Tag: news

Over the past four days, risk assets have been on a tear, led by the collapsing Yen and soaring Nikkei, as the market has digested daily news that – as we predicted last week – Bernanke has been urging Japan to become the first developed country to unleash the monetary helicopter, in which the central banks directly funds government fiscal spending, most recently with an overnight report that Bernanke has pushed Abe and Kuroda to sell perpetual bonds, all of which would be bought by the BOJ.

There may be a very big problem with what the market is pricing in, however. As Reuters reports, citing government and central bank officials directly involved in policymaking, “there is no chance Japan will resort to helicopter money.” The problem: it is prohibited by law to directly underwrite government debt, which means parliament needs to revise the law for the central bank to start directly bank-rolling debt.

“Adopting helicopter money in the strict sense is impossible as it’s prohibited by law,” said one of the officials. “If it’s about the BOJ buying huge amounts of bonds and the government deploying fiscal stimulus, we’re already doing that.”

With the BOJ already keeping borrowing costs near zero with aggressive money printing, as the central bank already gobbles up more government bonds than is sold to the market each month under its massive monetary stimulus program,  there is no strong push from premier Shinzo Abe’s administration to revise the law and force the central bank to resort to helicopter money, said the officials, who declined to be named due to the sensitivity of the matter.

While hardly a hurdle to Bernanke, the reality is that for Japan to adopt helicopter money, Abe would need to change the fundamental laws of central bank independence, and many are already rising up against this prospect. “It’s an illusion to think that a country can spend as much money as it wants, without having to pay it back,” said another official on condition of anonymity.

“I haven’t heard of any such discussions taking place in the Ministry of Finance,” a third source said, adding that adopting helicopter money was “unthinkable.”

One can probably discount what BOJ Governor Haruhiko Kuroda said when he dismissed the idea of helicopter money, stressing the central bank is buying bonds not to finance debt but to hit its 2 percent inflation target: recall that Kuroda said just one week before Japan unveiled NIRP that no NIRP would come to Japan, which certainly dilutes any credibility he may have.

However, the dissent to Bernanke’s plan has spread far and wide, spreading as far as Abe’s cabinet.

Masahiko Shibayama, an influential aide to Abe, voiced caution over helicopter money involving the issuance of perpetual bonds.

Koichi Hamada, another key economic adviser to Abe, told Reuters on Thursday Japan should not resort to helicopter money as it could lose control of inflation. “Resorting to such a step would be sending a grave message to the international community” on Japan’s fiscal management, he told Reuters on Thursday. “We need to think carefully about how markets will react if we even signal it as an option.”

Worse, quoted by the WSJ, Hamada hinted at what we have said all along: helicopter money would be the precursor to hyperinflation.

Japan shouldn’t make its central bank directly underwrite government borrowing, or it could suffer the kind of runaway spending and inflation that followed a similar move in the 1930s, said Hamada.

 

“It would be too tempting for politicians. They wouldn’t give it up once you made it possible for them to print and spend as much money as they please, either for political purposes or for their own ambitions,” said Koichi Hamada in an interview with The Wall Street Journal recently.

 

The stern warning from the Yale University professor comes as economists increasingly speculate that Mr. Abe may resort to the radical step to save his campaign to escape deflation, a negative cycle of price falls. Mr. Abe’s recent pledge to bolster spending and his meeting earlier this week with former Federal Reserve Chairman Ben Bernanke, an advocate of monetization, has fueled such speculation.

Which is not to say that helicopter money is impossible. Supporters of the measure, known as “helicopter money,” view it as the quickest, surest way to stimulate demand and create the 2% inflation wanted by Mr. Abe. But the problem is that politicians may not have the self-discipline to withdraw the policy before it destabilizes the economy, Mr. Hamada said, playing down a recent local newspaper report that portrayed him as supportive of helicopter money.

“There is a huge risk that fiscal expansion would get out of control” if the Bank of Japan started underwriting government borrowing, Mr. Hamada said.

The adviser called attention to the consequences of debt monetization in the 1930s by finance minister Korekiyo Takahashi. Mr. Takahashi’s powerful stimulus helped the nation escape the Great Depression, but Mr. Hamada said it opened the door to aggressive military spending that later caused sky high inflation.

Mr. Takahashi was assassinated by rebel officers in 1936.

Other aides to Mr. Abe, including Japan’s ambassador to Switzerland Etsuro Honda, see Mr. Takahashi as a national hero and put the blame for spiraling spending and inflation squarely on the military and capacity shortages in a war-torn economy.

For now, the reality is that with a political gate to helicopter money, the best Japan can hope for is to jawbone the Yen and markets higher; however for Abe to actually change the law a far more drastic deterioration in Japan’s inflationary picture will have to emerge.

Renewed debate over helicopter money underlines the continued radicalization of discussions over how to remedy Japan’s lost two decades. It also reflects frustrations over the limited effects so far of Abenomics.

Hamada agreed that expanding fiscal and monetary policies at the same time is likely to produce stronger stimulus effects than implementing them in isolation. But Mr. Hamada said that if the BOJ continues to buy debt from the markets, not directly from the government, the policy coordination wouldn’t amount to monetization by strict definition.

Speaking of the BOJ’s coming policy decision on July 29, Mr. Hamada said he “can’t say with absolute certainty for now” whether the central bank should undertake additional easing. “It depends on how much stock prices will have recovered and how much the yen’s upward momentum will have weakened by then,” he said.

However, that goes back to problem #1 for Japan: it has insufficient bonds to monetize, forcing the BOJ to increasingly soak up ETFs and other non-debt instruments. As such, continuing with merely more QE will lead to even lower record JGB rates, sending even more acut deflationary signals to the local and global economy, and forcing Japanese investors to buy even more record amounts of offshore debt.

Mr. Hamada said policy decisions are up to Mr. Kuroda to make, but added that Japan’s tightening labor market means that officials don’t need to debate the need for action at every meeting. He also urged Japanese companies to stop expecting too much from the BOJ and instead to put their savings to better use, by investing more or offering sharper pay raises.

“I am wondering if those corporate managers…understand that they are a drag on the Japanese economy,” Mr. Hamada said.

They do, however with the help of such “experts” as Kuroda and Bernanke, they have every reason to believe that the punch bowl will not only not be taken away but will be spiked even more. This time, however, that may not happen.

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Following yesterday's chaotic polling data, the latest NYT/CBS poll provides a post-email-gate reality check as Hillary Clinton's 6-point lead has evaporated leaving Trump tied nationwide, leading the "reckless" former secretary of state on the economy and jobs, trade, and national security. Perhaps more worrying for the Clinton campaign is the rise in negativity with 67% of voters saying she is not honest and trustworthy.

So this is what the professional pollsters said yesterday…

Pick whichever makes sense.

But now, as The New York Times reports, Hillary Clinton has emerged from the F.B.I. investigation into her email practices as secretary of state a wounded candidate with a large and growing majority of voters saying she cannot be trusted, according to the latest New York Times/CBS News poll.

As Mrs. Clinton prepares to accept the Democratic Party’s nomination at the convention in Philadelphia this month, she will confront an electorate in which 67 percent of voters say she is not honest and trustworthy. That number is up five percentage points from a CBS News poll conducted last month, before the F.B.I. released its findings.

 

Mrs. Clinton’s six-percentage-point lead over the presumptive Republican nominee, Donald J. Trump, in a CBS News poll last month has evaporated. The two candidates are now tied in a general election matchup, the new poll indicates, with each receiving the support of 40 percent of voters.

 

Mrs. Clinton and her campaign celebrated the Justice Department’s decision not to indict her as a legal victory, but the political fallout appears significant, at least for now. She and her aides have vowed to win back the public’s trust, while acknowledging that this will be tough.

As the candidates head to their respective party conventions, they will confront voters who range from disappointed to disgruntled about their choices.

Just 28 percent of voters said they had a positive view of Mrs. Clinton, compared with 33 percent last month. Asked if her email practices were illegal, 46 percent of voters said yes, compared with 23 percent who said using a private server was improper but not illegal. Twenty-four percent said she did nothing wrong.

 

“I just don’t think she’s been completely truthful with this whole thing with her emails,” Cecelia Purner, 67, a retired customer service representative in Allentown, Pa., said in a follow-up interview. But, she added, “I think she’ll make a good president if elected.”

As attack ads and verbal charges intensify on both sides, voters already appear fatigued. More than six in 10 say they were not looking forward to the next few months of the campaign; 46 percent said they were unenthusiastic about the 2016 presidential election.

Carole Bower, 75, a retiree in Carthage, Ill., supported Gov. John Kasich of Ohio in the Republican primary, but now plans to vote for Mr. Trump. “I will reluctantly do that because he’s got to be better than Hillary,” she said. “I will hold my nose and go into that voting booth.”

The grim view of the political climate comes as Americans experience heightened anxieties connected to their economic prospects, the threat of terrorism and race relations.

Read more here…

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Not everybody is believing the positive spin being put on recent financial market data. In fact some would go as far as to say that it is “propaganda” being spread in the mainstream media in an election year for the US.  At least that is what John Embry concluded in a recent interview.

For those that are not familiar with Embry, he is the chief investment strategist at Sprott Asset Management and Sprott Gold and Precious Minerals Fund, and a highly respected precious metals industry expert with nearly 50 years of experience.

Embry believes that, while stock markets have gone back to near record levels in the US, the fact that interest rates remain at depression levels in most industrialised countries, including the US, is telling the real economic story.

He also highlights the stellar performance of silver mining stocks as an indicator of what might be in store for the silver price.

“The absolutely spectacular performance of silver mining equities so far this year tells the real story.  I firmly believe we are on the cusp of an explosion in the silver price that will ultimately see silver trade at many multiples of the current $20 price (new all-time highs).  And if the hyperinflation occurs, which I believe is inevitable due to the current global monetary policy, who knows how high the price can go?”

 

You can read the full interview here 

Gold and Silver Bullion – News and Prices

Gold steady, supported by expectations of interest rate cuts (Reuters)

Gold Declines as Investors Await Stimulus From Policy Makers (Bloomberg)

Silver back at two-year high as gold marks first gain in five sessions (MarketWatch)

Fed’s beige book finds ‘softening’ in retail sales (MarketWatch)

U.S. posts $6 billion budget surplus in June (Reuters)

Gold Finds Its Place Amid Shifting Global Risks (Bloomberg)

“Soon” And “Really, Really Crazy”: Starting Up The Helicopters (Zerohedge)

Forget plain old money printing – it’s time to get really radical (MoneyWeek)

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Moments ago, JPM – the biggest US bank by assets – became the first bank to report second quarter earnings, which beat expectations with Adjusted EPS of $1.46 (reported EPS of $1.55) on $25.2 billion in non-GAAP revenue ($24.4 billion in reported revenue), which was $1.1 billion higher than in Q1 and $0.7 billion more than a year ago. Wall Street was expecting $1.43 and $24.42 billion in EPS and revenue respectively (although a meet if one uses the actual reported top-line number). Q2 profit fell 1.4%, or less than expected, as fixed-income trading revenue and loan growth jumped.

Net income dropped to $6.2 billion, or $1.55 a share, from $6.29 billion, or $1.54 a share, a year earlier, the New York-based company said Thursday in statement. Revenue climbed 2.8 percent to $25.2 billion. That figure included $3.96 billion from fixed-income trading, a 35 percent increase, and $1.6 billion from equity trading, up 1.5 percent.

While JPMorgan executives have said trading rebounded in April and May, that was before the referendum roiled markets and pushed out expectations for additional U.S. interest-rate increases to at least next year. The delay would extend a post-financial-crisis era of low rates that’s forced banks to rely on expense cuts to cope with stagnant revenue. Citigroup Inc. and Wells Fargo & Co. are scheduled to report results Friday, while Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley are due next week. Analysts estimate the industry will post its fourth-straight profit decline in the second quarter, according to data compiled by Bloomberg. The group saw profits fall 12 percent on a year-over-year basis in the first quarter.

Going back to JPM’s results, the good news was that after an abysmal Q1, sales and trading rebounded in the second quarter, in which Jamie Dimon saw “strong underlying performance,” with record consumer deposits, credit card sales volume, merchant processing volume, “broad” core loan growth, particularly in mortgage, commercial real estate.

This is what Jamie Dimon said:

“JPMorgan Chase continued to perform well in all of our major businesses. We saw strong underlying performance with record consumer deposits (up 10%), credit card sales volume (up 8%), merchant processing volume (up 13%) and broad core loan growth (up 16%) – particularly in mortgage and commercial real estate. Outside of energy, both wholesale and consumer credit quality remained very good.”

Amusingly, JPM noted the incipient FinTech competition and highlighted that it had nearly 25 million active mobile customers, up 18%.

Looking at just the bank’s all important corporate and investment bank results, 2Q trading $5.56b vs est. $5.16b, up 23% Y/Y; while net income rose to $2.5 billion, up $152mm from a year ago. FICC reported $3.96b vs est. $3.57b; Equities $1.6b vs est. $1.59b;Investment banking revenue $1.49b, vs est. $1.49b

• Fixed Income Markets up 35% YoY, driven by higher revenue in Rates, Currencies & Emerging Markets, Credit and Securitized Products
• Equity Markets up 2% YoY
• IB revenue of $1.5B, down 15% YoY, largely driven by lower equity underwriting fees
• Securities Services revenue of $907mm, down 9% YoY

 

The not so good news was that in Q2 the Fed continued to pressure NIM 2.25%, which came below the estimated 2.31%.  However, what JPM lost in margin, it made up for in volume, with average core loans rising 3% Q/Q and 16% Y/Y.  JPM aslo reported a record growth in average deposits, up $54 billion, or 10%.

Another recurring question is how did JPM’s loan book perform. Here is what it said:  

The provision for credit losses was $1.4 billion, up from $935 million due to reserve increases in the current quarter versus reserve releases in the prior-year quarter, and higher net charge-offs. The Consumer provision reflected an increase in reserves primarily driven by higher loss rates in newer Card vintages, in line with expectations, as well as growth in the Card and Auto portfolios, partially offset by releases for Mortgage Banking and Student loans. The Wholesale provision reflected higher net charge-offs primarily driven by Oil & Gas and Metals & Mining and a reserve build of approximately $50 million, which reflected a net increase of approximately $200 million, driven by one Oil & Gas name in the CIB, and offsetting net releases across the remainder of the portfolio.

Visually:

JPM’s delinquency trends generally remained flat.

JPM provided the following outlook:

• Expect 2016 net interest income to be up ~$2B+ YoY
• Expect 2016 noninterest revenue to be ~$50B, market dependent
• Expect 2016 adjusted expense to be $56B+/-
• Expect 2016 net charge-offs to be ?$4.75B, with the YoY increase driven by both loan growth and Oil & Gas

Overall, a better than expected report, one which JPM urgently needed after last quarter’s poor showing.

Full investor presentation below:

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With markets pricing in an 86% chance of a rate-cut (compared to 11% pre-Brexit) and hopes high for some form of increased QE, Bank of England’s Carney had highly dovish expectations to live up to today. Cable and FTSE were both rallying into the decision (with Gilt yields slightly higher). Given that there has been little post-Brexit data to show any effects, Carney appears to have decided to wait…

• *BOE VOTES 9-0 TO KEEP ASSET-PURCHASE FACILITY AT 375B POUNDS
• *BOE VOTES 8-1 TO KEEP RATE AT 0.5%; VLIEGHE WANTED 25BPS CUT
• *BOE SAYS MOST OFFICIALS EXPECT POLICY LOOSENING IN AUGUST

And offeres hope for an August cut – after more data is available.

The pound is spiking on this disappointment – up 2.5%.

Stocks and bonds are both lower…

• *U.K. TWO-YEAR GILT EXTENDS DROP; YIELD UP 4 BPS TO 0.15%
• *FTSE 100 PARES GAIN AS BOE MAINTAINS BENCHMARK INTEREST RATE

So considering expectations:

DID THE MPC CUT RATES, BY HOW MUCH?
The probability of a 25bp BOE rate cut today is about 78%, money-market pricing shows.
A slim majority of analysts surveyed by Bloomberg expect a cut as soon as today; 23 see rates on hold, 25 see a 25bps decrease while 2 see a 40bps cut, another 2 expect a 45bps cut, and 2 see a cut to zero
There’s been little hard data to show how the U.K.’s decision to leave the EU has affected the economy but consensus is that it will weaken, especially if negotiations become drawn out
And Governor Carney warned there’s a prospect of a material slowing of the economy and his stance at the Bank of Canada was to act early to prevent a deeper downturn

 

HOW SPLIT WERE THE VOTES?
Given heightened expectations of a rate cut in short- sterling markets, but mixed views about whether the case for easing is proven yet, all eyes will be on the split — whether the bank cuts today or not
The bank publishes new quarterly forecasts for growth and inflation next month; some policy makers may prefer to wait for that analysis before taking action
Carney has expressed caution about rate cuts given the likely impact on bank margins and there’s a broader discussion about what easing measures central banks should prioritize in the future; this could be reflected in this week’s vote

 

WHAT ABOUT QE?
The majority of economists, 40 out of 43, expect the Bank to leave its asset purchase facility unchanged at GBP375b
It’s likely though that the U.K.’s rate-setters discussed what other easing options it has at its disposal, including a relaunch of its credit easing program

The MPC Statement is a big disappointment:

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target and in a way that helps to sustain growth and employment.  At its meeting ending on 13 July 2016, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%, with one member voting for a cut in Bank Rate to 0.25%.  The Committee voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.  Committee members made initial assessments of the impact of the vote to leave the European Union on demand, supply and the exchange rate.  In the absence of a further worsening in the trade-off between supporting growth and returning inflation to target on a sustainable basis, most members of the Committee expect monetary policy to be loosened in August.  The precise size and nature of any stimulatory measures will be determined during the August forecast and Inflation Report round.

This was a big disappointment, despite leaving the door open for August.

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The global meltup continues with the S&P set to open at new all time highs, some 20 points higher from yesterday’s close, however the driver for the latest rally is not so much the imminent BOE announcement which is expected to cut rates by 25 bps from 0.50%, but a dramatic surge in the USDJPY just after 1am Eastern when Bloomberg revealed more details about Ben Bernanke’s masterplan for Japan’s helicopter money.

According to Bloomberg, Bernanke, who met Japanese leaders in Tokyo this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers. Abe advisor Etsuro Honda said that during an hour-long discussion with Bernanke in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation. He noted that helicopter money could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option. The implication, as we said last week when we previewed just this “big thing” is that Japan is indeed set to be the first testing ground of helicopter money in the modern financial system.

Though Honda said he thought Japan was already engaged in a strategy that involved helicopter money, he said that he watned to convey the idea to Abe and asked Bernanke to meet with the premier in Japan. While this didn’t happen in the spring, Bernanke joined central bank chief Haruhiko Kuroda over lunch this Monday and on Tuesday he attended a gathering with Abe and key officials, including Koichi Hamada, another influential economic adviser.

Honda, 61, said he told Abe about Bernanke’s views after his April meeting. “I told him now is the time for Japan to expand fiscal spending and at the same time, additional monetary easing should be taken,” Honda said. “I told him it is necessary to strengthen the effects of Abenomics” through such a strategy.

While nothing definitive has been revealed by Japan yet, bond, stock traders and economists have been mulling the possible implications of Bernanke’s visit and the next steps to come in Abenomics. Amid intense speculation about the chances of helicopter money, and the certainty of further fiscal stimulus ordered by the prime minister, Japanese shares have rallied for four consecutive days while the yen has weakened. The Japanese currency weakened sharply in late afternoon trading in Tokyo, and reached just shy of 106 around 6am ET, having soared nearly 600 pips in the past 4 days.

And with the Yen – the world’s carry currency – plunging, global stocks have climbed with U.S. equity index futures.  European shares rose to a three-week high and emerging-market equities advanced for a sixth day. South Africa’s rand and Russia’s ruble were among the biggest gainers against the yen after a gauge of metal prices climbed to a nine-month high and oil rebounded from a two-month low. The pound advanced as traders awaited the Bank of England’s first interest-rate decision since the U.K. voted to leave the European Union.

“The expectations of a two-pronged stimulus approach — both fiscal and monetary — have definitely put the yen under pressure,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London.

Meanwhile, as Japan prepares to formalize helicopter money, the BOE is set to ease in a more conventional way in less than an hour: “Everyone is focused on the BOE and whether or not they will announce more stimulus and cut rates.”

The Stoxx Europe 600 Index rose 1 percent at 10:55 a.m. in London, paring its losses since Britain’s referendum on June 23. All industry groups in the gauge climbed, led by carmakers and commodity producers. The MSCI Emerging Markets Index added 0.7 percent in its longest winning streak since April. The gauge advanced to 8.6 percent this year and trades at the highest valuation in more than a year. The MSCI World Index of developed markets has gained 2.1 percent in 2016.  Futures on the S&P 500 Index added 0.8%. BlackRock and JPMorgan are scheduled to report earnings before the market opens. Yum! Brands Inc. jumped 3.1 percent as the company raised its forecast after its KFC chain performed better than expected in China. Analysts predict second-quarter profits will drop 5.7 percent at S&P 500 firms, which would make it the fifth straight quarterly decline, the longest streak since 2009.

Sovereign debt fell in the U.S., the U.K., Japan and Germany. The yield on U.S. Treasuries due in a decade rose two basis points to 1.50 percent, while that on Japanese debt increased by two basis points to minus 0.26 percent. Yields climbed four basis points in the U.K. and Germany to 0.78 percent and minus 0.05 percent, respectively.

Global market snapshot

• S&P 500 futures up 0.8% to 2162
• Stoxx 600 up 0.9% to 339
• FTSE 100 up 0.8% to 6726
• DAX up 1.5% to 10076
• German 10Yr yield down less than 1bp to -0.07%
• Italian 10Yr yield down 2bps to 1.19%
• Spanish 10Yr yield down 2bps to 1.13%
• S&P GSCI Index up 0.6% to 360.1
• MSCI Asia Pacific up 0.2% to 133
• Nikkei 225 up 1% to 16386
• Hang Seng up 1.1% to 21561
• Shanghai Composite down 0.2% to 3054
• S&P/ASX 200 up 0.4% to 5412
• US 10-yr yield up 2bps to 1.49%
• Dollar Index up 0.08% to 96.29
• WTI Crude futures up 0.6% to $45.02
• Brent Futures up 0.6% to $46.53
• Gold spot down 1.2% to $1,326
• Silver spot down 0.9% to $20.17

Top Global Headlines:

• Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda
• Fed’s Harker Says Two Interest-Rate Hikes May Be Needed in 2016
• Volkswagen’s 3-Liter Car Recall Plan Rejected by California: Talks continue on how to fix VW, Audi, Porsche vehicles
• Monsanto Said to Revive Talks With BASF on Bayer Alternative: Monsanto board said split over merits of Bayer, BASF deals
• UBS, BofA Merrill Lynch Lead Wealth Managers With $3 Trillion: Volatile markets, ‘hesitating’ clients crimp industry assets
• Google Said to Face Added EU Antitrust Charges, WSJ Reports: EU Commission accuses co. of breaching EU antitrust rules by imposing strict contractual terms with its advertising service
• Wanda in Talks to Buy 49% of Viacom’s Paramount, WSJ Reports: Any agreement could face opposition from Sumner Redstone

We start the overnight update with Asian markets, where it was another mostly quiet session for equities with participants awaiting the Bank of England rate decision. Nikkei 225 (+0.95%) traded with modest gains to continue its 4-day winning streak amid source reports that fiscal stimulus worth around JPY 10tr1 could be announced later this month. Upside in ASX 200 (+0.43%) had been curbed by the decline in crude prices seen yesterday post DoE’s, while a lacklustre CNY 20bIn liquidity injection failed to lift the Shanghai Comp (-0.22%) out of the red.10yr JGBs traded flat amid the continued upside seen in Japanese stocks while a disappointing 5yr auction in which the b/c, and average yield were lower than prior failed to have a significant impact on price action.

Top Asian News

• Bernanke Floated Japan Perpetual Bonds Idea to Abe Adviser Honda: Prominent foreign economists drawn into nation’s policy making
• TSMC Profit Tops Estimates as China Phones Make Up for Apple: Co. raised planned 2016 capex
• Fast Retailing Cuts Profit Forecast for Third Time This Year: Stronger yen eroded Uniqlo-owner’s earnings from overseas
• UBS Said to Have Flagged Suspicious 1MDB Transactions to MAS: Suspicious transactions prompt investigation of accounts involved
• Great Eagle’s Lo Halts $330 Million London Project After Brexit: Group had planned to buy land in Shoreditch for Eaton Hotel
• Singapore Exchange Says Won’t Resume Trading at 2pm Local Time: Shares including DBS Group, Singapore Airlines not trading

Much of the price action so far today took place as European participants arrived at their desks, with significant moves seen early on amid mounting expectations for BoE and Japanese stimulus, but light newsflow thereafter has led ti subdued trade as we move closer towards the BoE rate decision. European equities saw significant upside through the open and trade in firm positive territory (Euro Stoxx: +1.4%). In terms of a sector break down, the likes of financials, materials and energy names are the best performers, while the defensive sectors healthcare and utilities are the session’s laggards. Italian banks Banca Monte dei Paschi and UniCredit lead the way higher in stock specific terms after Italian press reports suggested that a capital increase was on the card for both Co.’s. Despite much of the focus on macro news falling on the potential for further easing for the likes of UK and Japan, fixed income markets have been somewhat indecisive so far today, seeing initial downside before a turnaround by mid-morning. As such, by mid-morning Bunds are on the way to closing the opening gap and trading firmly back above the 167 level.

Top European News

• Bank of England Rate Cut in Focus as Brexit Rattles Economy: Traders are pricing in about an 80% chance of a rate reduction
• May Draws Line Under Cameron Era as Johnson Named to Brexit Team: May fires Osborne, appoints Hammond U.K. finance minister
• Boris Johnson an Undiplomatic Pick as Britain’s Top Diplomat: Former mayor said Kenyan ancestry affected Obama view of U.K.
• Deutsche Boerse Edges Closer to Investor Approval for LSE Deal: Shareholder approval rises to 53% — near 60% minimum needed
• Commerzbank Quarterly Profit Didn’t Improve, Handelsblatt Says: 1Q net income fell 52% to EU163m y/y
• Credit Suisse Said to Lift Salary, Chop Allowance for Some Staff: Other lenders have made similar moves in response to EU rules

In FX, the biggest story remains the Japanese yen which weakened 1.1 percent versus the dollar, after earlier strengthening as much as 0.5 percent. The pound strengthened 0.6 percent to $1.3229, having touched $1.3338 on Wednesday, the highest since July 4. Sterling rallied even amid rising speculation that the central bank will cut its benchmark rate for the first time since 2009 to support the U.K. economy from the fallout of Brexit. Futures pricing shows the chance of a reduction at this meeting has climbed to 85 percent, compared with 11 percent on June 23, the day of the nation’s referendum.“Currency investors see a rate cut today as a done deal,” Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London, wrote in a client note. “The BOE will struggle to exceed the already dovish market expectations and this will help the pound to consolidate in the aftermath of the meeting.”

In commodities, West Texas Intermediate crude oil rose 1 percent to $45.20 a barrel, after tumbling 4.4 percent on Wednesday as U.S. data showed crude stockpiles fell an eighth week, the longest declining streak since June 2015.The LME Index of six base metals rose to the highest since Oct. 15 on Wednesday as nickel climbed on potential supply disruptions and copper advanced on speculation policy makers’ efforts to spur economic growth will boost demand for metals. Zinc and aluminum rose, while tin fell. Gold declined 1.2 percent to $1,327.12 an ounce, after gaining 0.7 percent in the last session. Corn increased 2 percent in Chicago, climbing for a third day as forecasts for hot and dry weather in the U.S. Midwest raised concern crop yields will deteriorate.

On today’s calendar, in addition to the much anticipated rate cut by the BOE due out shortly, in the US we’ve got the latest weekly initial jobless claims number and also the June PPI report (market expectations are for +0.3% mom at the headline and +0.1% mom at the core). Fedspeak wise Lockhart (at 4.15pm) is set to opine this afternoon and George (6.15pm BST) later this evening. As we noted earlier JP Morgan highlights the earnings calendar while Delta Airlines is also due to report.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities enter the North American crossover in positive territory with all eyes now firmly placed on the BoE at 1200BST/0600CDT
• The median expectation for the BoE is for the bank to cut rates by 25bps but analysts are very much split in their views
• Looking ahead, highlights include BoE Rate Decision, US PPI & Initial Jobless Claims & Earnings from JP Morgan & Blackrock

US Event Calendar

• 7am: Bank of England Bank Rate, est. 0.25% (prior 0.5%)
• 8:30am: Initial Jobless Claims, July 9, est. 265k (prior 254k)
• 8:45am: Bloomberg U.S. Economic Survey, July
• 9:45am: Bloomberg Consumer Comfort, July 10 (prior 43.5)
• 10:30am: EIA natural-gas storage change
• 11:15am: Fed’s Lockhart speaks in Victor, Idaho
• 1:15pm: Fed’s George speaks in Oklahoma City
• 7pm: Fed’s Kaplan speaks in St. Louis

DB’s Jim Reid concludes the overnight wrap

The market is pricing an 80% chance of a 25bps cut today with economists a little more split as to whether they do or not (30 out of 54 are expecting a cut). DB’s George Buckley thinks it’s a close call but on balance believes the BoE will wait the extra three weeks until the August meeting when a lot more data will be available for the post referendum period. Supporting this he says that the comments from the BoE pre-referendum seemed to hint at waiting to tailor the response to the world that emerges after the vote. The BoE will be compiling the quarterly Inflation Report/analysis of the economy coinciding with the August meeting. He thinks delaying may be the preference and they can buy themselves time with a sufficiently dovish statement today. The markets have offered the BoE an opportunity not to rush given the recent rally. Politics may also be involved to some degree. Without knowing what the new administration’s policy will be, a wait and see approach maybe gives them powder for a more comprehensive package down the line. It’s a fine line though and we’re highly likely to see action by the August meeting at the very least.

Staying with the UK, last night should remove any doubt that Brexit does indeed mean Brexit as new PM Theresa May appointed Brexit campaigners David Davies and Boris Johnson Secretary for exiting the EU and Foreign Secretary respectively. So the long roadmap to exiting the EU started being formulated as of last night.

Away from this, today brings the first key US earnings report of the season with JP Morgan reporting before market opening. That will kick start a run of quarterly bank reports that we’re due to get in the next ten days or so including Citi and Wells Fargo on Friday and BofA, Goldman Sachs and Morgan Stanley next week. Markets hit a bit of a brick wall yesterday with the recent rally showing some signs of fatigue so these upcoming earnings reports could provide a bit of direction again.

Indeed it was a large leg lower for Oil which weighed on sentiment yesterday. WTI plunged -4.38% yesterday and tested those Monday low’s again back below $45/bbl after the latest EIA data showed evidence of an unexpected increase in gasoline supplies last week. Energy stocks were under pressure as a result and it ended with the S&P (+0.01%) fluctuating between modest gains and losses and closing pretty much flat. The Stoxx 600 (-0.13%) closed just in the red although European Banks (Stoxx Banks -1.51%) and the FTSE MIB (-1.15%) stood out. That was actually despite some more positive chatter around Italian Banks with the news that a second bank support fund to supplement Atlante is being discussed.

Meanwhile, sovereign bond markets reversed some of their weakness this week with 10y and 30y Treasury yields in particular 4-5bps lower following a strong 30y auction. In another eye catching stat for the week, a new 10y Bund was issued yesterday with a negative yield (-0.05%) for the first time ever. It’s the first Eurozone 10yr sovereign bond to be issued with a negative handle yield and joins Japan as the second G7 member to do such.

As we flick over to the latest in Asia this morning, most major bourses are following the lead from Wall Street and Europe yesterday and trading with a relatively cautious tone, although the outlier is again Japan where the Nikkei (+0.76%) and Topix (+0.75%) continue to benefit from the elevated expectations that stimulus is around the corner. Elsewhere, the Hang Seng (+0.02%), Shanghai Comp (-0.36%), Kospi (-0.06%) and ASX (+0.35%) are a bit more mixed although moves have been modest. As expected the Bank of Korea kept rates on hold this morning, although they did move to cut growth and inflation expectations this year.

Moving on. There was a bit of Fedspeak for markets to take account of yesterday. Earlier in the day we heard from Dallas Fed President Kaplan (moderately hawkish) who said that the recent US employment report shows signs of making progress in reducing labour market slack but that a ‘slow, gradual, careful’ approach to raising rates is still appropriate. Kaplan added that there are two effects coming from the current slow GDP growth environment. He noted that it means that the Fed will ‘make progress on our dual mandate but it might be slower than it would be otherwise’ and that the other impact ‘is that the neutral rate is probably lower than it would be otherwise’. Meanwhile and speaking overnight, Philadelphia Fed President Harker (also moderately hawkish) said that he believes inflation will return to target sometime next year and that ‘I anticipate that it may be appropriate for up to two additional rate hikes this year and that the funds rate will approach 3% by the end of 2018’.

Staying in the US, datawise yesterday there wasn’t too much to add to the debate. Import prices rose a less than expected +0.2% mom in June (vs. +0.5% expected) with the YoY rate now at -4.8% from -5.0%. The June Monthly Budget Statement revealed a smaller than expected surplus during the month ($6.3bn vs. $19.0bn expected) with receipts down -3.9% yoy. Later in the evening the Fed’s Beige Book revealed that the US economy has expanded at a modest pace since mid-May and that ‘districts reporting on overall growth expect it to remain modest’. The text also suggested that labour market conditions were said to have remained stable with employment continuing to grow modestly and wage pressures remaining ‘modest to moderate’.

The Bank of England also released its Q2 credit conditions survey yesterday. The main take away from the summary was the reference to the outlook post-Brexit with the summary revealing that major UK lenders expect the availability of secured credit to be little changed in the near term but the demand for secured credit to fall. The text also revealed that the availability of credit to the corporate sector is expected to hold steady, although a further tightening is expected for the commercial real estate sector.

Before we look at today’s calendar and just wrapping up the data yesterday, France revised down their final June CPI print to +0.1% mom from +0.2%, although the YoY rate stayed as is at +0.2%. More notable was the weaker than expected Euro area industrial production report for May (-1.2% mom vs. -0.8%) which has resulted in the YoY rating fall to +0.5% from +2.2%.

Looking at the day ahead, this morning in Europe the overriding focus will of course be on the aforementioned BoE meeting at midday, especially with no data coming out of note. This afternoon in the US we’ve got the latest weekly initial jobless claims number and also the June PPI report (market expectations are for +0.3% mom at the headline and +0.1% mom at the core). Fedspeak wise Lockhart (at 4.15pm) is set to opine this afternoon and George (6.15pm BST) later this evening. As we noted earlier JP Morgan highlights the earnings calendar while Delta Airlines is also due to report.

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Submitted by John Rubino via DollarCollapse.com,

As the abject failures of the past few years’ monetary experiments became apparent, it was clear that something else would have to be tried. The only questions were when this would happen and how crazy the next iteration would be. Both answers are now coming into focus, and they’re looking like “soon” and “really, really crazy.”

Beginning with the most enthusiastic experimenter, Japan just reelected Shinzo Abe, of “Abenomics” fame, by a landslide, setting him free to turbo-charge his policy of massive government deficits fueled by unprecedented currency creation:

Abe orders drafting of new stimulus package to breathe life into Japan’s economy

(Japan Times) – Prime Minister Shinzo Abe ordered economic revitalization minister Nobuteru Ishihara on Tuesday to draft a range of economic measures to bust deflation and raise Japan’s growth potential, including with a supplementary budget for fiscal 2016.

The government will submit the budget draft for fiscal 2016 to an extraordinary Diet session this fall, Ishihara told a news conference later in the day.

 

Ishihara declined to comment on the size of the economic measures, saying that will be decided at the end of the month using a “bottom-up approach.”

 

On Tuesday, the Nikkei financial newspaper reported the projects are likely to be worth about ¥10 trillion, including the supplementary budget and government-backed loans to businesses.

 

Ishihara said the budgets will likely benefit workers at nurseries and day care services for the elderly, but he declined to give any further details.

 

“The aim of the economic measures is to make investments for the future,” Ishihara said.

 

However, the list of planned projects also includes public works projects that are often used as sweeteners for the construction industry and to reward local politicians who helped secure the LDP’s election victory.

 

In a written instruction to Ishihara, Abe ordered the minister to accelerate construction of maglev railway lines and to expand the nation’s shinkansen bullet train network.

 

There will also be spending on measures to help farmers and fishermen export their products, the paper said.

 

Abe urged Ishihara to take advantage of the negative interest policy recently introduced by the Bank of Japan, which would lower borrowing costs for the already debt-ridden government.

 

This means Ishihara was urged to issue more public bonds to finance the projects, further adding to government debt.

 

Japan’s public debt amounts to more than 200 percent of gross domestic product, the highest of all developed countries.

 

But Ishihara emphasized that the government needs to do what it can to stimulate the economy and end deflation, which would then lead to economic growth and lower the ratio of debt to GDP.

Meanwhile Britain, post-Brexit, is a logical candidate for preemptive easing. And sure enough…

Carney Opens Lehman Playbook at Bank of England

(Bloomberg) – Mark Carney looks poised to repeat a strategy that served him well during the global financial crisis.

 

As the Bank of England governor seeks to stave off any turmoil after Britain’s decision to quit the European Union, he has cited his experience at Canada’s central bank in 2008 as a guide. Acting early to prevent a deeper downturn became the hallmark of his approach in the prelude to the international slump, a perspective he can bring to the Monetary Policy Committee’s debate this week on whether to cut interest rates.

 

“One thing Carney is very good at doing is jumping ahead of the curve,” said James Rossiter, an economist at TD Securities in London and a former official at the both the British and Canadian central banks. “As governor of the Bank of Canada, he was cutting rates dramatically before Lehman went bust. To have that sort of foresight, to know this was going to be a bigger issue than perhaps the markets were appreciating, and to go forth on a clear easing strategy, is something that we could see him repeating.”

 

With Brexit roiling currency markets before a 2.6 percent rally in the pound this week, confidence gauges diving and Carney warning of a “material slowdown,” economists and investors see more stimulus on the way. The governor is still at the vanguard of Britain’s response as the government remains sidetracked by a change of leadership in the ruling Conservative Party.

 

Carney said shortly after the referendum that easing will probably be needed this summer, meaning the focus now is on whether officials act this week or wait until their Aug. 4 meeting. The advantage of the later date is that the BOE will publish new forecasts in the quarterly Inflation Report and the governor is due to hold a press conference.

And of course the US hates to be left out of global trends:

Fed’s Mester Says Helicopter Money “The Next Step” In US Monetary Policy

(Zero Hedge) – Speaking overnight in Australia, the Fed’s Loretta Mester said “helicopter money” could be considered to stimulate America’s economy if conventional monetary policy fails.

 

As Australia’s ABC reports, Mester, president of the Federal Reserve Bank of Cleveland and a member of the rate-setting Federal Open Market Committee (FOMC), signalled direct payments to households and businesses to stoke spending was an option if interest rate cuts and quantitative easing fail.

 

“We’re always assessing tools that we could use,” Mester told the ABC’s AM program. “In the US we’ve done quantitative easing and I think that’s proven to be useful.

 

“So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.

 

The surprising comments from a Fed hawk, come on the heels of two other Fed presidents hinting that more QE could be used as additional “ammo” should the US economy relapse back into recession, and as major central banks consider unconventional policy tools in a world of slowing growth, low inflation and record low interest rates. Mester said that concerns about the Brexit vote were a consideration in June when the Federal Reserve left rates at between 0.25 and 0.5 per cent, a consideration While the immediate impact of Brexit rattled financial markets, Mester said the Fed would be looking to medium and long term fallout.

 

“Between now and our next meeting and future meetings we are all going to be assessing what the impact of that decision will mean in terms of economic conditions and how they affect the medium term outlook for the US economy,” she explained.

 

And if all else fails, there is always Bernanke’s helicopter, first in Japan then coming to the US.

 

So many thoughts, so little time:

 Japan has an “economic revitalization minister”? That seems like an admission of defeat right there, since the name implies an economy that (under current leadership) isn’t vital. But hey, at least it’s honest, unlike the US where the numbers are cooked to show vitality where there is none.

“The budgets will likely benefit workers at nurseries and day care services for the elderly, said [Japan’s] Ishihara. ‘The aim of the economic measures is to make investments for the future’.” Really, day care for the elderly is an investment? This illustrates the debasement not just of currency but of language, when anything a politician thinks will buy votes can, with a straight face, be called an investment.

That picture of Bernanke doesn’t convey any new information but it’s such a great example of parody revealing underlying truth that it deserves to be reprinted every few months.

The idea (now being pushed by a surprising number of people who ought to know better) that governments should take advantage of historically low interest rates to “invest” with borrowed money has an obvious fatal flaw. That is, accumulating even more negative or zero-rate debt will make it functionally impossible to raise rates to “normal” levels, which is to say levels where markets can once again function as mechanisms for moving savings into productive investments. It’s not a stretch to call this the end of capitalism and the beginning of a new Dark Age.

The coming experiments are of course not the end of the process. A full-on debt jubilee is still out there, and will be tried after a simple ramp-up of fiscal/monetary stimulus fails again. Be prepared for governments to start buying our houses at double the market price in 2017.

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