Category: zerohedge

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It was fun playing Masters of the Universe when expectations were low.

Ah, the good old days, when a simple, completely empty promise to do whatever it takes could move the world. It was fun being a central banker back in the good old days–back then playing Master of the Universe was wondrously good fun.

Now–not so fun. Now that interest rates are drifting below zero, there's not much room for fun left in that sandbox.

As for mortgage rates: they're so low, some countries are effectively paying people to take out a mortgage, and the resulting bubbles and market distortions are no fun.

Buying assets with newly created trillions was very good fun, but now people are demanding results in the real economy from our asset buying sprees–ugh, that's no fun at all.

Now that the Federal Reserve is maintaining its balance sheet at a mere $4.5 trillion, the thrill of expansion is gone.

The Bank of Japan is still ramping up asset purchases, but the results are, well, nowheresville–a real drag in the fun department.

It was fun playing Masters of the Universe when expectations were low. Just saving the banking system from well-deserved collapse was enough to win the undying gratitude of greasy politicos left and right.

But now, the Great Unwashed are demanding some actual positive impact on the real economy–and that's beyond the powers of central banks.

Central banks can create free money for financiers, but they can't move the needle of the real economy, except to distort and cripple it with perverse incentives to gamble borrowed money on malinvestments and skimming operations, a.k.a. high frequency trading, stock buybacks, etc.

As former Master of the Universe Ben Bernanke noted: "Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending (that) will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

Yeah, right. What we're really talking about when central bankers revel in being Masters of the Universe is the pathology of power. To better understand the pathology of power, we should turn first to Pathology Of Power by Norman Cousins, published in 1988.

Cousins' description of the pathology of power is an uncannily accurate account of the Fed and other central bank fiefdoms.

"Connected to the tendency of power to corrupt are yet other tendencies that emerge from the pages of the historians:

1. The tendency of power to drive intelligence underground;

 

2. The tendency of power to become a theology, admitting no other gods before it;

 

3. The tendency of power to distort and damage the traditions and institutions it was designed to protect;

 

4. The tendency of power to create a language of its own, making other forms of communication incoherent and irrelevant;

 

5. The tendency of power to set the stage for its own use."

In broader terms, we might add: the tendency of power to manifest hubris, arrogance and failure.

via http://ift.tt/1OoP2Ri Tyler Durden

It’s not just about negative yielding sovereign debt anymore.

As a reminder, in its latest calculation in early June, Fitch estimated that the total amount of fixed-rate sovereign debt trading at negative yields grew to $10.4 trillion ($7.3 trillion long term and $3.1 trillion short term) as of May 31, up 5% from the $9.9 trillion that Fitch calculated as of April 25. Of this Japan still by far the largest source. Modest declines in Japanese, Italian, German and French sovereign yields during the month drove the $0.5 trillion increase in the total stock of negative-yielding debt.

Of course, now that the German 10Y Bund is borderline subzero (earlier today Germany auctioned off €3.3 BN at 0.01% in an uncovered auction), we expect the total sovereign notional amount to rise even higher and may surpass $11 trillion in negative yielding debt.

However, as Reuters writes this morning citing Tradeweb data, it’s now time to also look at corporate debt, because the amount of euro-denominated investment-grade corporate bonds with negative yields has tripled over the last six weeks, a move accelerated by their inclusion in the European Central Bank’s quantitative easing programme.

Specifically around 16%, or 440 billion euros, of the 2.8 trillion euros of these bonds now yield less than zero, up from around 5% at the start of May, according to Tradeweb data.

The culprit for this, as for the NIRP sovereign bond debt paradox, which as DB said is the “Simple Indicator Of A Broken Financial System”  is, of course, the ECB which started buying corporate bonds last week, and in a single day bought 348 million euros, well exceeding market expectations.

We anticipate that global bond yields will turn even more negative in coming weeks, putting even more downward pressure on US corporate and sovereign yields, as the rest of the world rushes to the only remaining fixed income securities that offer a positive yield, in the process pushing the long end of the curve, and flattening the yield curve to the point where concerns about not just a global, but domestic recession, will force the Fed out of its hypnosis that all is still well.

via http://ift.tt/1VZ40yY Tyler Durden

In his monthly call with DoubleLine investors, Jeff Gundlach ratcheted up the gloomy rhetoric – and considering the rising voices claiming central banks are rapidly losing both credibility and control, he has been spot on – and said on Tuesday investors are dropping risky assets and turning to safer securities including Treasuries and gold because they are losing faith in central banks.

As Reuters puts it Gundlach, who oversees more than $100 billion at DoubleLine, is one of the first heavyweight investors to publicly raise red flags, and to keep hammering it at every possible opportunity, about the credibility of major central banks, including the U.S. Federal Reserve, as countries struggle to manage economic growth. Last year, Gundlach correctly predicted that oil prices would plunge, junk bonds would live up to their name and China’s slowing economy would pressure emerging markets. In 2014, he forecast U.S. Treasury yields would fall, not rise as many others had expected.

“Central banks are losing control and they don’t know what to do … just like the Republican establishment and Donald Trump,” Gundlach told Reuters in a telephone interview, speaking one day before the Fed is widely expected to again announce it will do nothing as it continues its one-and-done “strategy.”

“The Fed is confused and their confusion spills into investor psychology,” said Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine. “The Fed changes its tone so frequently, it seems every other week the message is different. They’ve turned into the ‘Zombie Fed.’ They say the meeting this week is ‘live,’ but investors all know it isn’t at all.”

In terms of investments, Gundlach said it is a “dangerous price appreciation game” to purchase German Bunds at current levels and that gold and gold miners are still an attractive place to put money to work. He also said that negative interest rates, notably in Japan, were backfiring. “Negative interest rates don’t do what they’re theoretically supposed to do,” he said, noting the appreciation in the Japanese yen.

He added that negative interest rates “aren’t leading to higher economic growth” and forecast that world GDP could be averaging around just 1 percent against the backdrop of aggressive global monetary policies. To make his case, Gundlach noted the dramatic “drawdowns” from the highs in several stock markets. Germany is down 22 percent, Japan is down 23 percent, China is down 45 percent, the United Kingdom market is down 15 percent and France is down 20 percent.

“Negative rates do not prop up stock markets,” Gundlach said on the webcast. Correct: there’s QE for that… and helicopter money.

But while his pessimism about monetary policy continued, Gundlach was far more sanguine about next week’s key event: the UK referendum vote. “I believe ‘Stay’ will prevail,” Gundlach said during the webcast.  He said the polls reflect people’s complaints and frustration rather than the actions they’ll take when voting in the June 23 referendum. “I believe that ‘Leave’ is over-polling, it’s punching above its weight class,” the fund manager said. “When it comes up for a vote, I think it will fail.”

This confirm what UK-based bookies also think (and where people are actually putting their money): the political bookmakers (http://ift.tt/1S5eSo4) still have a 60% (up 1% after ComRes poll) probability of ‘remain’ winning even if it has fallen substantially in recent days. This could reflect a few things: a) pure weight of money staked, b) the view that referendums in the likes of Quebec and Scotland saw late swings for the status quo, c) the debatable reliability of opinion polls in recent years and d) the phone polls which are rightly or wrongly seen as more accurate still showing ‘remain’ in a slightly more favourable light.

Of course, if Gundlach is wrong, bad things will happen as he himself admits: “If leave prevails, it’s the beginning of the end for the Eurozone.”

No matter what happens with Brexit, however, Gundlach is expecting volatility to return soon: “This summer is going to be a rocky ride.”

* * *

For those who missed it, here is his latest presentation given yesterday, titled “Timing and Strategy”

via http://ift.tt/1Uc1YMI Tyler Durden

For seven years, the world has operated under a complete delusion that Central Banks somehow fixed the 2008 Crisis.

All of the arguments claiming this defied common sense. A 5^th grader would tell you that you cannot solve a debt problem by issuing more debt. Similarly, anyone with a functioning brain could tell you that a bunch of academics with no real-world experience, none of whom have ever started a business or created a single job can’t “save” the economy.

However, there is an AWFUL lot of money at stake in believing these lies. So the media and the banks and the politicians were happy to promote them. Indeed, one could very easily argue that nearly all of the wealth and power held by those at the top of the economy stem from this fiction.

So it’s little surprise that no one would admit the facts: that the Fed and other Central Banks not only don’t have a clue how to fix the problem, but that they actually have almost no incentive to do so.

So here are the facts:

1)   The REAL problem for the financial system is the bond bubble. In 2008 when the crisis hit it was $80 trillion. It has since grown to over $100 trillion.

2)   The derivatives market that uses this bond bubble as collateral is over $555 trillion in size.

3)   Many of the large multinational corporations, sovereign governments, and even municipalities have used derivatives to fake earnings and hide debt. NO ONE knows to what degree this has been the case, but given that 20% of corporate CFOs have admitted to faking earnings in the past, it’s likely a significant amount.

4)   Corporations today are more leveraged than they were in 2007. As Stanley Druckenmiller has noted, in 2007 corporate bonds were $3.5 trillion… today they are $7 trillion: an amount equal tot nearly 50% of US GDP.

5)   The Central Banks are now all leveraged at levels greater than or equal to Lehman Brothers was when it imploded. The Fed is leveraged at 78 to 1. The ECB is leveraged at over 26 to 1. Lehman Brothers was leveraged at 30 to 1.

6)   The Central Banks have no idea how to exit their strategies. Fed minutes released from 2009 show Janet Yellen was worried about how to exit when the Fed’s balance sheet was $1.3 trillion. Today it’s over $4.5 trillion.

Today, Central Bankers are now actively punishing depositors and bond holders with negative interest rates. Globally, over $10 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000. So if get fed up with the banks and want to pull your money out, you cannot.

We are heading for a crisis that will be exponentially worse than 2008. The global Central Banks have literally bet the financial system that their theories will work.  They haven’t. All they’ve done is set the stage for an even worse crisis in which entire countries will go bankrupt.

On that note, we are already preparing our clients for this with a 21-page investment report titled the Stock Market Crash Survival Guide.

In it, we outline the coming crash will unfold…which investments will perform best… and how to take out “crash” insurance trades that will pay out huge returns during a market collapse.

We are giving away just 1,000 copies of this report for FREE to the public.

To pick up yours, swing by:

http://ift.tt/1HW1LSz

Best Regards

Graham Summers

via http://ift.tt/1Uc2wlu Phoenix Capital Research

• Osborne Warns of Brexit Tax Toll as ‘Leave’ Gains in Polls (BBG)
• Clinton wins D.C. primary, has ‘positive’ meeting with Sanders (Reuters)
• Federal grand jury could charge wife of Orlando shooter (Reuters)
• Brexiteers swiftly closing in on Remain as poll reveals there’s just one point between the two sides (Sun)
• Trump gains slightly on Clinton after Florida attack: Reuters/Ipsos poll (Reuters)
• Hill Republicans despondent over Trump (Politico)
• London traders brace for biggest night since ‘Black Wednesday’ (Reuters)
• Venezuela in talks with China for grace period in oil-for-loans deal (Reuters)
• Why Billions in Proven Shale Oil Reserves Suddenly Became Unproven (BBG)
• Bank of America axe hovers over thousand of retail jobs (FT)
• About 16 pct of Europe’s top-rated corporate bonds yield below zero  (Reuters)
• Andreessen Sees Big Exits for Tech Startups in Next Wave (BBG)
• China spy ship ‘shadowing’ U.S., Japanese, Indian naval drill in Western Pacific (Reuters)
• BOJ could be bracing for Brexit with delayed bond buying (Nikkei)
• As gates open in Shanghai, Disney already adding to $5.5 billion park (Reuters)
• China May new yuan loans rise to 985.5 bln yuan, beating forecasts (Reuters)

Overnight Media Digest

WSJ

– U.S. Republican House Speaker Paul Ryan joined Barack Obama and Hillary Clinton in rejecting Donald Trump’s call for a ban on Muslim immigration in the wake of the Orlando shootings. (http://on.wsj.com/1S4NyWX)

– The U.S. Democratic presidential race officially came to an end with Hillary Clinton winning the District of Columbia’s primary. (http://on.wsj.com/1S4OqLi)

– Uber Technologies is turning to the so-called leveraged-loan market for the first time to raise as much as $2 billion in a sign of the popular ride-sharing network’s hunger for cash as it expands around the world. (http://on.wsj.com/1S4Pf6P)

– Media mogul Sumner Redstone, who has been out of the public eye for more than a year, paid a visit to Viacom Inc’s Paramount Pictures movie studio in Hollywood, according to a letter made public from Viacom’s lead independent director on Tuesday. (http://on.wsj.com/1S4OYRi)

FT

– London Business School raised 125 million pounds ($176.46 million) in a major fundraising round, closing its five-year fundraising schedule ahead of time.

– Twitter’s venture capital arm has invested in online music platform SoundCloud. The investment is reportedly $70 million at a $700 million valuation.

– Volkswagen would seek to change its incentives in its components business so they can compete more with suppliers. It is likely to revamp its components business to shore-up profitability.

– Car-hailing company Uber seeks to raise $2 billion in leveraged loans and is being underwritten by Barclays and Morgan Stanley

NYT

– MSCI Inc, a widely-followed global index provider, said on Tuesday it wasn’t adding China’s local-currency shares to its benchmark emerging markets index, a fresh setback for China’s efforts to join international markets. (http://on.wsj.com/1Ooj4Vn)

– Federal prosecutors claim that Andrew Caspersen ran a Ponzi-like scheme to defraud friends, family and a hedge fund foundation of nearly $40 million over an 18-month period. (http://nyti.ms/25WQC4J)

– High-speed internet service can be defined as a utility, a federal court has ruled in a sweeping decision clearing the way for more rigorous policing of broadband providers and greater protections for web users. (http://nyti.ms/1UstWls)

– Iran has reached an agreement with the Boeing Co for the acquisition of new passenger planes to help modernize its outdated fleet, state-run Iranian news media reported on Tuesday. (http://nyti.ms/21lcCQa)

Britain

The Times

A global flight to safety triggered by the prospect of Britain leaving the European Union and central banks’ ability to stimulate economic growth pushed 10-year German government borrowing costs into negative territory for the first time in history. (http://bit.ly/1U7xnur)

British tenpin bowling operator Hollywood Bowl Group will unveil plans today for a stock market flotation valuing the company at about 280 million pounds ($395.11 million). (http://bit.ly/1U7x3eV)

The Guardian

Kingfisher, the owner of B&Q, will face further pressure over pay and conditions for staff at its annual shareholder meeting on Wednesday when campaigners will ask the retailer to reverse cuts made this year. (http://bit.ly/1U7vMEN)

The UK government now fully backs a legal ban on polluting plastic microbeads in cosmetics and toiletries, environment minister George Eustice said on Tuesday. (http://bit.ly/1U7wJNm)

The Telegraph

Betfred, the bookmaker led by billionaire chairman Fred Done, is to pay out more than 800,000 pounds ($1.13 million)after it was found that one of the company’s VIP customers was betting online with stolen money. (http://bit.ly/1U7w0vM)

Equipment hire company Ashtead is to launch a 200 million-pound share buyback after a strong performance in the North American construction market helped push pre-tax profits up 24 percent to 616.7 million pounds. (http://bit.ly/1U7wqCc)

Sky News

A former finance executive, Barry Nightingale, at the airline Monarch will be installed on Wednesday in a top job at the troubled owner of Garfunkel’s and Frankie & Benny’s. (http://bit.ly/1U7vWfh)

Virgin Active, majority-owned by South African investment group Brait, is selling 35 UK gyms as it moves further to fund its expansion into luxury fitness clubs. (http://bit.ly/1U7wq5e)

The Independent

Evidence given by the former BHS owner Dominic Chappell at an enquiry into the collapse of the chain has been branded “not correct” by Goldman Sachs, days after a former financial adviser to the retailer slammed Chappell as a “Premier League liar”. (http://ind.pn/1U7w7r4)

via http://ift.tt/1Q45c2R Tyler Durden

If there is one bank that is more concerned than any other about global central bank unorthodoxy, it is Deutsche Bank which as we reported yesterday, saw its stock price drop to a record low yesterday. As such it is not surprising that in his overnight note, DB’s Jim Reid focuses on the “broken financial system” and highlights the one indicator that confirms just how broken the system is: the Bund Yield.

This is what he said:

The Moon landing, JFK’s assassination, John Lennon’s shooting, maybe even the Red Wedding episode from Game of Thrones. In years to come will they also be asking you where you were at the time you heard the news that 10 year Bund yields turned negative for the first time? For me it was in an airport in Vienna! Although there has been a creeping inevitability on this for several days now this landmark remains a truly remarkable event. If one wanted a simple indicator to reflect a broken financial system then this would be a strong candidate. In today’s PDF we show 10 year Bund yields back to the early 1800s to put this move in some perspective. It’s incredible when you think that the central bank responsible for the inflation rate in Germany has a target of (just below) 2% per year. Let us stress that until Governments/central banks change policy, yields are likely stay at ultra low levels due to secular stagnation type themes and the overwhelming amount of QE hoovering up bonds. However it still reflects a broken financial system.

 

Which is not to say that DB wants a return to normalcy. As we reported back in February, what DB wants is an end to NIRP and a return to more QE and, eventually, the start of helicopter money, both of which at least will not crush DB’s own stock price if only in the immediate future. Until then, expect laments such as this one to persist and get louder.

via http://ift.tt/1Xp3SKg Tyler Durden

Following MSCI’s second Chinese snub in as many years, when yesterday the indexer again decided not to include China in its EM index due to concerns over Chinese “market integrity”, there was some concern that Chinese stocks would tumble now that China’s market manipulation is the primary topic preventing the country from being integrated into the financial community. That was ironic because after Chinese equities opened down around a percent they promptly spiked with Shanghai closing 1.6% higher, despite the global risk off yesterday, on – you guessed it – more manipulation and government intervention, which pushed not only Chinese equities higher but the USDCNY which after rising to the highest in 5 years, dipped just fractionally below the key resistance level of 6.60.

“It’s a sharp [equities] reversal so there has to be some government intervention,” said Francis Lun, CEO at Geo Securities in Hong Kong. “The Chinese government never wants to see the market falling too much.”  Dear Francis, no government ever wants to see that.

Aside from China, the story has been more of the same: Brexit and today’s Fed meeting (to be followed by tomorrow’s BOJ decision), and after several days of muted of concentrated selling, European stocks rallied, helping end the steepest selloff in global equities since January, as the British pound rebounded ahead of the Federal Reserve’s policy review on stronger than expected UK employment data (Feb-April Unemployment 5.0%, Exp. 5.1%). 

The Stoxx Europe 600 Index climbed for the first time in six days and most shares rose on the MSCI Asia Pacific Index. As noted above, Shanghai equities reversed initial losses, which according to Bloomberg spurred speculation state-backed funds were supporting prices: surely to be expected on Xi Jinping’s birtday. The British pound strengthened, after sliding more than 1 percent in two of the last three trading sessions, and the yen retreated from its strongest level since 2014. Futures on the S&P 500 Index were up 0.2%, after the U.S. benchmark ended the last session at a three-week low. The MSCI Asia Pacific Index rose 0.1 percent, after sliding 4.4 percent over the last four trading days. Japan’s Topix rebounded from a two-month low as the yen snapped a three-day advance and Hong Kong’s Hang Seng Index gained 0.2 percent. Toshiba Corp. surged more than 7 percent in Tokyo as brokerages including CLSA Ltd. turned more positive on the stock.

On the face of this modest global rebound in assets, crude continued to suffer and sank
to about $48 a barrel after a report showed U.S. stockpiles increased; it will be interesting if today’s DOE report once again violently disagrees with the API data.

Over in the wacky world of bonds, yields on Japan’s benchmark government bonds hit record lows across tenors from two to 40 years. The rate on the 10Y JGB fell to an unprecedented minus 0.195%, while 20-year and 30-year yields touched historic lows of 0.135% and 0.21%, respectively. At least they are still positive.  Ten-year U.S. Treasuries yielded 1.62 percent, after ending the last two sessions at 1.61 percent, the lowest closing level since 2012. The rate on similar-maturity German debt held near zero, after sliding into negative territory for the first time on Tuesday as the U.K.’s potential exit from the EU fueled demand for haven assets. In an auction conducted earlier today, Germany sold €3.259BN in 10Y Bunds (less than the €4.0BN expected) at an average yield of just 0.01%.

Today’s key event will be the Fed’s interest rate decision at 2pm when however, the probability of the Fed doing nothing, according to the market, is 100%. The Fed is expected to keep the benchmark lending rate unchanged when its two-day policy meeting concludes in Washington, though the central bank’s statement and Chair Janet Yellen’s comments at a press briefing will be scrutinized for clues on the likely timing of the next increase. Futures indicate the odds of a move by July tumbled to 16 percent from 53 percent since the start of this month, damped by weak U.S. payrolls data and turbulence in global financial markets.

Meanwhile pessimism persists: “While we get a bounce following the huge knockdown across markets, investors should probably sell into the strength ahead of the Brexit vote,” said Nicholas Teo, a trading strategist at KGI Fraser Securities Pte in Singapore. “There’s a lot of uncertainties out there. A statement from the Fed tonight may help calm the market, but concerns remain on the timing of the rate hike.”

Market Snapshot

• S&P 500 futures up 0.3% to 2071
• Stoxx 600 up 1.5% to 325
• FTSE 100 up 1.1% to 5986
• DAX up 1.3% to 9648
• German 10Yr yield up 1bp to 0.01%
• Italian 10Yr yield down 3bps to 1.48%
• Spanish 10Yr yield down 3bps to 1.54%
• S&P GSCI Index down 0.6% to 377.1
• MSCI Asia Pacific up 0.1% to 127
• Nikkei 225 up 0.4% to 15920
• Hang Seng up 0.4% to 20468
• Shanghai Composite up 1.6% to 2887
• S&P/ASX 200 down 1.1% to 5147
• US 10-yr yield up 2bps to 1.63%
• Dollar Index down 0.13% to 94.81
• WTI Crude futures down 1.2% to $47.92
• Brent Futures down 1.4% to $49.12
• Gold spot down 0.3% to $1,282
• Silver spot up less than 0.1% to $17.41

Looking at regional markets, we traditionally start in Japan where equity markets were resilient and shrugged off the weak lead from the US to trade mostly higher, although still lingers on Brexit concerns and the looming FOMC capped upside. Nikkei 225 (+0.4%) was initially pressured at the open but then recovered as USD/JPY found support at the 106.00 level, while ASX 200 (-0.5%) was led lower by commodity names after iron ore fell over 4% and crude prices declined for the 4th consecutive day with WTI below USD 48/bbl following an API Inventory build. Elsewhere, Hang Seng (+0.4%) and Shanghai Comp (+1.6%) recovered despite the initial disappointment from the MSCI decision to delay China inclusion in the EM index, with the rebound led by outperformance in Shenzhen markets on hopes of action for future MSCI inclusion. Finally, 10yr JGBs lead futures rose to record highs as yields continued to slump with the 5yr, 10yr, 20yr and 30yr yields all printing record lows, while the BoJ entered the market to purchase JPY 1.15trl of government debt and also kick-started its 2-day policy meeting.

Top Asian News

• MSCI Rebuffs Chinese Shares for Third Time in Blow to Xi’s Goals:Measures on trading halts, quotas failed to sway index firm
• China Cracks Down on $1.5 Trillion Dark Corner of Fund Industry: CSRC regulations target funds’ role as shadow banking channel
• China Coal Firm Flags Bond Default Risks as Debt Woes Spread: Sichuan Coal Industry unsure it can repay 1.057b yuan
• Ultra-Low Japan Yields Go Global as Hedged Yen Buying U.S. Bonds: Japanese investors bought record amount of Treasuries in March
• Carry Trade Success Convinces Funds Rupee Will Ride Coming Storm: Rupee Sharpe ratio is second highest among developing nations

It has been a relatively quiet start to the session in terms of newsflow after the recent volatility seen and ahead of the key risk event of the FOMC rate decision later today, the DAX has made a slow start to the session but has ticked slightly higher in a retracement from the lows seen yesterday. So far in the session, financial names have outperformed in a corrective move after the sharp selloff yesterday. Despite also being in positive territory, the energy sector is the worst performing and the larger than expected build in API inventory levels may be a catalyst for the sectors underperformance. Bund yields are back in positive territory today after slipping below 0 for the first time on record yesterday. In terms of price action, the upside in equities has seen Bunds come off their best levels and firmly back below 165.50, however still remaining above the 165 level. Additionally, the latest Bund auction was technically uncovered with yields continuing to hover between negative and positive territory.

Top European News

• Osborne Warns of Brexit Tax Toll as ‘Leave’ Gains in Polls: Says that reduced trade, investment would leave GBP30b “black hole.”; Rising Brexit Angst Drives Weaker-Pound Wagers to $35b
• VW Said to Plan Merging Components Units, Weigh Asset Sale: CEO to present sweeping strategy update to public on Thursday
• U.K. Unemployment Falls to Lowest Rate in Almost 11 Years: Jobless rate declined to 5% in 3 months through April, the lowest since 2005.
• Steinhoff Mulls Poundland Bid in Latest European Retail Push: Announcement made without Poundland’s consent, Steinhoff said.
• Schneider’s Second Attempt to Acquire Aveva Ends Abruptly: Cos. had sought to resurrect earlier talks that snagged on concern that integration costs would be too high.

In FX, the yuan fell as much as 0.1 percent to a five-year low of 6.6047 a dollar in Shanghai, before trading little changed at 6.5933. The pound strengthened 0.4 percent to $1.4166. It slid 1.1 percent on Tuesday after five opinion polls in two days put the ‘Leave’ campaign ahead of ‘Remain’ in the run-up to the EU vote and as Britain’s best-selling newspaper, The Sun, backed a withdrawal. The amount wagered on the currency falling to $1.35 or lower — levels last seen in the 1980s — after the referendum has more than doubled during the past three months. The yen weakened 0.2 percent to 106.28 per dollar, after rallying almost 1 percent over the past three sessions. It touched 105.55 on May 3, the strongest level since October 2014. New Zealand’s dollar rose 0.5 percent, the best performance among 16 major currencies tracked by Bloomberg. It recovered from earlier weakness as shares rallied in China, the country’s biggest export market.

In commodities, West Texas Intermediate crude slipped 1.1 percent to $47.95 a barrel, falling for a fifth day. Concern over a global glut in the commodity reemerged with the American Petroleum Institute reporting a 1.16 million-barrel increase in U.S. oil inventories for last week. Nigerian militants, whose attacks on oil infrastructure have sent the country’s output plunging to its lowest level in 27 years, also said for the first time they are considering peace talks. Copper rose 1.5 percent in London and nickel gained 1 percent, advancing for the first time in a week. Gold was little changed, after surging 3.4 percent over the last five days.

On today’s US event calendar, highlights Include the Producer Price Index and Empire Fed reports, Industrial Production, the DoE crude inventory report, as well as the latest TIC data, however the main event will be the June FOMC rate decision at 2pm  and subsequent comments from Fed Chair Yellen.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• Risk on sentiment across European equities amid upside in financial names ahead of the FOMC meeting.
• GBP regains its footing against major counterparts with early Brexit fears subsiding.
• Highlights Include, FOMC rate decision, US PPI Final Demand, DoE crude inventory report and comments from Fed Chair Yellen.

• Treasuries lower in overnight trading as global equities rally, oil and precious metal drop; FOMC rate decision and SEP at 2pm ET followed by presser at 2:30pm; Fed will skip rate move at meeting and is likely to retain its forecast for 2 hikes this year, based on published research by economists and others; next possible move seen in 3Q or 4Q
• Fed fund futures fully pricing next rate hike around June 2017, implied rate 62bp, near midpoint of 50-75bp target range
• The campaign to keep the U.K. in the European Union is seeking to regain momentum with a warning from Chancellor of the Exchequer George Osborne that a vote to leave could create a fiscal crisis
• Over in Canada, a $7 billion fund manager is loading up on cash in an attempt to profit if the U.K. votes to leave the European Union
• The U.K. jobless rate declined to 5% in the three months through April, the lowest since 2005, as labor market showed signs of resilience in the face of the referendum on European Union membership
• China’s stocks jumped the most in two weeks, reversing an earlier loss and spurring speculation that state-backed funds may be supporting the market after MSCI Inc. refused to add the nation’s domestic equities to benchmark indexes
• China’s overall growth numbers are stabilizing. However, beneath the surface, signs of increasing weakness in hiring and private-sector investment are ringing alarm bells
• As well as a surging yen, non-existent inflation and a weak economy, Bank of Japan Governor Haruhiko Kuroda has something else to think about when deciding monetary policy this week: unhappy banks

US Event Calendar

• 7am: MBA Mortgage Applications, June 10 (prior 9.3%)
• 8:30am: PPI Final Demand m/m, May, est. 0.3% (prior 0.2%)
• 8:30am: Empire State Manufacturing, June., est. -4.90 (prior -9.02)
• 9:15am: Industrial Production m/m, May, est. -0.2% (prior 0.7%)
• 10:30am: DOE Energy Inventories
• 2pm: FOMC Rate Decision (Upper Bound), est. 0.5% (prior 0.5%); (Lower Bound), est. 0.25% (prior 0.25%)
• 4pm: Net Long-term TIC Flows, April (prior $78.1b)
• 7:40pm: Bank of Canada’s Poloz speaks in Whitehorse, Yukon Territory

DB’s Jim Reid concludes the overnight wrap

Asian markets have stabilised though despite the risk off yesterday and despite the news last night that MSCI has decided to delay the inclusion of Chinese equities into their global benchmark. Chinese equities opened down around a percent but the Shanghai and Shenzhen are up around 1.5% and 3% as we type. Bloomberg is reporting speculation that perhaps the Chinese government is intervening to soften the blow. The Nikkei is 0.55% higher ahead of the BoJ tomorrow. GBPUSD is at $1.414 up from around $1.410 at the time of the ComRes poll.

The slightly better Asian risk sentiment followed another day of risk off globally. European equities extended their losses to a fifth consecutive day, dropping by -1.92% yesterday. UK equities were also hit hard as the FTSE also posted its fourth consecutive day in the red with losses amounting to -2.01%. Both indices saw broad based declines across all sectors, with every company but one declining in the latter index. Credit markets were also caught in the crossfire with both iTraxx Main and Crossover spiking off yesterday’s three month highs as spreads widened further by +5.5bps and +22.8bps respectively on the day. US equities yet again outperformed and impressively only closed down -0.18%. The VIX also stabilised after Monday’s outsized move. Decent US data (see below) perhaps helped.

As we discussed at the top, Germany 10Y yields turned negative for the first time in recorded history, hitting -.004% (-2.7bps). The demand for safe haven assets also caused US 10Y treasuries to rally for the sixth consecutive day as yields dropped to 1.6% (-1.2bps) – although we’re back above 1.62% this morning.

Trading the possible Brexit outcomes saw another layer of complexity yesterday as a widely read Reuters article suggested that the ECB will soon release a public statement pledging that they will backstop financial markets alongside the Bank of England if the UK does vote to leave the EU. The ECB’s pledge is expected to involve opening swap lines with the Bank of England to provide unlimited funding to banks in Euro and Sterling in hopes of preventing a liquidity crunch and subsequent economic fallout.

As a final word on the EU referendum for today, yesterday my team published a report “Brexit Risk in GBP and EUR Credit”. Firstly, we provide a performance overview of GBP vs. EUR and USD credit in terms of both cash bond spreads and currency-adjusted spreads. Secondly, we compare the performance of UK issuers’ bonds vs. Eurozone and US issuers’ bonds across currencies. We find that GBP bonds have underperformed EUR and USD bonds, especially in the non-financial sector. There has also been some underperformance of UK issuer credit recently, particularly in the GBP space. However, it seems that Brexit risk mainly manifests itself via the currency channel rather than credit risk here. See your emails at 1525 BST yesterday from Michal Jezek for the report or contact him (Michal.Jezek@db.com) if you haven’t got it.

A few weeks ago when Fed rate hike expectations started to build it would have been hard to imagine that the preview of today’s FOMC would be relegated to the 9th paragraph but that reflects how events have changed. DB’s Joe Lavorgna expects the Fed to remain on hold tonight (along with everyone else) and the tone of the statement to be mixed. While the Fed is unlikely to signal a July hike with risks of a possible labor market slowdown following the May employment report, it will likely leave the growth, employment and inflation forecasts largely intact with only minor tweaks to the Summary of Economic Projections (SEP). In particular he does not expect the Fed’s 2016 and 2017 median rate forecasts as per the ‘dot plot’ to fall, thus allowing the Fed the option to raise rates in the coming months should the data improve. The Fed should also address the fact that its five-year forward breakeven inflation rate has moved substantially downward. Yellen’s post-meeting Press conference will likely focus on many of the themes of her speech last week, with an emphasis on the uncertainty associated with the Fed’s forecasts and the data dependent nature of the monetary policy action. Brexit will also likely feature as a risk to their outlook.

Data took an understandable back seat yesterday but for completeness let’s look at what we saw. Starting off in the UK, we saw May inflation numbers which largely came in softer than expected. CPI (+0.2% mom vs. +0.3% expected) and PPI (+0.1% mom vs. +0.3% expected) both came in lower than expected, and while RPI was in line with expectations on a monthly basis (+0.3% mom) but disappointed in annual terms (+1.4% YoY vs. +1.5% expected). We also saw the final May CPI numbers for Italy (-0.3% YoY) and Spain (+0.5% mom; -1.1% YoY), both of which were in line with expectations. One major positive data point was the April industrial production data out of the Eurozone, which clocked in at the very upper end of the forecast range and well above expectations (+1.1% mom vs. +0.8% expected).

Heading over to the US, the data was positive across the board. The NFIB Small Business Optimism index for May surprised on the upside to hit its highest level since January (93.8 vs. 93.6). Despite May’s weak payrolls report, the uptick was largely supported by a better labour market outlook among small business owners, with both a moderate improvement in plans to hire (12% vs. 11% previous) as well as raise worker compensation (26% vs. 24% previous). Although expectations for the economy remained negative, the sub index improved on the month (-13% vs. -18% previous).

Thereafter we saw the closely watched US retail sales also beat expectations, posting an increase of +0.5% mom in May (vs. +0.3% expected). The uptick was a general broad-based gain, as nine out of 13 categories demonstrated increases in demand with online merchants and clothing stores leading the way. We also saw the import price index for May beat estimates (+1.4% vs. +0.7% expected), primarily driven by the rising cost of oil. Both the improved retail sales data and the rising import prices could have sparked a more interesting debate ahead of the FOMC meeting had it not been for last month’s weak unemployment numbers.

After a relatively quiet start to the week, today is certainly a busy day in terms of data. We start off in Europe where we’ll get final May CPI numbers for France, which is expected to come in at +0.3% mom without any revisions. Thereafter we’ll get the employment report from the UK, where the April unemployment rate is expected to hold steady at 5.1% (5.1% previous). Average weekly earnings are expected to have grown at a slower rate (expected +1.7% 3M/YoY vs. 2.0% previous), while jobless claims for May are expected to be unchanged (vs. -2.4k previous). We will also see the Eurozone trade balance for April (expected 21.5b vs. 22.3b previous).

It’s even busier day over in the US. First off we’ll get PPI numbers for May, which are expected to clock in at +0.3% mom (+0.1% ex-Food and Energy). DB’s Joe Lavorgna notes that the PPI data will be important for market participants and Fed policymakers because they should provide clues as to the near-term direction of the core PCE deflator. The PPI series on selected healthcare industries, a direct input into estimating the medical care component of the core PCE deflator (the Fed’s preferred measure of inflation), should be closely watched. It should also be noted that the PPI data will be the last inflation data point that the Fed’s policymakers will see before the conclusion of the FOMC meeting.

Thereafter we’ll get a forward and backward looking perspective on the health of the US factory sector with the NY Fed’s Empire State Manufacturing Survey (expected -4.50 vs. -9.02 previous) and the industrial production numbers for May (expected -0.2% vs. +0.7% previous) respectively, both of which are expected to indicate weakness in the industrial sector.

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After a relatively calm and stable three months, the last three days have seen Bank of America Merrill Lynch’s Global Financial Stress Index soar by the most since the middle of the European crisis in August 2011.

The index, that tracks cross-market risk, hedging demand and investor flows has surged more than 90 percent in just three days…

The last time the GFSI was rising at such a pace was August 2011, when this happened…

In August, European Commission President Jose Manuel Barroso warns that the sovereign debt crisis is spreading beyond the periphery of the eurozone.

 

The yields on government bonds from Spain and Italy rise sharply – and Germany’s falls to record lows – as investors demand huge returns to borrow.

This level of stress is higher than the Aug 2015 China crisis. It sems for now that more than a few are banking on ‘protection’ saving them…

We just gently remind them what happened in August when ETF liquidity collapsed…

VIX doesn’t hedge that!

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Submitted by Michael Shedlock via MishTalk.com,

With all eyes on Brexit, let’s not lose track Spanish elections on June 26.

Center-right Popular Party (PP) candidate and EU puppet, Mariano Rajoy might go down in flames in another election too close to call.

The December 2015 election ended in a deadlock with no coalition able to form a majority.

On Monday, in televised debates, socialist (PSOE) leader Pedro Sánchez ruled out an alliance with Rajoy.

If Sánchez sticks to that pledge there are only two possible outcomes: another hung election or an alliance of PSOE with Unidos Podemos (United We Can).

The Financial Times reports Spanish Party Leaders’ TV Debate Offers Familiar Dilemma.

Spain’s election campaign kicked into a higher gear on Monday night as the first, and only, television debate between party leaders saw tetchy but familiar exchanges over economic policy, corruption and coalition strategies.

 

The two-hour discussion saw Mariano Rajoy, the acting prime minister, come under sustained attack from his three main rivals. The leader of the centre-right Popular party was sharply criticised for his handling of recent corruption scandals in his party and for Spain’s unemployment problem, but the attack lines were mostly well-rehearsed — as were Mr Rajoy’s replies.

 

Polls suggest that the Spanish electorate will once again break four ways in the election. According to a survey by Metroscopia, published in El País on Sunday, the PP is on course to win 28.9 per cent of the vote, with the Socialists taking 20.8 per cent and Ciudadanos 15.9 per cent.

 

Podemos, which is running with the United Left party on a new list called Unidos Podemos (United We Can), is predicted to push the Socialists from second place and win as much as 25.4 per cent.

 

Mr Iglesias, who will need the support of the Socialists to become prime minister, urged Mr Sánchez to throw in his party’s lot with Unidos Podemos. “There are only two options: the PP or a progressive government,” he said.

 

The Socialist leader refused to commit himself to a deal with Podemos but ruled out an alliance with the PP.

 

Albert Rivera, the leader of Ciudadanos, sought to land a series of blows against Podemos — accusing the anti-establishment party of planning to take Spain out of the EU — and against Mr Rajoy’s economic record. “An unemployment rate of 20 per cent is nothing to be proud of,” he said.

December 2015 Election Results vs. Current Projections

The above charts from El Pais.

Those are the latest projections I can find. They are before the Monday’s television debate.

To form a majority 176 seats are needed. PSOE + Unidos Podemos has approximately 170. It will not take much to knock Rajoy out of this.

If the debate swings things in a net +6 manner to Unidos Podemos (United We Can) + PSOE, it’s likely they will form an alliance, ending the regime of Rajoy.

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If you're itching to go out clubbing in Qatar, make sure you keep your hand over your drink.

A 22 year old Dutch woman said she was drugged by a Syrian man during a party in March at the Crystal Lounge nightclub at the W Doha Hotel, and woke up in an unfamiliar apartment. Upon waking up the woman known as "Laura" realized that she had been sexually assaulted, and subsequently reported the incident to the Qatari police.

The police, in turn, arrested Laura on March 14 on charges of committing illicit sex acts, and have held her ever since.

Brian Lokollo, Laura's lawyer argued: "She went dancing, but when she returned to the table after the first sip of her drink, she realized that she had been drugged. She really didn't feel very well. The young woman remembers nothing more until the following morning, when she woke up in a totally unfamiliar apartment and realized to her great horror that she had been raped."

Laura finally learned her fate on Monday, as she was convicted by the Qatari court of "having sex out of wedlock." The court sentenced Laura with a one-year suspended sentence and deportation to the Netherlands, Al Jazeera reports.

A court official described the one-year suspended sentence as "lenient", adding "had she been a Muslim woman, she would have received at least five years in jail. No one can get out of such charges here in Qatar."

As far as the man, identified as Omar Abdullah al-Hasan, he was also convicted of having sex outside of marriage, which is a serious offense in Qatar. al-Hasan was sentenced to 100 lashes for illicit sex acts, and another 40 lashes as punishment for public drunkenness – he too will be deported.

al-Hasan acknowledged having sex with Laura, but claims it was consensual.

Laura's mother was quoted by Dutch media as just being thankful it was over, and that Laura was just going to be deported – "I'm shaking in my legs. I can't believe it. She has been sentenced. I don't know what for but I don't care. This is the best I could have wished for."

* * *

So the lesson here is twofold, one is if you're going out in Qatar, cover your drink, and the second is that if you get raped after a night out, you're going to be arrested and convicted of having sex outside of wedlock. There's really not much else to say about that.

Additionally, it would be beneficial to try and remain sober, just to ensure you don't end up on the receiving end of 40 lashes.

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