikes implied by the dot plots and the huge gap still between the two means Yellen will have to choose her words wisely. The last couple of weeks have seen more evidence of a dovish leaning from Fed officials, including Fischer and Dudley and we’d expect Yellen to echo a similar acknowledgement of recent tightening in financial conditions and increased global growth concerns.

It’s likely that this will be somewhat balanced with upbeat commentary around the labour market in particular despite that below-market January payroll number (151k vs. 190k expected). In fairness this was about in line with the whisper number while much was made of the three-month moving average being at a still robust 231k. It was the details in the report which got most talking however. After expectations had been for no change, the unemployment rate declined one-tenth last month to 4.9% and a post-recession low. The broader U-6 measure held steady at 9.9%. Meanwhile average hourly earnings rose an impressive +0.5% mom (vs. +0.3% expected) meaning on a YoY rate earnings are +2.5%.

A short-lived sharp drop aside, the Dollar index closed up +0.58% on Friday following the data and helped to slightly dampen what was a rough week for the Greenback with the five-day fall for the index (-2.59%) the most since October 2011. Treasury yields initially jumped higher but then pared that entire move into the close. 10y Treasury yields were up as high as 1.894% (+5bps on the day) before falling back to 1.840% by the finish. The data was less kind to risk assets however although a weak day for tech stocks didn’t help (LinkedIn in particular tumbling 40% following some much softer than expected management guidance for Q1) with the S&P 500 eventually closing down -1.85% and the Nasdaq down a steep -3.25%. In credit markets CDX IG finished over 5bps wider. Oil resumed its downward march with WTI eventually finishing -2.62% and back below $31/bbl although Gold continued its strong run of late, closing up +1.54% for its sixth consecutive daily gain and at $1173/oz is now at the highest since the end of October.

Over the weekend the main news of note is out of China where the latest FX reserves data is in. Reserves declined $99.5bn in the month of January to $3.23tn (vs. $3.21tn) – the third consecutive month that reserves have fallen and the second most on record. With Chinese New Year kicking off today and markets there subsequently closed (as well as in a number of other Asia economies), markets are a bit more muted in Asia this morning. In Japan we’ve seen the Nikkei (+0.77%) pare some early steep losses to trade higher, while in Australia the ASX (-0.03%) is back to near unchanged. WTI is up 1% after a meeting between Oil Ministers from Saudi Arabia and Venezuela on the weekend was said to be ‘productive’ but seemingly yielded nothing more. US equity market futures are signaling some small gains.

Moving on. In the wake of Friday’s data, DB’s Chief US Economist Joe Lavorgna has revised down 2016 growth and inflation forecasts, while at the same time has altered his Fed rate call to just one hike this year which he expects to be in December. Highlighting tighter financials conditions, elevated inventories, weak global growth and depressed energy-related capital spending, Joe has reduced his estimates of Q1, Q2 and Q3 real GDP growth in 2016 to 0.5%, 1.0% and 1.2% from 1.5%, 2.2% and 2.1% respectively. Consequently, he expects full-year 2016 real GDP growth, as measured on a Q4-over-Q4 basis to now be 1.3% (from 2.0%). With regards to core CPI, Joe is forecasting 1.9% yoy in Q1, followed by 1.8% in Q2-Q4.

In terms of the rest of Friday’s data, the December US trade balance revealed a modest widening in the deficit by just over $1bn to $43.4bn (vs. $43.2bn expected). Post the market close we got the latest consumer credit data covering December which was much higher than expected at $21.3bn (vs. $16.0bn expected). Reflecting the latest forecast for real consumer spending growth post Friday’s employment report and also for real gross private domestic investment growth, the Atlanta Fed upgraded their Q1 2016 real GDP growth forecast to 2.2% from 1.2% on February 1st.

European risk assets succumbed to much of the post-payrolls weakness on Friday too with the likes of the Stoxx 600 (-0.87%) and DAX (-1.14%) closing lower following a fairly choppy session. It’s been the moves in credit however and specifically financials which are starting to take up more attention. Main closed +5.5bps on Friday, while Crossover finished +17bps, but it was the moves for senior (+13bps) and sub-financials (+28bps) which were more eye catching. In fact, YTD the sub-fins index is +122bps wider, which compares to Crossover which is +107bps wider. Senior financials are now +44bps wider while Main is +33bps wider. A lot of this reflects what’s been a particularly disappointing quarter for earnings in the sector which is adding to the energy and global growth related worries, but the concern is that it could be something more and is certainly something else for Draghi to consider ahead of next month. It’s noticeable also that there are a number of bank share prices now approaching or even slightly below 2008/09 levels.

That takes us to the latest in earnings season which in the US has now passed the half way mark. There wasn’t much to report from Friday’s reporters, but with 315 S&P 500 companies having now reported, we’ve seen 244 (77%) beat on earnings but just 146 (46%) beat at the sales line. A reminder of how that compares to previous quarters. From Q1 to Q3 last year we saw 73%, 75% and 74% beat at the earnings line, but just 48%, 49% and 44% report beats at the top line. So a fairly mixed bag this quarter. European earnings season is still to get going properly and so far we’ve seen 199 Stoxx 600 companies report with 50% beating earnings guidance and 64% sales guidance. It’s worth highlighting that the data for European earnings is a lot more inconsistent however.

Onto the week ahead now. It’s a fairly quiet start to proceedings this week with the only data of note in Europe being German industrial production for December and confidence indicators for the Euro area and France. The usual post-payrolls lull in the US means there’s no data due across the pond today. Tuesday’s highlights include trade reports covering the December month out of both Germany and the UK, while across the pond the January NFIB small business optimism reading is due out, along with the December JOLTS report and wholesale inventories and trade sales data for the same month. Turning to Wednesday we’re starting in Japan where the latest January PPI numbers are due out. In Europe we’ll get regional industrial production reports for Italy, France and the UK while the sole release in the US in the afternoon is the January Monthly Budget Statement. It’s a particularly quiet day for data on Thursday with nothing of note in Europe and just initial jobless claims data due in the US. It looks like we’ll have a busy end to the week on Friday with Euro area Q4 GDP and industrial production, French employment data and German Q4 GDP and CPI all due out. In the US the big focus will be on the January retail sales data along with the first reading for the University of Michigan consumer sentiment print for February and December business inventories data.

Arguably the focus of the week will be away from the data and instead reserved for the aforementioned Fed Chair Yellen’s semi-annual testimony to the House Financial Services on Wednesday and the Senate on Thursday. Also due to speak will be the Fed’s Williams on Wednesday and Dudley on Friday. Meanwhile we’ll also see the attention for the US presidential election move to New Hampshire which is due to hold the first-in-the-nation primary on Tuesday.

Elsewhere, earnings season rumbles on and we’ve got 64 S&P 500 companies set to report including Coca-Cola, Walt Disney and Cisco. In Europe we’ve got 80 Stoxx 600 companies reporting including Total, L’Oreal, Heineken and Nokia.

via Zero Hedge http://ift.tt/1QQdWX7 Tyler Durden

 

 

 

 

Who Really Needs A Gold Standard?

Written by Jeff Nielson (CLICK FOR ORIGINAL)

 

 

Bloomberg News recently made an astounding proclamation in a news release, by nothing less than postulating a return to a gold standard. Let me repeat. Bloomberg, a part of the mainstream media propaganda machine which often bashes all things related to gold (including the gold standard), is now advocating a return to a gold standard.

However, a major caveat must be attached to this astonishing revelation. This media tentacle was not advocating that we abandon our fraudulent, fiat currency Ponzi-scheme and return to a gold standard at the global level. Rather, it was only advocating a quasi-gold standard, domestically, and in just one nation.

 

Time For A Gold Standard In China?

This is laughable and ironic on so many levels – too many to be covered within the scope of a single commentary. Instead, analysis will have to be saved for only the most obvious of ironies. We begin with the fact that this propaganda was no ordinary Bloomberg release. Rather, it was labeled as “BloombergIntelligence.” The debate as to whether this phrase is an oxymoron or merely a non sequitur, must be saved for another time.

For now, all that is pertinent is the irony of such a label, as we explore Bloomberg’s pseudo-argument. We start with the reason given by Bloomberg as to why China, and only China, needs a gold standard: supposedly, it’s to prop up China’s “weak currency.”

This is almost too humorous for words. For the better part of two decades, one of the major themes in the slapstick theatre which the United States calls its Congress has been that “China is a currency manipulator.” When hundreds of U.S. political representatives made this accusation, chomping at the bit to articulate the words, were they accusing China of manipulating a “weak currency” upwards?

No. For nearly twenty years, U.S. politicians have serially accused China of holding down the value of its strong currency. Now, seemingly overnight, a different script has been handed to the mainstream media by their Overlords. Suddenly, we’re told, China has a weak currency, a currency so weak that nothing less than a gold standard could rescue it.

Why? How? What could have happened to precipitate such a rapid, monetary metamorphosis? Bloomberg had an answer for that, too, in a follow-up interview on the same subject, via Bloomberg mouthpiece Ken Hoffman:

China is quite the mess. There’s no other way about it. They have had a very hard landing in the commodities space, no question about that…

No question? Really? For well over a decade, as China has been the world’s premier manufacturing power, it has been a net-importer of nearly all categories of hard commodities as inputs for its manufacturing (particularly oil). The trough in these commodities prices, and the manipulated collapse in the price of oil, are highly stimulating for China’s economy.

Thus, this is what we are supposed to believe, via Bloomberg Intelligence. Overnight, China’s strong currency has become a weak currency, and it’s all because of the “hard landing” which China has supposedly suffered as a result of the highly stimulative drop in the prices of hard commodities. Very “intelligent.”

Now back to the real world. China’s economy remains the growth engine of the global economy, but one which is clearly overdue for a significant consolidation. However, this is true for many of the world’s economies, as we near the end of another of the One Bank’s eight-year, bubble-and-crash cycles. It is absolutely no basis for any weakening of the renminbi, let alone some absurd reversal from its status as a strong currency to a weak one.

What, then, is the real reason for the sudden weakness of the renminbi in global currency markets? Why don’t we ask the Serial Currency Manipulators, the Big Bank tentacles of the One Bank, which were recently convicted of serially manipulating all of the world’s currencies going back to at least 2008? Maybe they can give us an explanation. Sorry – their lawyers have advised them to say nothing on this subject.

We still have plenty of additional irony that must also be covered here. We move on to a famous cliché, yet one which is apparently totally unknown, not just to Bloomberg, but to every major U.S.-based media tentacle.

People who live in glass houses shouldn’t throw stones.

Who really needs a gold standard, in order to rescue an otherwise worthless currency? Regular readers can answer that question, via an all-too familiar chart, which has surely now been burned into their minds. It is the last legitimate representation of the U.S. monetary base before this statistical data became completely falsified by the Federal Reserve.

As has been explained on many previous occasions, this is a chart of a currency (the U.S. dollar) which has already been hyperinflated to worthlessness. Neither China, nor any other nation except Zimbabwe, has diluted and debauched its currency to the degree of the United States.

Furthermore, this chart still omits trillions of dollars in additional counterfeiting, all part of the U.S. monetary fraud known as “0% interest rates.” Thus, if we were to pick only one nation on the planet that really needed a gold standard in order to restore legitimacy to its monetary system and restore value to its currency, only three letters would come to mind: “U-S-A.”

Naturally, Apologists for all things American will immediately demand an explanation. How could the Mighty U.S. Dollar possibly be “worthless,” as it soars along at an especially absurd exchange rate versus the world’s other currencies?

Why don’t we ask the world’s Serial Currency-Manipulators if they can explain how or why the U.S. dollar is currently propped up to such an absurd and suspicious exchange rate? Sorry – their lawyers are saying that they shouldn’t answer that question, either.

However, all this leaves out an even larger, central irony in Bloomberg’s cynical call for a return to a gold standard, but only in China. It leaves out the real reason why we need a gold standard, not just in the U.S., or China, but for the whole global economy.

In revealing this reason, we immediately uncover an even greater irony. In a recent White Paper for Sprott Money, this reason was a central theme of an 8,000 word analysis as to why (more than ever) we require a return to a hard gold standard.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation [emphasis mine].

– Alan Greenspan (1966)

The extraordinary irony in this quote should be immediately apparent to any reader with a reasonable knowledge of the U.S. monetary system. It was roughly two decades after articulating this famous warning that Sir Alan Greenspan became one of the principal Villains who was responsible for “confiscating” the savings of Americans (and people all over the world) via deliberately manufactured inflation. This is the inflation which always exists within any monetary system based upon fiat currency (and “fractional reserve”) fraud.

The following was also covered in the previously cited White Paper:

All fiat currencies are Ponzi schemes. This is not an assertion, but rather an elementary statement of fact. It is a principle which can be demonstrated in a variety of different manners, both direct and indirect.

However, this puts the cart before the horse. What is a “fiat currency”? It is the currency which, by definition, has no intrinsic value of any kind. Rather, the sole basis for accepting it as a medium of exchange is because of government decree (i.e. the “fiat” of our government). Worthless scraps of paper that we are forced to accept as payment for goods/services because of government decree. Is it any surprise that such a scam has never been able to withstand the test of time?

The world’s first fiat currency originated in China roughly 1,000 years ago. In the millennium since then, every fiat currency ever created has either plunged to worthlessness (like all Ponzi schemes), or simply been removed from circulation before that final plunge could occur. One thousand years, and “a perfect record.”

A fiat currency monetary system provides the ultimate vehicle for stealing-via-inflation. And a gold standard provides the ultimate impediment for such systemic theft. This principle is verified, accidentally, by the world’s ultimate gold-hater and banker-lover, John Maynard Keynes. Keynes famously whined that a gold standard functioned as a set of “Golden Handcuffs.”

Not only does a gold standard restrict Keynes’ patrons – the bankers – from stealing-via-inflation, it also prevents the bankers’ lackeys – our governments – from enslaving us in debt. The Golden Handcuffs preclude our governments from running large deficits, which is also a central reason why entities such as Keynes, the Big Banks, and Bloomberg all refer to a gold standard with unmitigated contempt – almost all of the time.

In addition, by restricting the amount of currency in circulation to a non-fraudulent level, a gold standard automatically reduces the size, and thus the power and influence, of the financial sector. As the current Big Bank crime syndicate is caught committing one mega-crime after another, the commensurate need for a gold standard has never been greater at any time in history. The White Paper summarizes these reasons via two different perspectives.

Positively, a gold standard ensures the following economic/monetary virtues:

a) It protects and preserves the wealth of all citizens/residents of that economic system.

b) It protects and preserves the integrity of the monetary system itself.

c) It ensures (relatively) fiscally responsible governments.

d) It ensures (relatively) rational, sustainable, economic development.

e) It reduces the size/severity/frequency of financial crimes, systemic and otherwise.

Negatively, this is what we have actually seen in the 40 years since Paul Volcker (et al) successfully assassinated our gold standard:

a) Our standard of living has fallen by more than half.

b) Our monetary system has not merely “lost its integrity,” but has been corrupted in any/every way possible. Our paper currencies are literally worthless.

c) Our governments are bankrupt. Our once-prosperous economies lie in ruin. The real unemployment rate has roughly tripled.

d) After decades of unsustainable growth; our bubble-exhausted economies now no longer respond at all to the most extreme monetary stimulus in history.

e) Our natural resources are being consumed/cannibalized at an increasingly unsustainable rate. Our environment is being degraded (if not completely contaminated) at a geometrically increasing rate. Entire species are being rendered extinct, at an exponentially increasing rate.

f) Systemic financial crime has exploded at a rate at which most readers cannot even conceive. In 1971, the most serious financial crimes were measured (at most) in the $100s of millions of dollars. Today, the banking crime syndicate perpetrates crimes six orders of magnitude larger: crimes measured (literally) in the $100s of trillions of dollars.

Who really needs a gold standard? We all do, immediately.

 

For questions on this article or precious metals, please contact HERE

 

 

Who Really Needs A Gold Standard?

Written by Jeff Nielson (CLICK FOR ORIGINAL)

 

via Zero Hedge http://ift.tt/1K7ByHu Sprott Money