Submitted by Pater Tenebrarum via Acting-Man.com,

A Negated Breakdown

There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.

We suspect that in it was initially still widely expected that stock market weakness was just a fluke and that the downtrend in the gold price would therefore soon resume. Moreover, base metal mining stocks were pounded mercilessly and as we have previously discussed, there is a completely illogical short term correlation between this sector and gold mining stocks, likely due to various tracking products and the mindless automatic buying and selling associated with them. From a technical perspective the action has created quite an interesting situation though:

XAU and HUI daily. After initially beginning to recover from November, resp. December lows, both indexes sold off sharply after the first trading week in January, and in the process broke below a previous support level that has been tested many times and has up to that point always held. It looked like yet another breakdown in the long-lasting bear market was underway – but the indexes quickly reversed back above the broken support line – click to enlarge.

As the chart annotation indicates, the recent reversal is definitely positive. Both false breakouts and false breakdowns often turn out to be reliable trend change signals. An additional bonus in this case was that the initial breakdown has induced widespread capitulation (judging from anecdotal evidence).

Advance in Gold Characterized by Caution

What looks encouraging as well is the recent saucer-shaped bottom in gold – usually this kind of formation leads to a fairly decent rally:

Gold begins to rise out of a saucer-formation – click to enlarge.

Contrary to the immediately preceding rally attempt, the current one has been a “scared rally” so far. There has been fairly little speculative buying in COMEX futures, and small speculators have actually remained net short up until last week, when their net position turned roughly neutral.

Speculative buying in COMEX gold futures has so far been far more subdued than during previous rallies – click to enlarge.

The mainstream financial press is still busy penning obituaries on gold, which is generally a good sign as well. A playable rally should be widely disbelieved in its early stages. According to the article we have linked to “many still don’t see a bottom”, but in terms of major non-dollar currencies it has of course occurred a few years ago already. In numerous EM currencies gold has in fact attained new all time highs, but even priced in major developed market currencies the performance of the gold price continues to diverge significantly from that in USD terms.

Gold in yen and euro. There wasn’t even a bear market in yen terms, merely a correction – and it bottomed in mid 2013. In euro terms the gold price has bottomed in late 2014 and appears to have put in its third consecutive higher low recently. If it manages to exceed its early 2015 interim high, it will be legitimate to speak of a new bull market – click to enlarge.

In developed market commodity currencies like the Canadian dollar and the Australian dollar, gold has bottomed in mid 2013 as well and has gained significant ground since then.

As we have remarked in a previous update on the sector, we don’t like it when gold rises for a “reason”, and we found it a bit unsettling that a consensus seemed to have emerged that the gold rally was primarily considered a result of the stock market sell-off.

However, so far it has continued to hold up quite well, in spite of a not overly dovish sounding FOMC statement and a rebound in stocks, so perhaps the gold market is actually beginning to look beyond these presumed correlations. It is a bit too early to judge though – a further short term rally in stocks or in the US dollar may well derail it again.

An Update on Divergences

There is one technical development that on the face of it argues for caution. Below is an update of the divergences between the HUI-gold ratio, the HUI and gold. Readers may recall that the last divergence that was put in seemed quite encouraging, as the HUI had failed to confirm a new low in gold. Now a third consecutive divergence has occurred – this time, the above discussed brief breakdown in XAU and HUI was not confirmed by the gold price. However, neither have the two indexes managed to confirm gold’s recent move to an interim high.

The HUI-gold ratio, the HUI and the USD gold price – the series of non-confirmations continues, with the most recent one (illustrated by the red line) normally considered negative – click to enlarge.

As we have pointed out in “How to Recognize an Emerging Bull Market”,   usually major turning points are first signaled by strength in gold stocks and only later confirmed by a rising gold price. However, given the strange correlation between gold stocks and base metal mining stocks which has developed in recent years, one should perhaps not be too fixated on the indexes, especially as there are large disparities within the sector – numerous stocks are notably lagging and underperforming, while others are performing quite well.

If one looks at the two gold stocks with the biggest market cap and the greatest liquidity, one actually sees a perfect example of how things should be. Both ABX and NEM have begun to rally well before gold made its low and have built quite decent looking bottoming patterns in the process. Both have not confirmed the new lows in XAU and HUI in mid January. ABX looks especially strong:

ABX, NEM and the gold price – this is a classic bullish divergence – click to enlarge.

On the other hand, GG and RGLD are examples of large cap gold stocks with a fairly strong institutional following that have performed very poorly, so on the whole it is a mixed bag.

GG and RGLD – two major gold stocks that have performed very poorly – click to enlarge.

As we have stressed late last year, bottoming processes in the sector are always tricky (see 1992-93 as a pertinent example). It could well be that things are simply especially tricky this time around. Naturally, we can by no means rule out yet that the rebound is just another flash in the pan – that will only be possible once the HUI actually overcomes its 200 dma and manages to hold above it.

South African Gold Stocks vs. the Rest of the Sector

We have discussed Harmony Gold in early December after the company had suddenly paid down a hefty chunk of its debt, and the rand gold price broke out to new highs. We revisited South African gold stocks and the rand gold price again in early January (see “The Canary in the Gold Mine” for details). In the meantime, gold in Rand has surged even further, as the rand up until recently weakened quite a bit more in concert with other EM currencies. As a result this sub-sector has delivered an excellent performance – as the combination of fundamental developments and chart patterns a few weeks ago indicated it would.

The three South African gold miners that have benefited the most from the weaker ZAR, as most or all their producing assets are located in SA – click to enlarge.

However, it seems to us that the time is ripe for at least a short term correction or a consolidation in these particular stocks. If last week’s rebound in oil prices/ industrial commodities and stock markets continues for a while longer, EM currencies are bound to strengthen. As you can see below, the Rand has in fact turned up against the USD last week from extremely oversold levels (shown as “overbought” in USD/ZAR), and the Rand gold price has begun to correct accordingly:

The Rand gold price and USD/ZAR – click to enlarge.

Keep in mind though that these stocks have historically tended to add to their gains after such an initial correction, even if gold in Rand only proceeded to move sideways in a new, higher range. This may be because some investors only react once the first earnings results reflecting the move in the Rand gold price have been released. So it seems worth keeping an eye on these stocks.

In the meantime, it could well be that certain laggards in the sector are actually poised to do something analogous to what these stocks have done. Consider for instance the ratio of Canadian gold mining form Kinross (KGC) to HMY. It certainly argues in favor of mean reversion. The chart of KGC by itself looks awful – but so did that of HMY when it approached its low. Another important similarity is that the market fails to reflect a number of positive fundamental developments in KGC’s case as well at present (we will discuss this particular stock in more detail in a separate post).

The ratio of KGC to HMY has moved from one extreme to another – perhaps the time for a mean-reversion has now come? Many Canadian gold stocks have been extreme laggards, and in a number of cases it is not quite clear why – click to enlarge.

In short, there may be a few opportunities to redeploy funds from one group of stocks within the sector to another group that still appears to have catch-up potential. As an aside, many silver stocks have also been beaten down a lot and may therefore have bounce potential, but as long as economic confidence is weakening, gold should continue to outperform silver, even though silver is historically cheap relative to gold.

Conclusion

In spite of the sector continuing to try the patience of investors, a number of positive things have happened lately – but as so often, it is a mixed bag, as a few short term technical warning signs are in evidence as well (see the discussion of divergences above). Whether a sector-wide trend change is in fact beginning remains of course uncertain until certain technical preconditions have been met (such as overcoming lateral resistance levels and the 200 dma).

However, as we have previously argued, even short term rebounds that are subsequently surrendered again are worth playing in this sector due to its enormous volatility (consider e.g. that HMY has rallied nearly 300% between late November and late January; not too many stocks manage to do this in just two months). At some point there will be a sector-wide rally that will turn out to be the “real McCoy” and we will certainly comment if/when that happens. Note as an aside that the fundamental macro backdrop for gold itself has improved of late.

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The Keynesians will not be pleased. Despite the holiday season, December spending disappointed with no change MoM (0.0% vs +0.1% exp). This is further sentiment-destructivbe as income data rose more than expected MoM (+0.3% vs +0.2% exp) even as income growth YoY slipped to its weakest in 9 months.

Perhaps most sadly of all, 42% of December Personal Income gains came from Government Social Benefits, mostly Social Security and Medicare. Vive le recovery.

Spending on Goods, both durable and non-durable, tumbled by $34.6 billion offset by $33.9 billion jump in spending on services.

Widening the gap…

This of course means the personal savings rate rose, pushing to 5.5% – the highest since 2012.

Not what the PhDs in The Eccles Building are demanding or their textbooks are predicting.

Charts: Bloomberg

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After last week’s relatively quiet, on macro data if not central bank news, week the newsflow picks up with the usual global PMI survey to start, and end the week with the US January payrolls report.

Here is a closer look at what to expect via DB:

• We’ve got a busy day of data kicking off on Monday in Europe with the final revisions to the manufacturing PMI’s (January) for the Euro area, Germany and France. UK money supply and credit aggregates data is also due this morning. Over in the US we’ll get the December core and deflator PCE data along with personal income and spending, manufacturing PMI, construction spending and the important ISM manufacturing and prices paid.
• It’s a quieter session on Tuesday with just Euro area PPI and German unemployment data in the morning, before we get vehicle sales data and the IBD/TIPP economic optimism print in the US.
• Wednesday starts in China where we’ll get the Caixin services and composite PMI prints. We’ll also get the non-official readings for Japan before we get the final revisions for the services and composite prints for the Euro area, Germany and France along with readings for UK, Italy and Spain. Euro area retail sales is also due. Over in the US on Wednesday the ADP employment change print for last month will be closely followed for clues ahead of Friday. The ISM non-manufacturing print is the other big release along with the final services and composite PMI’s.
• The main focus during the morning session on Thursday will be on the UK where the BoE rate decision is due. Over in the US we’ll get final revisions to those soft December durable and capital goods orders data, along with initial jobless claims, nonfarm productivity, unit labour costs and December factory orders.
• The only data of note on Friday in Europe will be German factory orders. Over in the US the main event will of course be the January employment report where we’ll get payrolls, unemployment, participation rate and weekly earnings data. If that wasn’t enough we’ll also get the December trade balance and consumer credit data.

And some more detail from Goldman on what to expect:

Monday, February 1

08:30 AM Personal income, December (GS +0.3% consensus +0.2%, last +0.3%)

• Personal spending, December (GS flat, consensus +0.1%, last +0.3%)
• PCE price index, December (GS flat, consensus flat, last flat)
• Core PCE price index, December (GS +0.11%, consensus +0.1%, last +0.1%)
• PCE price index (yoy), December (GS +0.6%, consensus +0.6%, last +0.4%)
• Core PCE price index (yoy), December (GS +1.42%, consensus +1.4%, last +1.33%)

We forecast personal income grew by a modest 0.3% in December. Payroll growth was strong in December, although wage growth was modest. Personal spending was probably flat in December, in line with the weak December retail sales report and some modest deceleration in services expenditures reported in last week’s Q4 GDP report. We expect core PCE prices to increase by 0.11% in December but the gain in the quarterly core PCE price series from Friday’s GDP suggests some upside risk to this forecast. The core PCE price index likely rose 1.4% over the past year with the possibility that the year over year rate rounds to 1.5%.

10:00 AM ISM manufacturing, January (GS 48.4, consensus 48.5, last 48.2)

Manufacturing surveys were mixed, with all but the Richmond Fed and Chicago PMI pointing to contracting activity. The Philly index rose by 6.7pt to -3.5 and the Chicago PMI was up 12.7pt to 55.6. The Empire State index declined (-13.2pt to -19.4), as did the Richmond Fed (-4pt to 2) and the Dallas index (-13.0pt to -34.6) while Kansas City was flat at -9. On net, our manufacturing survey tracker – which is scaled to the ISM index – rose 0.8pt to 49.2. We find that that weak net exports – probably caused by continued dollar appreciation and weak foreign demand- play the most important role in the manufacturing’s sector recent difficulties (in addition to reduced orders from the energy sector), and are likely to contribute to a contractionary read on ISM manufacturing for January.

10:00 AM Construction spending, December (GS +0.6%, consensus +0.6%, last -0.4%)

We expect construction spending rose in December, reflecting continued strength in private residential investment. Construction spending unexpectedly declined 0.4% in November, but remains 10.5% higher over the last year.

01:00 PM Vice Chairman Stanley Fischer (FOMC voter) speaks

Vice Chairman Fischer will discuss recent developments in the U.S. economy and monetary policy at a Council on Foreign Relations event in New York. We will be looking for indications about the weight Vice Chairman Fischer puts on the recent tightening in financial conditions in the outlook for monetary policy.

Tuesday, February 2

01:00 PM Kansas Fed President Esther George (FOMC voter) speaks

Federal Reserve Bank of Kansas City President Esther George will speak about the U.S. economic outlook and monetary policy in Kansas City at the Central Exchange, a group that promotes leadership development for women. President George is a voting FOMC member this year.

04:00 PM Total vehicle sales, January (GS 17.3mn, consensus 17.4mn, last 17.2mn)

Domestic vehicle sales, January (GS 14.0mn, consensus 13.7mn, last 13.5mn)

Our auto analysts expect total vehicle sales to accelerate slightly from December to 17.3mn.

Wednesday, February 3

08:15 AM ADP, January (GS +185k, consensus +190k, last +257k)

Based on our understanding of how ADP filters its own proprietary data with other publicly-available information, we expect a 185k gain in ADP payroll employment in December.

10:00 AM ISM non-manufacturing, January (GS 55.0, consensus 55.2, last 55.8)

Among service sector surveys, the Dallas Fed index (-12.7pt to -10.4) and the Philly Fed (-21.6pt to 5.1) declined. The NY Fed increased by 2.0pt +4.0. (The New York survey is a relatively new and seasonally-not adjusted series). The Richmond Fed also rose (revenues +10pt to 10, employment flat at +18), while the Markit PMI was flat. The ISM non-manufacturing index fell by 0.8pt last month.

Thursday, February 4

08:30 AM Nonfarm productivity, Q4 preliminary (GS -1.2%, consensus -2.0%, last +2.2%)

Unit labor costs, Q4 preliminary (GS +4.4%, consensus +4.0%, last +1.8%)

Nonfarm business output growth was close to flat in Q4, while hours worked likely rose at a roughly 1.2 % rate, implying a roughly 1.2% decline in productivity. Unit labor costs—compensation per hour divided by output per hour—likely rose at about 4.4%.

08:30 AM Initial jobless claims, week ended January 30 (last 278k)

Continuing jobless claims, week ended January 23 (last 2,268k)

08:30 AM Dallas Fed President Robert Kaplan (FOMC non-voter) speaks

Federal Reserve Bank of Dallas President Robert Kaplan will speak on global economic conditions in Dallas.

10:00 AM Factory orders, December (GS -3.1%, consensus -2.8%, last -0.2%)

Factory orders likely declined markedly in December, reflecting the already-reported weak December durable goods orders.

Friday, February 5

08:30 AM Trade balance, December (GS -$43.0bn, consensus -$43.2bn, last -$42.4bn)

The new advance report on trade showed a slightly wider goods deficit in December (-$61.5bn from -$60.5bn), reflecting a widening trade balance across most sub-categories. We expect the services balance to be little changed in December. Overall, we expect the total trade deficit to be at -$43.0bn, and for the deficit to continue acting as a drag on GDP growth in the coming quarters.

8:30 AM Nonfarm payroll employment, January (GS +190k, consensus +190k, last +292k)

• Private payroll employment, January (GS +180k, consensus +180k, last +275k)
• Average hourly earnings (mom), January (GS +0.3%, consensus +0.3%, last +0.0%)
• Average hourly earnings (yoy), January (GS +2.2%, consensus +2.2%, last +2.5%)
• Unemployment rate, January (GS 5.0%, consensus 5.0%, last 5.0%)

Data have been broadly softer this month, including the higher claims data. In addition, we expect to see some payback from the warm weather-induced boost to payroll growth at the end of last year. We expect a December payroll gain of 190k after the strong December 292k print and an upwardly revised 252k read for November, which resulted in the firm Q4 2015 average of 284k. We also expect the unemployment rate to be unchanged at 5.0%, and average hourly earnings to increase 0.3%.

* * *

Finally, in table format courtesy of SocGen:

Source: DB, GS

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Haruhiko Kuroda’s move to NIRP and Mario Draghi’s implicit promise to ramp up PSPP in March underscore the extent to which Janet Yellen has made a policy mistake by hiking at a time when the US economy (not to mention the global economy) looks to be decelerating and the disinflationary impulse looks to be gathering steam.

January marked a rather inauspicious start to the new year with wild swings in Chinese markets fueling volatility across the globe and crude carnage taking its toll on investors’ collective psyche. Oil managed to ramp but China is still a (big) problem, as we explained this morning in the overnight wrap. 

With Beijing set to export its deflation to the rest of the world and with central bankers in panic mode, investors are piling into core paper like there’s no tomorrow. Below, find some insightful commentary from former FX trader Mark Cudmore.

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Moments ago, following last week’s torrid crude oil price rebound driven entirely by now-denied hopes of some production cut consensus between oil suppliers, namely Russia and Saudi Arabia, oil halted its four-day rally as weak Chinese manufacturing data added to economic demand concern.

“The risk seems to be the greatest on the downside again” and speculation of OPEC production cuts has “faded fast,” says Saxo Bank head of commodity strategy Ole Hansen. “China and South Korea are both helping the market return to fundamental focus where it is worried about demand.”

But the biggest downward catalyst overnight as noted previously, was not demand concerns but a return of oversupply fears following a note by Goldman’s Damien Courvalin who warned quite explicitly that “cuts are unlikely” in what Goldman dubs the New Oil Order, and that in the current rebalancing phase, oil prices will “remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterized by a highly volatile and trend-less market with the price lows likely still to be set.” But most importantly Goldman writes that “given the likely time necessary to enact such cuts, the continued large builds in US and global inventories and the fast pace at which US Gulf Coast spare storage capacity is filling, it may already be too late for OPEC producers to be able to prevent another large decline in prices.” Here’s why:

The past week featured headlines suggesting that OPEC producers and Russia would meet in February to discuss a potential coordinated cut in production. Despite the sharp bounce in oil prices that these headlines generated, we do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists’ forecast. This view is anchored by our belief that such a cut would be self-defeating given the short-cycle of shale production and the only nascent non-OPEC supply response to OPEC’s November 2014 decision to maximize long-term revenues. As a result, we reiterate our view that prices need to remain low enough to force fundamentals to create the adjustment back towards a new equilibrium. We believe this inflection phase requires oil prices to remain between $40/bbl (financial stress) and $20/bbl (operational stress) until 2H16. This phase will be characterized by a highly volatile and trend-less market with the price lows likely still to be set.

The full list of Goldman points listed below, which incidentally are quite accurate, is a useful primer for any oil bull who hopes that a prompt supply cut is in the cards:

1. The potential for production cuts became once again a key driver to oil prices following headlines last Wednesday (January 27) that Russian officials had decided to talk to Saudi Arabia and other OPEC members about output cuts of 5% although no discussions are scheduled at this time and other headlines suggested the move was instead initiated by Saudi Arabia or Venezuela. On Thursday, ministers from Saudi Arabia and the UAE were instead commenting on their continued oil field investments to sustain production. Despite this lack of clarity, oil prices rallied 7% last week, taking 1-month oil price volatility to 70%, its highest level since April 2009.
2. We continue to view a coordinated production cut as highly unlikely and ultimately self-defeating. The decision made by OPEC in November 2014 and again in December 2015 to sustain production is the one that maximizes their revenues medium term. While fiscally difficult in the short term, it was nonetheless necessary in the face of strongly growing higher-cost non-OPEC production (see The New Oil Order, October 2014). And after a 14-month wait, the strategy is finally bearing fruit, with non-OPEC producer guidance pointing to production declines since oil prices fell below $40/bbl a few weeks ago. We had identified this as the required pain threshold to see sufficient financial stress and shut funding markets to finally impact forward production (see Lower for even longer, September 2015). As such, a cut that would bring prices above $40/bbl now would undermine this only nascent adjustment. Exacerbating the difficulty of enacting a correctly sized cut in our view are (1) the current high price volatility, (2) the remaining uncertainty on the size of the oil oversupply, (3) the continued rapid fill of remaining storage capacity, and (4) the potential for US production to quickly respond.
3. We believe that the spring 2015 rally in oil prices has increased the resolve of core OPEC producers to stick to their policy of sustaining production and let oil prices rebalance this market (as they have repeatedly commented in recent months). Specifically, last year’s price rally was quickly followed by an increase in the US oil rig count and we would expect such a response once again should prices rally near $60/bbl. In fact, recent E&P cost and efficiency guidance and producer comments at our equity analysts’ Energy Conference in January suggest that this threshold is now likely even lower. Further, the velocity of such a response will be much greater this time as the average number of days from beginning of drilling to production collapsed by 40% from 1Q to 3Q15 to reach 80 days in the Permian. The magnitude of such a response will also be supported by the acreage highgrading that occurred last year, lower legacy decline rates and average first 3 months’ production for new wells up by 25% over that period.
4. Such a production cut would further require cooperation between OPEC members. And while Venezuela, Algeria and Iraq – which for the first time last week hinted at welcoming cuts – would agree to such a decision, Iran’s production ramp up would likely be a significant hurdle to any OPEC action. While Iranian officials have commented on their desire to not flood the market, their production recovery target remains aggressive and their desire to regain market share steadfast. Iranian observed exports have already picked up in January to their highest level since April 2014 despite these remaining to destinations permitted under sanctions given reported caution in granting ship insurance to vessels carrying Iranian crude to new customers. As a result, a production cut would likely need to accommodate continued growth in Iranian production, an agreement which seems unlikely given recent tensions with Saudi Arabia.
5. For Russia, the desire to join a coordinated production cut would need to come from the government as our Russian energy analyst, Geydar Mamedov, estimates that Russian oil producers remain free cash flow positive even at $30/bbl given the concurrent Ruble depreciation (we continue to expect steady production growth in 2016 and 2017). The strain of low oil prices are visible at the government level however as $30/bbl oil prices would leave the 2016 federal budget deficit reaching 5% of GDP vs. the government’s/President Putin’s 3% target according to our Russian economist Clemens Graffe. Since oil taxation is progressive and causes the deficit to widen faster as oil prices decline, current prices raise the risk of a potential increase in oil taxation and in turn lower production, which should it occur, would be an incentive to have other countries cut output at the same time. While a risk, our Russian economist estimates that given the need for legislative changes in order to institute tax changes and consensus expectations for prices to recover from current levels in 2H16, the pressure would likely be instead on better collection rates and an increased allocation of spending into regional budgets or off-budget to meet the 3% deficit threshold (see Russian budget pressures shifting from discretionary to structural, December 2015).
6. Despite our belief that no cut will occur, we nonetheless reviewed the recent history of production cuts as well as their price impacts. First and foremost, OPEC and non-OPEC (mainly Russia, Norway, Mexico and Oman) coordinated production cuts occurred in periods of weak economic and oil demand growth, which despite current concerns are not our economists’ forecasts. That was the case in 2009 (Financial Crisis), 2001 (September 11 attacks) and 1998-1999 (Asian Crisis). As we have argued before, we believe that weak global growth also remains a required condition for OPEC production cuts this time around. Second, while the headline cuts were large and did help support prices upon announcement, compliance was weak initially with production cuts delayed (by a year in 1998-1999). Consequently, prices only sustainably recovered once inventories started to draw which coincided with the lagged cuts in production.
7. As a result, should a cut occur, its impact on inventories would matter most, just as the current non-OPEC guidance cuts will only support prices once inventories stop to build. While prices may rally initially upon announcement, we would expect this move to fade and the oil forward curve to remain in contango until inventories decline, just as was the case in 1998-1999. Consistent with our current forecasts, the rise in long-dated prices would only occur once the inventory normalization is well under way as only then will new production need to be incentivized.
8. Most importantly, given the likely time necessary to enact such cuts, the continued large builds in US and global inventories and the fast pace at which US Gulf Coast spare storage capacity is filling, it may already be too late for OPEC producers to be able to prevent another large decline in prices. As a result, we reiterate our view that prices need to remain low enough to force fundamentals to create the adjustment back towards a new equilibrium with this inflection phase requiring oil prices to remain between $40/bbl (financial stress) and operational stress at $20/bbl (well-head cash costs) until 2H16 with the price lows of this phase likely still to be set.

And the charts:

Exhibit 1: The US shale production response to higher prices will be rapid
Days to production – quarterly mean of Permian wells

Exhibit 2: OPEC production cuts in 1998 occurred because of weak demand and did not generate sustained rallies…
WTI oil prices and forward curves ($/bbl)

Exhibit 3: … as OPEC production cuts were well shy of agreed targets
WTI oil prices (lhs, $/bbl); OPEC crude oil production (thousand barrels per day, rhs)

Exhibit 4: Oil prices troughed only once inventories started to draw 
WTI price ($/bbl, lhs); OECD commercial stocks (crude and products, million barrels, rhs)

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On Sunday night we got a look at the 2015 campaign reports for US presidential candidates as the deadline for FEC filings came and went.

There were a number of notable donations, but the headline grabber was George Soros who in the second half of last year gave $6 million to Hillary Clinton’s super PAC, bringing his total donation to $7 million.

Clinton’s “Priorities USA” pulled in $25.3 million in H2 and ended the year with more than $35 million in the bank. Hollywood billionaires Cheryl and Haim Saban gave $1.5 million each and producer Tom Tull chipped in a million. As CNN notes, two other groups supporting Clinton, American Bridge and Correct the Record, brought in an additional $6 million total.

Soros – a longtime Democratic supporter – is keen on ensuring Donald Trump doesn’t end up in The White House. “By fear mongering, he’s doing the work of ISIS,” Soros told a dinner in Davos last month. “He wants people to turn against the Muslim community and make the Muslim community think there is no alternative to terrorism.”

“We’re heading into the first caucuses and primaries with an organization second to none thanks to the support of hundreds of thousands of people across the country,” Robby Mook, Clinton’s campaign manager boasted. “We will have the resources necessary to wage a successful campaign in the early states and beyond.” All told, Priorities USA got 80 contributions in H2. 31 of those were for $100,000 or more.

In stark contrast Bernie Sanders has eschewed the super PAC. The senator raised $20 million in January alone ($34 million during Q4) from small donors. The average donation: $27.

The Sanders campaign says Bernie is “built for the long haul.”  “As Secretary Clinton holds high-dollar fundraisers with the nation’s financial elite, our supporters have stepped up in a way that allows Bernie to spend the critical days before the caucuses talking to Iowans about his plans to fix a rigged economy and end a corrupt system of campaign finance,” Sanders’ campaign manager said in a statement. 

Sanders isn’t the only one upending the traditional campaign finance system. Trump is of course self-funding his campaign – something he’ll happily tell you all about if you ask him. The GOP frontrunner raised $13.6 million in Q4. $10.8 million of that total came in the form of a loan from .. Donald Trump. He spent $6.8 million during 2015’s final quarter, leaving him with nearly $7 million on hand.

His campaign’s biggest expense: hats.

Trump spent $941,000 on “Make America Great Again” baseball caps.

The brazen billionaire also paid $908,000 for air travel. Of course that doesn’t really matter because $827,000 of the total went to Tag Air, a company Trump owns, so he’s effectively paying himself to fly around the country. 

“He’s running on his own terms, and he’s not backed by big corporations,” one 20-year-old sophomore graphic-design major from Drake University who plans to caucus for Trump told WSJ.

For his part Jeb Bush is effectively finished as donors jumped ship to Marco Rubio in Q4. Bush raised just $7.1 million in the quarter while Rubio pulled in $14 million. Rubio’s super PAC (“Conservative Solutions) raked in $16 million in H2 as donors increasingly believe the senator is now the most viable mainstream candidate able to mount a serious run at Ted Cruz and Donald Trump.  

Trump is depending on a strong turnout from first time caucus goers. “Some 39% of likely GOP caucus-goers who haven’t turned out in past contests prefer Mr. Trump over his rivals,” WSJ writes, “10 percentage points higher than the portion of past participants who favor the front-runner. That poll found Mr. Trump leading the GOP field.”

“The bigger the turnout, the better it is for Trump,” Iowa Gov. Terry Branstad, said.

Right. And the same thing goes for Bernie Sanders. “My prediction is that if tomorrow night there is a large voter turnout we win,” Sanders said on Sunday.

So strap in, because come Tuesday we’ll know if Trump and Sanders have managed to stage a coup by mobilizing previously inert portions of the American electorate and remember, billionaires can give millions to the political aristocracy, but they can only vote once. 

We close with a quote from Alec Bognor, 18, a Drake student who spoke about Trump to WSJ:

“I’m not sure I could be this excited about another candidate. I wouldn’t sit in line for three hours for Marco Rubio.”

*  *  *

Graphics: Bloomberg

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• Stocks cautious after rocky China data, bonds fly high (Reuters)
• Oil falls on China data, fading prospect of OPEC action (Reuters)
• Republican Vote in Iowa Caucus Hinges on Newcomer Turnout (WSJ)
• When Trump tells supporters not to donate, they mostly listen (Reuters)
• Goldman Sachs Employees Shift to Rubio as Bush Support Fades (BBG)
• Four Theories on How Oil Has Hypnotized the Global Stock Market (BBG)
• Global Yields Hit 12-Month Low With Japan 2-Year at Minus 0.16% (BBG)
• Record China Factory Gauge Slump Adds to Monetary Policy Dilemma (BBG)
• Euro-Area Factories Cut Prices as Deflation Risks Loom Large (BBG)
• Oops: Cheap oil less of a boon for U.S. growth than in the past (Reuters)
• February Is the Longest Month for Central Bank Watchers (BBG)
• Marc Andreessen and Silver Lake have considered a deal for Twitter (Information)
• Credit Suisse, Barclays to Pay $154.3 Million to Settle ‘Dark Pool’ Investigations (WSJ)
• Death toll up to 70 from Islamic State Damascus attack (Reuters)
• Toyota to stop Japan production for one week due to steel shortage (Reuters)
• HSBC to Freeze Hiring, Salaries in 2016 Amid Cost Reductions (BBG)
• Marissa Mayer to Make Case That Yahoo Can Be Turned Around (BBG)
• Zika virus spreads fear among pregnant Brazilians (Reuters)
• Google Defends U.K. Tax Accord as Legal, Not ‘Sweetheart Deal (BBG)
• China Calls Lending Platform Ezubo a $7.6 Billion Ponzi Scheme (WSJ)
• China-Built High-Speed Rail in Indonesia Gets Off to Bumpy Start (BBG)

Overnight Media Digest

WSJ

– The E. coli outbreak that sickened more than 50 Chipotle Mexican Grill Inc customers in nine states last year is expected to be declared over. Investigators haven’t been able to pinpoint the ingredient responsible for the contamination. (http://on.wsj.com/1Svlj84)

– Time Warner Inc and Hulu have been in talks since late last year about Time Warner buying into the streaming site as a part-owner. In the discussions about taking a 25 percent equity stake in Hulu, Time Warner has told the site’s owners that it ultimately wants episodes from current seasons off the service, at least in their existing form, although that is not a condition for its investment. (http://on.wsj.com/23CeQ0x)

– A frigid January for initial public offerings – there were no U.S. IPOs for the month – is pointing to a hard winter for fledgling biotech firms and other private companies. (http://on.wsj.com/1PpNx3h)

– Crude-oil prices fell in early Asia trade, dragged by lackluster Chinese manufacturing data and dimming prospects of a coordinated production cut. (http://on.wsj.com/1WWiQV2)

FT

* J Sainsbury Plc has been advised that it should raise its offer for Home Retail Group Plc to at least 160p per share or preferably closer to 165p to support a bid and pressure Home Retail Plc’s board to accept the deal.

* The new chief executive of Alstom SA Poupart-Lafarge said the sector in Europe is good for consolidation and it would “make sense” for Alstom to look at transformational deals.

* Ofcom urged Brussels to block the merger of telecoms operators O2 and Three, highlighting concerns that mobile phone bills for users in the UK would move sharply higher.

* Christine Tacon’s probe of Tesco Plc’s accounting practices has raised fresh concerns that the balance of power in the grocery supply chain lies far on the side of retailers.

NYT

– Microsoft Corp sank a data center on the ocean floor, where the sea water acts as a coolant, and plans to use the waves to power it. The results were encouraging enough to try a bigger version. (http://nyti.ms/1WVJflC)

– Europe is greatly increasing military and security spending on the fight against terrorism, a shift from austerity methods that dominated its policies in recent years. (http://nyti.ms/1mAo3BN)

– Anna Wintour, Condé Nast’s artistic director, and Bob Sauerberg, its new chief executive, are trying to keep the publisher’s many magazines profitable and relevant in the Internet age. (http://nyti.ms/1QBjepr)

– Barclays PLC and Credit Suisse will pay a combined $154.3 million to settle allegations that they misrepresented their private stock trading services. The systems, known as dark pools, are supposed to offer a haven to traditional traders and investors from predatory trading behavior. (http://nyti.ms/1QRLlT3)

Canada

THE GLOBE AND MAIL

** China Minerals Mining and its subsidiary Cassiar Gold Corp have filed a petition with the Supreme Court of British Columbia that seeks to reverse a portion of the British Columbia government’s transfer of Crown land near the Yukon border in northern British Columbia to the Kaska Dena Council. (http://bit.ly/1SmwZvD)

** The rout in commodities has hit men harder than women in Alberta. Nearly 16,000 men in the western province have been laid off from September 2014 through the end of last year. Meanwhile, 22,800 women have found new positions over the same period, according to Statistics Canada. (http://bit.ly/1SmxjKV)

** The Canadian government is busy promoting its defense industry in Kuwait even as a United Nations report accuses a Saudi-led coalition, which includes Kuwait, of “widespread and systematic” bombing of civilians in Yemen. (http://bit.ly/1SmxUwk)

NATIONAL POST

** A class action lawsuit against Valeant Pharmaceuticals has alleged that the makers of Cold-FX sat for years on a study that suggested Canada’s most popular cold and flu remedy was no more effective than a placebo in treating symptoms of the viruses. Valeant owns the product after buying Edmonton’s Afexa Life Sciences in 2011. (http://bit.ly/1Kl7zM2)

** British Columbia’s top court has torpedoed a popular consumer loyalty rewards program for pharmacies, a sort of frequent flyer plan for prescription drug users, over fears it can be abused to the detriment of health. (http://bit.ly/1Kl7Gat)

Britain

The Times

– Sharon White, the head of Ofcom, has expressed her concerns to Europe’s regulators that the takeover of O2 by Three, its smaller rival, will lead to less competition and higher prices. (http://thetim.es/1UBiqlg)

– J Sainsbury Plc has been speaking to Home Retail Group Plc’s leading shareholders and has been told by the company’s largest investor that the offer must rise to at least 160p, or £1.3 billion. (http://thetim.es/1UBiwcS)

The Guardian

– A senior government minister has admitted the tax settlement between Google and the UK government “was not a glorious moment”. The admission by the business secretary, Sajid Javid, came as a senior executive from Google claimed he could not say how much UK profit has been generated by the technology firm in the past decade, or how many meetings had been held between the company’s executives and ministers. (http://bit.ly/1UBiC47)

– Barclays Plc and Credit Suisse Group AG are paying more than $150m to settle charges that they misled investors who used their dark pool trading platforms. The US Securities and Exchange Commission and the New York attorney general are expected to announce the settlement on Monday. (http://bit.ly/1UBiHF2)

The Telegraph

– Hitachi will continue to invest in the UK even if the country votes to leave the European Union, according to its chief executive. Hiroaki Nakanishi, who is also chairman of the Japanese industrial giant, said he discussed with Philip Hammond, the Foreign Secretary, last month how a British exit from the EU could be made “feasible”. (http://bit.ly/1UBiNwd)

– Sky has backed the bid to merge Three with rival mobile operator O2 as Brussels competition watchdogs prepare to lay out their problems with the takeover. The European Commission is due to issue Hutchison with a formal statement of objections on Tuesday stretching to hundreds of pages. (http://bit.ly/1UBiUYA)

Sky News

– An investment firm owned by the taxpayer-backed Lloyds Banking Group is in advanced talks to buy CitySprint, one of Britain’s biggest same-day delivery companies. LDC has entered exclusive talks to buy CitySprint even as technology giants such as Amazon and Uber seek to exploit their distribution networks to win business held by traditional courier firms. (http://bit.ly/1UBj1nf)

– Britain’s first new high street bank in more than 100 years has warned investors that an exit from the European Union could damage its prospects. In a copy of a circular to shareholders issued this week, the start-up lender said it faced “risks associated with a vote to exit the EU”. (http://bit.ly/1UBjg1q)

The Independent

– The pay gap faced by black workers widens the more qualifications they obtain, according to research revealing the challenges faced by ethnic minority Britons pursuing professional careers. Black graduates leaving university earn an average of 23 per cent less than their white counterparts, the new analysis by TUC shows. (http://ind.pn/1UBjp51)

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It didn’t take much to fizzle Friday’s Japan NIRP-driven euphoria, when first ugly Chinese manufacturing (and service) PMI data reminded the world just what the bull in the, well, China shop is…

… leading to a 1.8% drop on the first day of February after Chinese stocks slid 23% in January with the nation’s manufacturing sector faces strong galewind challenges as the government plans to reduce excess industrial capacity and unleash troubling mass unemployment, while a weakening currency is spurring capital outflows.

And then it was about oil once again, when Goldman itself – which recently has been quietly changing its tone on oil to bullish – said not to expect any crude production cuts in the near future, to wit: “The past week featured headlines suggesting that OPEC producers and Russia would meet in February to discuss a potential coordinated cut in production. Despite the sharp bounce in oil prices that these headlines generated, we do not expect such a cut will occur unless global growth weakens sharply from current levels, which is not our economists’ forecast.“

Throw in some very cautious words from the sellside about what the BOJ’s move actually means and Friday’s month-end window dressing 2.5% surge is now just a distant memory.

As a result European stocks declined after the Chinese PMI fell to a three-year low in January. Nokia tumbles, dragging technology shares to biggest decline. Euro rose for an 8th day against the yen amid speculation the European Central Bank won’t be as aggressive as the Bank of Japan in boosting monetary stimulus.

“Investors are getting conflicting signals about global growth, Daniel Murray, London-based head of research at EFG Asset Management, told Bloomberg. “It’s all very confusing and it’s making people nervous. Even the smallest macro event or data point can tip sentiment either way.”

Asian stocks remained buoyed by the BOJ momentum rose for a 4th day as shares in Tokyo extended Friday’s rally after the Bank of Japan stepped up its monetary stimulus. Chinese shares extended their steepest monthly selloff since the global financial crisis after an official manufacturing gauge missed estimates.

“The BOJ’s action on Friday helped — it’s a situation where you get short-term relief when central banks make supportive announcements or ease policy,” Steven Milch, chief economist at Suncorp Wealth Management in Sydney, said by phone. “I’m not sure central bank actions are a panacea, but they do help in relation to investor sentiment. Uncertainty is clearly very high and it is possible that some markets have overshot on the downside. There’s a possibility that risk aversion and volatility diminish as we go forward.”

Here is where we stood as of this writing:

• S&P 500 futures down 0.4% to 1924
• Stoxx 600 down 0.1% to 342
• FTSE 100 down 0.4% to 6057
• DAX down 0.4% to 9757
• German 10Yr yield up less than 1bp to 0.33%
• Italian 10Yr yield unchanged at 1.42%
• Spanish 10Yr yield up 1bp to 1.52%
• MSCI Asia Pacific up 0.9% to 122
• Nikkei 225 up 2% to 17865
• Hang Seng down 0.4% to 19596
• Shanghai Composite down 1.8% to 2689
• US 10-yr yield up 2bps to 1.94%
• Dollar Index down 0.22% to 99.39
• WTI Crude futures down 1.4% to $33.14
• Brent Futures down 0.4% to $35.83
• Gold spot up 0.4% to $1,122
• Silver spot up 0.4% to $14.31

Looking at global markets, we start in Asia where equities traded mixed with the Nikkei 225 (+2.0%) the notable outperformer as participants continued to digest last week’s BoJ decision while the ASX 200 (+0.80%) was pushed higher with strength in health care names. Shanghai Comp. (-1.8%) underperformed amid rising risks that the nation faces a structural downturn following soft Official Mfg. PMI at its lowest since Aug’12, offsetting better than expected Caixin PMI data. JGBs were bid throughout the session, with yields plummeting to record lows in the 2-yr and 10-yr following the Friday’s stimulus move by the BoJ, as such the yield curve has notably steepened.

Asian Top News

• Mitsubishi UFJ’s Profit Falls 27% on Bond Trading, Lending: 3Q net 253b yen, est. 249.8b yen
• Nippon Steel Plans Purchase, Stock Buyback to Weather Slump: Cut its full-year profit forecast by more than a fifth, announced a stock buyback and said it’s in talks to take control of domestic partner Nisshin Steel Co
• BOJ Rate Cut No Solace for Top Japan Fund That’s in Cash: J Flag’s Osezawa expects more market volatility to follow
• Yen Bulls Burned After BOJ’s Surprise Spurs Biggest Rout in Year: Bullish yen positions had reached most in almost 4 yrs
• Macau Gaming Revenue Falls 21.4% in Lull Ahead of Lunar New Year: Jan. casino rev. falls 21.4% y/y vs est. 22% drop
• Rupee to Restrain Rajan as India Deficit Risks Stoking Inflation: 36 of 38 economists surveyed see repo rate left at 6.75%

European equities trade mostly in the red following sentiment brought about by the release of soft Chinese Official manufacturing PMI data, which printed at its lowest since Aug’12 and showed the 6th straight month of contraction. Furthermore, the poor official figures offset better than expected Caixin PMI data, which still came in below 50, thus demonstrating contraction, highlighting the weak outlook for the global economy.

The IT sector is the laggard in the Eurostoxx50 (-0.7%), following an EU proposal for tough new data protection laws, which German giant SAP say could put companies at a disadvantage to their US counterparts. Dax underperforms in terms of indices, with ThyssenKrupp weighing on the German bourse, following negative sentiment in the metals complex.

Nokia Oyj dragged a measure of technology stocks to the worst performance of the 19 industry groups on the Stoxx 600, tumbling 11 percent after investors were disappointed by a court decision in a patent dispute with Samsung Electronics Co.  Energy-related shares were also among the worst performers as the price of oil slid, with service provider Seadrill Ltd. leading declines.

Luxottica Group SpA fell 8.7 percent after quarterly sales missed analysts’ projections. The maker of Ray-Ban eyeglasses also said its co-Chief Executive Officer resigned. BT Group Plc rose 2.5 percent after quarterly profit beat estimates. Ryanair Holdings Plc gained 3.3 percent after forecasting fourth-quarter traffic will grow more than previously expected and saying it will return 800 million euros ($868 million) to investors via a share-buyback program.

European Top News

• Nokia Drops as Samsung Patent Ruling Disappoints Investors: An arbitration court of the International Chamber of Commerce settled the amount of additional compensation Samsung needs to pay to Nokia, the Finnish company said Monday, without providing exact financial details
• Euro-Area Factories Cut Prices as Deflation Risks Loom Large: Markit Economics said price pressures “remained on the downside” and output charges fell for a fifth month
• Domestic Demand Offsets Exports to Keep U.K. Factories Afloat: Markit Economics said on its factory gauge climbed to a 3-month high of 52.9 from a revised 52.1 in Dec.; forecast was 51.6
• Julius Baer to Boost Dividend 10% as U.S. Probe Nears End: Proposes to increase dividend to CHF1.10/shr, annual operating income misses analysts’ estimates
• Ryanair Doubles Quarterly Profit, Plans $868m Buyback: Fiscal 3Q profit after tax increased to EU103m from EU49m y/y, aided by a 25% surge in passenger numbers to 20m, will return EU800m to investors via a share-buyback program
• BT Profit Tops Estimates as Former Monopoly Pushes Into Mobile: 3Q adj. Ebitda GBP1.61b vs est. GBP1.58b, adds fiber broadband customers in 3Q
• Bankia Shares Climb After Fourth-Quarter Profit Beats Estimates: 4Q net profit EU185m, beats EU134.2m estimate
• Vallourec to Raise $1.1 Billion With Nippon Steel’s Help: Nippon Steel, Bpifrance to each own 15% of company after deal

In FX, a cagey start to FX trade this week, with AUD/USD the notable mover in the overnight markets after the China manufacturing PMIs disappointed. However, the mid .7000’s look to be finding some support, so no further softening to report. Manufacturing PMIs the running theme for the day, but only the UK surprised (to the upside) to alleviate the heavy GBP tone from first thing. However, Cable running into fresh selling interest above 1.4300. USD/JPY has held 121.00-121.50; specs on the downside, and exporters capping. CAD (and the rest of the Oil related pairs) in consolidation mode despite slight WTI slippage. More comments from OPEC sources; Saudi’s open to cooperated ‘oil market management’, but no immediate need for emergency meetings. More large 1.0800 EUR/USD strikes; strong bids ahead still in place.

In commodities, oil trades lower in the European morning, with the ongoing production-cut saga still dominating price action in the market. The latest comments today came from OPEC sources in Saudi press, who stated that they ‘are ready to manage the market’, with the usual caveat of OPEC and non-OPEC co-operation. An uptick was observed initially, however this move was pared following comments from the same source, which stated it’s too early to talk about emergency OPEC meeting. Furthermore, Goldman Sachs see output cuts by Non OPEC members as highly unlikely. Brent and WTI have the USD 35.00 and USD 33.00 handles respectively, with any further price action today likely to be driven by further comments.

Aluminum was 0.6 percent lower at $1,509.50 a ton, and industrial precious metals platinum and palladium were also lower. U.S. natural gas futures fell 4.2 percent. Gold climbed 0.3 percent to $1,121.83 an ounce on haven demand.

Gold has started February in very positive fashion, as Chinese Official manufacturing PMI printed at its lowest since Aug’12, bolstering safe haven bids in the yellow metal. Furthermore, the poor official figures offset better than expected Caixin PMI data, which still came in below 50, thus demonstrating contraction, highlighting the weak outlook for the global economy which has had a knock on effect in the base metals. Copper on the LME trades in negative territory this morning and It’s a similar story for other base metals, whose prices are consolidating some of Fridays BoJ inspired gains.

Following a busy day of global PMIs, today on the US calendar we’ll get the December core and deflator PCE data along with personal income and spending, manufacturing PMI, construction spending and the important ISM manufacturing and prices paid.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade mostly in the red following sentiment brought about by the release of soft Chinese Official manufacturing PMI data
• Oil trades lower in the European morning, with the ongoing production-cut saga still dominating price action in the market, however Brent and WTI hold the USD 35.00 and USD 33.00 handles respectively
• Looking ahead highlights include: US ISM and PMI Manufacturing data with pre-market earnings from Sysco and Cardinal Health
• Treasuries fall slightly in overnight trading as world equity markets mostly drop; today’s economic data brings personal income/spending, ISM.
• China’s official factory gauge signaled a record sixth straight month of deterioration, raising the stakes for policy makers struggling to prop up the economy amid a second bear market in stocks since June and a currency at a five-year low
• Currency interventions don’t work. That’s the gist of what the economist community is saying after Sweden’s central bank ratcheted up warnings that it may intentionally weaken the krona as it tries to spur inflation
• Factories in the euro area slashed prices of goods by the most in a year in January, highlighting the deflationary risks that’s keeping alarm bells ringing at the European Central Bank
• HSBC will impose a global hiring and pay freeze as part of its drive to cut as much as $5 billion in costs by the end of 2017. The measures will affect the consumer and investment banking businesses
• Italy’s plan to use securitization to help relieve banks of their soured loans is an attempt to imbue securities backed by non-performing assets with some of the luster enjoyed by sovereign bonds, according to a senior official at the Treasury
• Japanese banks extended losses in Tokyo following the central bank’s surprise move to start charging lenders for some of their deposits held at the institution
• The central bank’s surprise move to negative interest rates on Jan. 29 could boost Japanese domestic demand, while the weaker currency that’s likely to result from the policy is a boon for exporters
• Nigeria’s government is in talks for concessionary loans worth $3.5 billion from the World Bank and African Development Bank to help finance a planned record budget this year, Finance Minister Kemi Adeosun said
• Iowans will have their say tonight on who should be the next U.S. president. Donald Trump (Republican) and Hillary Clinton (Democrat) leading narrowly in a Bloomberg Politics/Des Moines Register Iowa Poll released over the weekend
• Sovereign 10Y bond yields little changed. Asian, European stocks mostly lower; U.S. equity-index futures drop. Crude oil and copper drop, gold rallies

US Event Calendar

• 8:30am: Personal Income, Dec., est. 0.2% (prior 0.3%)
  • Personal Spending, Dec., est. 0.1% (prior 0.3%)
  • Real Personal Spending, Dec., est. 0.2% (prior 0.3%)
  • PCE Deflator m/m, Dec., est. 0% (prior 0%)
  • PCE Deflator y/y, Dec., est. 0.6% (prior 0.4%)
  • PCE Core m/m, Dec., est. 0.1% (prior 0.1%)
  • PCE Core y/y, Dec., 1.4% (prior 1.3%)
• 9:45am: Markit US Manufacturing PMI, Jan. F, est. 52.7 (prior 52.7)
• 10:00am: ISM Manufacturing, Jan., est. 48.2 (prior 48.2)
  • ISM Prices Paid, Jan., est. 35 (prior 33.5)
  • ISM New Orders, Jan. (prior 49.2)
• 10:00am: Construction Spending m/m, Dec., est. 0.6% (prior -0.4%)
• 11:00am: ECB’s Draghi speaks at EU Parliament
• 1:00pm: Fed’s Fischer speaks in New York

Top Global News

• Barclays, Credit Suisse Agree to Dark Pools Settlements: Barclays will pay $70m, split evenly between SEC and New York the largest fine levied on a dark pool operator, Credit Suisse will pay $84.3m
• Clinton, Trump Face First Real Test as Iowans Head to Caucuses
• Record China Factory Gauge Slump Adds to Monetary Policy Dilemma: Manufacturing PMI fell to 3-yr low of 49.4 in Jan.
• HSBC to Freeze Hiring, Salaries in 2016 Amid Cost Reductions: CEO Stuart Gulliver is seeking $5b in savings by 2017
• Google Defends U.K. Tax Accord as Legal, Not ‘Sweetheart Deal:’ U.K. business chief says deal will change corporate behavior
• Symantec Completes Veritas Sale, Adds $2b to Capital Return Plan: Said it received ~$5.3b in after-tax cash proceeds from completion of Veritas sale
• Oil Bulls Jump in at Fastest Pace in Five Years on Rebound Hopes: Net-long position jumped 35% through Jan. 26: CFTC
• Global Yields Hit 12-Month Low With Japan 2-Year at Minus 0.16%: Yield on a Bank of America index of sovereign bonds dropped to 1.39%, the least since February 2015
• Bond-Market Inflationistas Say They’re No Fools as Losses Mount: Goldman sees inflation headed higher, recommends 10-yr TIPS
• Marissa Mayer to Make Case That Yahoo Can Be Turned Around: CEO to detail new initiatives this week as proxy fight looms
• Yahoo’s Marissa Mayer Said Not Planning to Leave Co.: NYP
• February the Longest Month for Investors Awaiting Central Banks: U.S., Japan, euro zone have no Feb. central bank meetings
• ‘Kung Fu Panda 3’ Tops Weekend Box Office With $41m: Disney’s “The Finest Hours” opened in 4th place and the Open Road Films parody “Fifty Shades of Black” landed in ninth
• IEX Debate Escalates With Public Knock to NYSE’s Systems: IEX posts letter saying NYSE has a ‘speed bump’ of its own
• RCS Capital Files for Bankruptcy as Previously Announced: Company has said it will borrow $150m for restructuring
• Blackstone Said to Shop Pactera Technology for Up to $1b: WSJ
• FTC Review of TEVA/AGN Seen Closing in 2-3 Weeks: DealReporter
• Sports Authority Confirms It Cut About 100 Jobs at Headquarters

DB’s Jim Reid concludes the overnight wrap

We’re straight to Japan this morning where the BoJ fuelled rally has extended for a second day with the Nikkei and Topix both up 2% in early trading. The Yen is more or less unchanged around 121.2. Japan aside though, it’s been a broadly mixed start for the rest of Asia however. The Hang Seng (-0.42%) and Shanghai Comp (-1.03%) in particular are trading with a much weaker tone, in part reflecting some more soft data out of China. The January manufacturing PMI has printed at 49.4 – a three year low – which was below expectations of 49.6 and also down from 49.7 in December to mark the sixth consecutive sub-50 print. The non-official Caixin PMI was also weak at 48.4, albeit up 0.2pts from the prior month. Meanwhile, the non-manufacturing PMI has printed at 53.5, down 0.9pts from December. Elsewhere this morning we’ve seen the ASX gain +0.75% while the Kospi is slightly firmer. Credit indices are around a basis point wider while Oil markets are currently down 1.5%.

So Japan’s decision to cut rates into negative territory must surely have increased the probabilities of an easier bias to rates across the globe. I’ve long been of the opinion that the US will have to do more QE again in the next downturn and that we could still be in the early stages of a global money printing era. While I still think this, it’s possible that the recent international trend to negative rates will also be a big theme on and off in the years ahead. I’m no expert on the functioning of the US money market but it seems inevitable that the FED will also have to consider such a policy in the future. If growth continues to be structurally low and their peers are in negative rate territory they may have little choice. The FED’s dot plot forecasts certainly look stratospheric at the moment.

Speaking of which, it’s hard to imagine that the Q4 GDP report we got on Friday will do much to help the FED’s case. The +0.7% qoq saar print was slightly softer relative to expectations of +0.8% but more importantly was a strong signal of significant further deterioration in underlying demand with our US economists highlighting that the most troubling aspect was the lack of any meaningful inventory liquidation. With demand slowing and the latter elevated, our colleagues highlight further downside risks through the first half of this year as stockpiles become unwound, with the danger being that real GDP growth falls below last quarter’s meager rate. Meanwhile the data confirmed just a +2.9% yoy gain for nominal GDP last quarter which was 0.1% higher than the forecast we had in our chart on Friday. The reading confirmed however that for just the third time since 1955 covering 118 hikes, the Fed raised rates in a quarter where nominal GDP growth on a yoy basis was below 4.5%. The other two occasions were also statistical anomalies that were corrected in the subsequent quarters. See Friday’s EMR for the chart.

Friday’s price action was already being dictated by the BoJ however with the fall in global yields being a notable feature. 10y Bund yields finished nearly 8bps lower at 0.323% which is the lowest now since last May. 10y Treasury yields closed nearly 6bps lower and at 1.922%, finished at the lowest closing yield since April last year. The rally for risk assets saw the S&P 500 finish up +2.48% which helped to cap a second consecutive weekly gain in the process. European equities were up similar amounts (Stoxx 600 +2.20%) too while the better tone for risk was also helped by a decent finish to the week for Oil markets. WTI closed +1.20% at $33.62/bbl meaning it was up nearly +4.5% last week, but well over 20% from the low’s on the 20th of last month. The more impressive move has been in Brent however which was up +3.42% alone on Friday (to $35.99/bbl) and +9.5% over the five days last week (although both have weakened some 2% this morning).

In fact, Brent has closed higher on seven of the last nine trading days as rumblings around potential OPEC production cuts added to the positive sentiment generated from a dovish ECB and BoJ. As the US earnings season rumbles along however we’re gently reminded of the pain that is already evident at a micro level, with Chevron the latest big name to report. The oil giant reported its first quarterly loss since 2002 last quarter after posting weaker than expected earnings, while the company looks set to undergo a second bumper wave of job layoffs and capex cuts. Updating where we are with earnings season now, 201 S&P 500 companies have now reported their latest quarterlies with the current trend being 80% beating earnings guidance (which have been heavily beaten down) but just 48% beating revenue guidance. The latter continues to hover around the top end of recent quarterly trends however at 44%, 49% and 48% for Q3, Q2 and Q1 last year, however the number of positive earnings surprises is better than what we’ve recently seen at 74%, 75% and 73% respectively in the same time.

Wrapping up the rest of Friday’s data. While the latest GDP data failed to meet expectations, both Q4 ECI (+0.6% qoq) and Core PCE (1.2% qoq) printed in line with consensus estimates. The December advance goods trade deficit widened slightly to $61.5bn while the final January reading for the University of Michigan consumer sentiment print was revised down 1.3pts to 92.0 after the expectations print fell 3pts relative to December. Just to add some confusion to the data, the Chicago PMI printed at 55.6 on Friday which was well ahead of expectations of 45.3 and 12.7pts higher than the December reading. It was in fact the highest level in 12 months.

Meanwhile the first Fedspeak since the FOMC meeting last week saw San Francisco Fed President Williams acknowledge that he now sees slightly slower growth and inflation, along with slightly higher unemployment this year which argues for ‘just a smidgen slower process of normalizing rates’.

In terms of Fedspeak this week we’ve Fischer due to talk tonight and George scheduled to speak tomorrow evening. The other big focus of the week will of course be on the corporate earnings with 119 S&P 500 companies set to report with the highlights including Alphabet, Exxon Mobil, Pfizer, Merck and Kraft Heinz. Over in Europe meanwhile we’ve got 75 Stoxx 600 companies set to report their latest quarterlies including Royal Dutch Shell, GlaxoSmithKline and BP.

via Zero Hedge http://ift.tt/1Q6F29s Tyler Durden

COMEX Registered Gold Inventories Plummet 73% In One Day

Posted with permission and written by Steve St Angelo, SRSrocco (CLICK FOR ORIGINAL)

Looks like something big is about to take place on the Comex as Registered Gold inventories declined a whopping 73% in one day. This is a very suprising update as Comex Gold inventories haven’t experienced much movement over the past few months.

Well, this all changed today as a stunning 201,345 oz (73%) of the total 275,325 oz of Registered Gold was transferred to the Eligible Category today:

As we can see, 21,200 oz was transferred from Brinks Registered Inventories, 84,881 transferred from HSBC and 95,269 from Scotia Mocatta. There are only 73,980 oz of Registered Gold remaining in the Comex inventories:

This is the lowest level of Registered Gold inventories on the Comex for more than 20 years. There are now only 2.3 metric tons of Registered Gold remaining at the Comex.

This has to be one of the most surprising movements of Comex Registered Gold inventories ever. It will be interesting to see what happens over the next few months as the broader stock markets continue to crash while precious metal physical investment surges.It seems to me that this huge decline of Registered Gold Inventories suggests that the end of the Comex Exchange as a price setting mechanism is now even closer at hand.

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COMEX Registered Gold Inventories Plummet 73% In One Day

Posted with permission and written by Steve St Angelo, SRSrocco (CLICK FOR ORIGINAL)

Independent researcher Steve St. Angelo (SRSrocco) started to invest in precious metals in 2002. Later on in 2008, he began researching areas of the gold and silver market that, curiously, the majority of the precious metal analyst community have left unexplored. These areas include how energy and the falling EROI – Energy Returned On Invested – stand to impact the mining industry, precious metals, paper assets, and the overall economy.

You can find many of Steve’s articles on many noteworthy sites. Visit Steve at http://ift.tt/1MlITTN.

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