Tag: news

California Tax Battle About More Than Semantics: New at Reason

Republicans in California voted for a tax hike, but don’t call it that. Steven Greenhut reports:

When is a tax increase not a tax increase?

The issue centered on a measure proposed by Gov. Jerry Brown (D) and the state’s Democratic leadership dealing with managed-care organizations (MCOs). Currently, the state imposes a tax on managed-care organizations that participate in California’s Medi-Cal program that provides health care to poor people.

But the Obama administration rejects that approach and insists the California government tax all MCOs, or lose more than $1 billion in federal reimbursements. The MCO plan would increase the tax across the board in order not to leave federal money on the table. It would reduce other taxes on health organizations, thus leaving the tax-hike question unanswered.

In 2010, California voters approved Proposition 25, which allows the Legislature to pass a budget with a simple majority vote. But the majority still needs a two-thirds vote for tax increases. The same year, voters also approved Proposition 26, which helped answer a similar question to the one being debated right now: What is a tax hike? Previously, a simple majority was needed if a tax package was revenue neutral. Prop. 26 required a two-thirds vote on any bill that raised anyone’s taxes even if other taxes were reduced at the same time.

Republican votes were therefore needed on this MCO tax plan.

View this article.

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Rubio Says Trump Is ‘Not Conservative’ but Can’t Explain Why

During last night’s Republican presidential debate, Marco Rubio warned voters that Donald Trump is not really a conservative:

We are not going to turn over the conservative movement, or the party of Lincoln or Reagan…to someone whose positions are not conservative. To someone who last week defended Planned Parenthood for 30 seconds on a debate stage. To someone, for example, that has no ideas on foreign—someone who thinks the nuclear triad is a rock band from the 1980s. To someone who time and again on issue after issue has not proven that he has the principles that outline what the conservative movement has been about—and, as Ted said, the things that made America great. America is great because of the conservative principles of limited government and free enterprise, and a strong national defense.

The claim that Trump does not stand for conservative principles is often heard from Republicans who are dismayed that he is on the verge of becoming their next presidential candidate. But it is not clear what this charge means—partly because, as Nick Gillespie notes, it’s not clear what conservative means in this context. To anyone who takes principles seriously, the positions commonly associated with the conservative movement (or the Republican Party) seem like a mishmash, much like the positions commonly associated with the progressive movement (or the Democratic Party). If you think the right to armed self-defense is important, then of course you want to ban abortion. If you believe in free trade, then obviously you want to suppress commerce in sexual services and arbitrarily proscribed intoxicants. Because there is no logic there, you just have to memorize the views that are supposed to go together, in the same way that you memorize the names of musicians in a band or players on a team. 

Rubio mentioned “a strong national defense.” But since no one wants a weak national defense, that phrase must be decoded. In practice it means that regardless of how much money the U.S. government is spending on the military, a conservative wants to spend more. I know: That doesn’t sound conservative, but you can’t get hung up on words and their meanings if you want to understand this stuff. The point is, conservatives want to spend more on the military, and Donald Trump doesn’t, so he is not a real conservative.

Except that Trump says in a campaign video, “I’m gonna make our military so powerful, so strong, that nobody—absolutely nobody—is gonna mess with us.” On Face the Nation last October, he said, “I want to have a much stronger military.” So “strong national defense,” check.

What about “limited government”? Again, forget that always wanting to expand so-called defense spending seems inconsistent with that principle. Does Trump talk about making government smaller? Yes, he does. Just last night, he talked about cutting federal spending by $300 billion a year. He said he would reduce entire agencies and departments to “little tidbits,” and he made a Reaganesque promise to eliminate “waste, fraud, and abuse.” Never mind that his numbers don’t add up. Did Reagan’s numbers add up? Did George W. Bush’s? Would Rubio say these guys were not real conservatives? So “limited government,” check.

As for “free enterprise,” it should go without saying that a successful businessman like Trump is a fan. True, he talks tough on trade, but so does Rubio. Plus Trump promises to stimulate the economy by cutting everyone’s taxes, thereby becoming “the greatest jobs-producing president that God ever created.” Aren’t conservatives all about creating jobs by cutting taxes? So “free enterprise,” check.

Rubio also implicitly took aim at Trump’s position on abortion. Trump forthrightly admits that he has “evolved” on abortion. So did Ronald Reagan and Mitt Romney. If they were conservative enough to be the Republican presidential nominee, why isn’t Trump?

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It’s a revolution: German banks told to start hoarding cash

Just stunning.

German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH.

Europe, of course, has been battling with negative interest rates for quite some time.

What this means is that commercial banks are being charged interest for holding wholesale deposits at the European Central Bank.

In order to generate artificial economic growth, the ECB wants banks to make as many loans as possible, no matter how stupid or idiotic.

They believe that economic growth is simply a function of loans. The more money that’s loaned out, the more the economy will grow.

This is the sort of theory that works really well in an economic textbook. But it doesn’t work so well in a history textbook.

Cheap money encourages risky behavior. It gives banks an incentive to give ‘no money down’ loans to homeless people with no employment history.

It creates bubbles (like the housing bubble from 10 years ago), and ultimately, financial panics (like the banking crisis from 8 years ago).

Banks are supposed to be conservative, responsible managers of other people’s money.

When central bank policies penalize that practice, bad things tend to happen.

Traditionally when a commercial bank in Europe wants to play it safe with its customers’ funds, they would hold excess reserves on deposit with the European Central Bank.

In the past, they might even have been paid interest on those excess reserves as an extra incentive to be conservative.

Now it’s the exact opposite. If a bank holds excess reserves on deposit at the ECB to ensure that they have a greater margin of safety, they must now pay 0.3% to the ECB.

That’s what it means to have negative interest rates. And for the bank, this eats into their profits, especially when they have tens of billions in excess reserves.

Talk about being between a rock and a hard place.

On one hand, banks stand to lose a ton of money in negative interest. On the other hand, they put their customers’ deposits at risk if they don’t hold extra reserves.

Well, the Bavarian Banking Association has had enough of this financial dictatorship.

Their new recommendation is for all member banks to ditch the ECB and instead start keeping their excess reserves in physical cash, stored in their own bank vaults.

This is officially an all-out revolution of the financial system where banks are now actively rebelling against the central bank.

(What’s even more amazing is that this concept of traditional banking– holding physical cash in a bank vault– is now considered revolutionary and radical.)

There’s just one teensy tiny problem: there simply is not enough physical cash in the entire financial system to support even a tiny fraction of the demand.

Total bank deposits exceed trillions of euros. Physical cash constitutes just a small percentage of that sum.

So if German banks do start hoarding physical currency, there won’t be any left in the financial system.

This will force the ECB to choose between two options:

1) Support this rebellion and authorize the issuance of more physical cash; or

2) Impose capital controls.

Given that just two weeks ago the President of the ECB spoke about the possibility of banning some higher denomination cash notes, it’s not hard to figure out what’s going to happen next.

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Junk Bond Funds Report Record Inflows

Two days ago, Credit Suisse reported something which had been rather visible in the markets: an onslaught of retail buying had entered the junk bond market in which institutions were delighted to sell to retail bagholders, in the process repricing the entire HY space if only briefly.

 

Overnight, fund flow tracking service EPFR confirmed this when it reported that US high yield funds recognized a $5.27bn (+2.8%) inflow for the week ended March 2nd, the largest ever in terms of $AUM and the 2nd largest on a percentage basis.

As BofA notes, even more impressive is that the $2.37bn (+7.13%) net inflow for ETFs was the largest ever for the sub-asset class while the +$2.90bn (+1.87%) for open-end funds was the 3rd largest on record.

Some more observations:

US HY has been starved of inflows since July of last year as investors waited for better entry points into the asset class. And as we have seen volatility subside, economic indicators turn more positive, spreads tighten 156bps, and oil rally nearly 20% in the past 3 weeks, retail has piled into high yield in what amounts to be the 2nd consecutive $2bn+ weekly inflow. However, we would fade the rally we have seen of-late as the fundamental backdrop has not changed meaningfully. In fact, we continue to see signs that we are nearing the end of the credit cycle with the default rate now at 4.2%, 2 consecutive periods of banks tightening lending standards, downgrades outpacing  upgrades by a ratio of 6:1, and a general unwillingness to fund CCC borrowers. Regardless, this week’s inflow is undoubtedly a strong technical for the market and we would not be surprised to see the near-term rally continue for several more weeks.

Other risk assets benefited from inflows as well last week, though to a lesser extent than high yield. Equities returned to inflows for the first time in 9 weeks ($622mn, +0.01%), non-US high yield gained $569mn (+0.2%), high grade added $1.27bn (+0.1%), and EM debt saw $480mn (+0.2%). The only asset class we track recording an outflow last week was loans (-$282mn, -0.35%), but even there the bleeding slowed as it was the smallest outflow in 14 weeks. As a whole, fixed income asset classes saw net inflows of $5.78bn (+0.3%).

So is this the “all clear” signal in fixed income? Hardly. If anything this is merely a stampede into risk as the vicious short squeeze in oil has gotten the animal spirits stirred for at least the present time.

Meanwhile, the flows into IG were nominal…

… while loan funds continued to bleed capital.

Finally, for an explanation why the junk bond market is set for another repricing lower, please see our post form last night “How This Default Cycle Is Different: Record Low Recovery Rates” – this is not news now; it will be news in a few months.


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Knight of Cups and Whiskey Tango Foxtrot: New at Reason

Surely Terrence Malick, the writer and director of Knight of Cups, knows what this movie is all about. If only he would let us in on it. Since the picture was shot without a script, or even scene-blocking for camera placement, you wonder how much of a clue the actors themselves had. Malick has made some wonderful films over the 43 years since he debuted with Badlands; but this one, like his last one, To the Wonder, isn’t one of them, writes Kurt Loder.

View this article.

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Futures Flat Ahead Of Payrolls As Gold Continues Surge After Entering Bull Market

There is an odd feeling of Deja QEu this morning, when with two hours to go until the February payrolls, global stocks are modestly higher, US equity futures are likewise slightly higher on the back of a weaker dollar (or perhaps stronger Euro following a Market News report according to which the ECB may disappoint, more on that shortly), but it is gold that is breaking out, and after entering a bull market yesterday when it rallied 20% from its December lows…

 

…  gold has continued to surge, rising as high as @1,274 in early trading a price last seen in January 2015, suggesting two things: i) someone believes wholesale currency debasement is about to be unleashed once again, and ii) faith in central banks is shaking as Goldman noted when it said two weeks ago to short gold because the “only thing we have to fear is fear itself.” It was wrong about the former, and may prove all too right about the latter.

 

Jens Pedersen, a Danske Bank A/S analyst in Copenhagen, told Bloomberg that “the rally has mainly been on the repricing and changing expectations regarding central bank policy.” The European Central Bank and Bank of Japan may ease policy further, while the U.S. Federal Reserve could postpone any further interest rate increases, he said. Looser policy and the lower rates on securities that tend to follow add to the appeal of gold, which yields nothing. The metal is also a haven in times of crisis and slow growth. Investors are awaiting data on U.S. non-farm payrolls that will offer further insight into the health of the world’s biggest economy and the trajectory of interest rates.

“Although gold is very much driven by Fed policy, the impact of ECB policy decisions may become increasingly relevant for gold price action, as concerns about negative interest rates gain traction,” Joni Teves, a strategist at UBS Group AG, said in a note on Friday. “We think negative interest rates should be positive for gold.”

Another reason why there is a sense of QE-ness to the world, is because Bloomberg reports that the only reason Chinese equities rose this week, is due to central bank intervention with state-backed funds said to have intervened in the market ahead of the National People’s Congress on Sunday. Similar to what the Fed has done for a far longer time in the US.

Emerging markets extended their best week since October and copper advanced, supporting mining stocks, on speculation China will boost stimulus at an annual gathering of the nation’s legislature. Treasuries and developed-nation shares were little changed before U.S. jobs data.

Elsewhere, it has been a relatively quiet start, with Euro Stoxx 600 up 0.2%, US equity futures up 0.1%, while global equities have recouped more than half of this year’s losses since sinking to a 2 1/2-year low on Feb. 11. “The mood is quite positive this morning, but now everyone is waiting for payroll data,” said Benno Galliker, a trader at Luzerner Kantonalbank AG. “Two weeks ago we were accepting the fall back into a recession, and now the fears seemed to have been overblown and we have a kind of positive bias.”

That may all change shortly when the US reports February nonfarm payrolls, forecast to show 195,000 jobs were added and an unemployment rate of 4.9 percent: as we will explain shortly, a “too strong” number will be the worst case scenario for bulls, and may lead to another repeat of the February (and January) selloffs.

Finally, over the weekend China may announce its plans to revive growth when an annual meeting of the National People’s Congress gets under way on Saturday.

Global Market Wrap

  • S&P 500 futures up less than 0.1% to 1991
  • Stoxx 600 up less than 0.1% to 340
  • FTSE 100 up 0.4% to 6158
  • DAX up 0.4% to 9787
  • German 10Yr yield up 2bps to 0.19%
  • Italian 10Yr yield up 1bp to 1.44%
  • MSCI Asia Pacific up 0.6% to 126
  • Nikkei 225 up 0.3% to 17015
  • Hang Seng up 1.2% to 20177
  • Shanghai Composite up 0.5% to 2874
  • S&P/ASX 200 up 0.2% to 5090
  • US 10-yr yield down less than 1bp to 1.83%
  • Dollar Index down 0.04% to 97.55
  • WTI Crude futures up less than 0.1% to $34.58
  • Brent Futures down less than 0.1% to $37.04
  • Gold spot up 0.6% to $1,272
  • Silver spot up 1.4% to $15.43

Top Global News

  • Microsoft, Google Back Apple in FBI Fight Over Unlocking IPhone: Tech companies argue privacy, security threatened in case. San Bernardino shooting victim among those supporting Apple
  • AMC Entertainment Buys Carmike as Wang Consolidates Cinemas: $30-a-share deal, a 19% premium over closing price, values No. 4 U.S. exhibitor at $1.1b
  • Goldman, BofA Dismiss Traders After Getting Taste of 2016 Markets: Goldman said to plan cutting more than 5% of fixed- income jobs. BofA said to eliminate 150 trading, investment- banking workers
  • Samsonite to Buy Tumi for About $1.8 Billion in Biggest Deal: Tumi investors will get $26.75/share in cash, ~33% more than Wednesday’s closing price
  • China Said to Intervene in Stocks Before Annual Policy Meeting: state-backed funds intervened in the stock market on Friday, buying primarily bank shares before the start of the National People’s Congress on Saturday
  • HP Enterprise’s Meg Whitman Shows Early Success After Split: Company pledges to buy back $2b in shares after deal. Enterprise Group first-quarter sales gain 1% to $7.1b
  • Fed Plans Second Effort at Limiting Banks’ Ties to One Another: Dodd-Frank Act measure would restrict firms’ credit exposure
  • Facebook to Pay Millions of Pounds More in U.K. Tax: Company to quit routing its largest ad clients through Ireland
  • Snapchat Raises $175m From Fidelity at $16b Valuation, WSJ Says: Co. still at same valuation of $16b from 1 yr ago

Looking at regional markets, Asian equities saw choppy trade throughout the session with price-action indecisive amid caution ahead of key US NFP jobs data later today. Nikkei 225 (+0.3%) was mainly driven by JPY movements, while ASX 200 (+0.17%) was underpinned by materials following gains in metal prices in which gold advanced to bull-market territory, with prices over 20% higher from December 2015 lows. Shanghai Comp (+0.5%) traded in choppy fashion to ultimately close higher on touted intervention, while the PBoC conducted its largest net weekly drain in 3 years of CNY 840b1n. 10yr JGBs traded higher amid the cautious tone with the BoJ also in the market under its large asset purchase program for JPY 1.26tr1 across all maturities.

Top Asian News

  • BHP Downgraded by Moody’s as Commodity Rout Weighs on Profit: World’s biggest miner cut to A3 from A1, with negative outlook. Sees credit metrics “substantially” weaker in 12 to 24 months.
  • ANZ Bank Taken to Court by ASIC Over Alleged Rate Rigging: Australia’s securities regulator accuses bank of trying to set artificial bank bills price
  • Nomura, UOB Said to Weigh Offers for Barclays’s Asia Wealth Unit: Second-round bids for the British lender’s unit are due by middle of this month
  • Foxconn Said Near Finalizing Deal Approved by Sharp’s Board: Companies are aiming to reach a final agreement by March 7
  • Kuroda Says BOJ Not Currently Considering Lowering Rates Further: Comments by BOJ Governor come less than 2 weeks before next BOJ meeting

In Europe, equities have had a more subdued morning and trade with minor gains, with sentiment tentative ahead of the key US nonfarm payroll release later today. Financials are once again one of the worst performing sectors in the EuroStoxx 600 (+0.24%), while materials have seen a continuation of their recent reprieve and remain among the best performers. In tandem with equities, fixed income markets also remain subdued, with Bunds taking a dip below the 165.50 level and shrugging off the latest geopolitical concerns after North Korea threatened physical reactions against US and others.

Top European News

  • Carige Plunges as ECB Demands New Funding Plan on Deposit Drop: Italian bank restates loss for 2015 on bigger writedowns. Carige raised capital a year ago after ECB stress test failure
  • Seadrill Surges as Fredriksen Piles Up Cash, Short Bets Covered: Main owner frees up $510m in cash, fueling speculation of a bailout off offshore driller
  • VW to Report Earnings April 28 After Scandal Triggered Delay: Reschedules shareholders meeting for June 22
  • HSBC Alters Debt-Issuance Strategy on Fed Bank-Failure Plan: HSBC Holdings Plc alone will issue TLAC-eligible debt in 2016
  • Austria Suffers Heta Blow as Deutsche Bank Rejects Bond Offer: German bank sees no reason to write off state guarantees
  • Edmond de Rothschild Swiss Unit Subject of French Criminal Probe: Investigation is about former business relationship managed by a former employee

In FX, the dollar fell this week against all 31 major peers, including a 3.3 percent slide against Australia’s currency. The pound fell against the dollar and euro, paring the biggest weekly gains in at least four months.

There has been some early buying in USD/JPY, but ahead of US payrolls, a fresh push through 114.00 was going to be a struggle. We have since drifted back into the mid 113.00’s as the market calms into the key data release. Yesterday’s ISM services showed the employment index contracting, so some early signs that a softer number may well materialise. The USD index is under pressure as a result, but this is also down to a EUR/USD upturn on fears the ECB meeting will again disappoint. EUR/GBP gains have followed through also, and this has pressured Cable a little. Fresh from testing 1.4200 yesterday, the spot rate has had the wind take out of its
sales, getting pressured into 1.4120+ bids. EUR/GBP is now back in the mid .7700’s, and eyeing .7800. AUD/USD still trying to push through .7480-85 resistance, with projections through here cited closer to circa .7700. NZD/USD following higher. CAD hit on a slip in Oil price, but spot holding off the highs seen Thursday. The euro added 0.2 percent to $1.0976, and the yen was at 113.70 per dollar.

In commodities, copper rose as much as 1.6 percent to the highest level in almost four months on bets for more stimulus in China, the largest consumer of metals. Used in everything from property construction to high-voltage cables and mobile phones, copper is a key indicator for global inflation, helping drive movements in bonds and currency markets.

Gold advanced 0.6 percent to $1,272.05 an ounce, extending its rally in the first bull market since 2013. Investors have sought the metal as a haven this year from turmoil in equity markets. Silver gained 1.3 percent and platinum added 0.9 percent. Oil traded near an eight-week high in New York, poised for a third weekly gain as the Organization of Petroleum Exporting Countries prepared for a meeting with other major producers on March 20 to renew talks on an output freeze. West Texas Intermediate was at $34.60 a barrel.

Looking at the day ahead, with little in the way of notable data out of Europe this morning it’s all eyes on the February payrolls and employment indicators in the US this afternoon, while the January trade balance will also be released alongside where a modest widening in the deficit is expected. Away from the data the Fed’s Kaplan is scheduled to speak again this evening at an event in Dallas. It might be also worth keeping an eye on any interesting comments from Germany’s Merkel this afternoon speaking at a State Party Convention which of course comes before the state elections on the 13th March.

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade in somewhat tentative fashion, albeit in minor positive territory with participants awaiting the latest NFP report.
  • In a relatively quiet session, gold has been the most notable mover, reaching its highest level for over a year
  • Looking ahead, the main highlights will entail the latest US jobs report, while there will also be comments from Fed’s Kaplan
  • Treasuries mostly steady in overnight trading as global equity markets rise as hopes of further central bank stimulus buoy sentiment; today’s economic calendar brings nonfarm payrolls (est. 195k) and unemployment rate unchanged at 4.9%.
  • China intervened to support its stock market, helping the benchmark index cap its best weekly gain of 2016 before policy makers meet to approve a five-year road map for the economy
  • Emerging markets extended their best week since October and copper advanced, supporting mining stocks, on speculation China will boost stimulus at an annual gathering of the nation’s legislature
  • Greece is grappling with an escalating influx of refugees, another deadlock over financing and more political unrest. While the market is high risk and illiquid, its bonds paint a slightly different picture: they’re the best-performers in the euro region over the past week, returning almost 6%
  • Goldman Sachs will eliminate more than 5% of traders and salespeople in its fixed-income business, Bank of America will dismiss about 150 trading and investment-banking employees next week
  • The Federal Reserve is set to re-propose long-delayed rules for limiting Wall Street firms’ credit exposure to any other financial firms to 10% of capital, aiming to ensure megabanks won’t take others with them if they fail
  • $10.7b IG corporates priced yesterday, 13th straight session with at least 1 deal pricing; 10 of those priced >$5b.; week $58.875b, March $41.475b, YTD $335.725b; No HY priced, $1.5b MTD, $16.355b YTD
  • Sovereign 10Y bond yields mixed with Greece 15bp higher; European, Asian markets higher; U.S. equity- index futures rise. WTI crude oil, copper and gold rally

US Event Calendar

  • 8:30am: Trade Balance, Jan., est. -$44b (prior -$43.36b)
  • 8:30am: Change in Non-farm Payrolls, Feb., est. 195k (prior 151k)
    • Change in Private Payrolls, Feb., est. 190k (prior 158k)
    • Change in Mfg Payrolls, Feb., est. -1k (prior 29k)
    • Unemployment Rate, Feb., est. 4.9% (prior 4.9%)
    • Average Hourly Earnings m/m, Feb., est. 0.2% (prior 0.5%)
    • Average Hourly Earnings y/y, Feb., est. 2.5% (prior 2.5%)
    • Average Weekly Hours All Employees, Feb., est. 34.6 (prior 34.6)
    • Change in Household Employment, Feb., est. 175k (prior 615k)
    • Labor Force Participation Rate, Feb., est. 62.8% (prior 62.7%)
    • Underemployment Rate, Feb. (prior 9.9%)
  • 1:00pm: Fed’s Kaplan speaks in Dallas

DB’s Jim Reid concludes the overnight wrap

On the recession watch the all important ISM non-manufacturing was ok yesterday at the headline level (53.4 vs. 53.1 expected, 53.5 last month) and maintaining a 3.9 point gap with the manufacturing number. However a fair amount of attention was drawn to the employment component (49.7 vs. 52.1 last month) which came on the back of a sub-50 reading for the same component in the manufacturing print (48.5). This ahead of this afternoon’s payrolls number then where current market expectations are sitting at 195k (which is also the forecast of our US economists). Post yesterday’s data however it feels like the whisper number is sitting somewhere between today’s consensus and the January’s 151k low print. As always it’s worth keeping an eye on the rest of the data in the employment report. The unemployment rate is expected to hold steady at 4.9%, average hourly earnings are expected to have risen +0.2% mom (on the back of that bumper +0.5% gain in January) and the labour force participation rate is expected to nudge up one-tenth to 62.8%. All eyes on 1.30pm GMT.

Leading into the data, overall risk sentiment is as strong as it’s been all year at the moment, despite a bit of caution attempting to prevail in last night’s session. Despite a fairly benign day for the most part in the energy market (WTI -0.26%, Brent +0.38%, Gasoline -0.91%) it was yet another strong performance for energy stocks which helped the S&P 500 bounce off an early – 0.5% low to close +0.35% and in positive territory for the third consecutive session. Interestingly it’s not only US HY which is back in positive territory YTD but also energy stocks with the S&P 500 energy index now up to a near 1% gain for the year. The VIX dipped below 17 and to its lowest level for the year while US credit was the outperformer again with CDX IG 3bps tighter and stronger for the seventh straight day. There’s no stopping the primary market too with over $10bn of US IG issuance pricing, including a $3bn deal out of the energy sector in the form of ConocoPhillips.

Taking a look at the latest in Asia this morning, gains are relatively subdued in the region as we close out the week. The Nikkei (+0.10%), Shanghai Comp (+0.41%), Hang Seng (+0.59%) and ASX (+0.18%) in particular are all in positive territory although it’s been a bit choppy. Oil is generally holding in just below $35/bbl while the only data out this morning was in Japan where labour cash earnings nudged up three-tenths as expected to +0.4% yoy.

Back with China and looking ahead to this weekend, given the growing concern about China’s slowdown, the National People’s Congress (NPC) starting on March 5th will be closely followed. Our Chief China Economist Zhiwei Zhang will provide further updates as events transpire but has also laid out his broad policy expectations in a new note. He expects the 13th Five Year Plan to be an important focus, but doesn’t expect too many surprises deviating from the framework laid out in the Guiding Principles published following the CPC’s 5th Plenary Session last October. With regard to macroeconomic policies, Zhiwei notes that fiscal and monetary policy will likely remain supportive in 2016. The official fiscal deficit target is expected to be raised from 2.3% to slightly above 3.0% (of GDP) to remain accommodative of growth. PBoC Governor Zhou is also expected to speak in the NPC press conference and his words will help further clarify the current monetary policy stance of ‘prudent with a slight easing bias’. Finally, policy messages should shed new light on the shifting balance of supply-side reforms and demand-side support going forward.

Back to yesterday, away from the ISM number the rest of the data in the US was a bit of a mixed bag. Initial jobless claims (which cover the last week of today’s payrolls period) rose 6k last week to 278k (vs. 270k expected) although the four-week average continues to hover around 270k. Factory orders disappointed with just a +1.6% mom rise in January (vs. +2.1% expected) while the final services PMI was revised down 0.1pts to 49.7 to make the number the weakest since October 2013. Elsewhere, on the back of the GDP revisions last week, Q4 nonfarm productivity was revised up seven-tenths to -2.2% and unit labor costs were revised down a full 1% to 3.3%.
Away from this, the Fed’s Kaplan reiterated his fairly dovish stance by calling for the Fed to remain patient in light of tightening financial conditions and the continued slowing global economic growth. Kaplan highlighted that while he believes that excessive accommodation carries a cost in terms of distortions and imbalances in hiring, asset allocation and investment decisions, the Fed official also believes that the Fed needs to show patience in decisions to remove accommodation and that monetary policy is ‘somewhat’ less accommodative than it was at the beginning of the year.

Prior to the better finish in the US last night, the run of gains (which had stood at five days) for European equities finally came to an end yesterday with the Stoxx 600 closing -0.45%. Oil aside, other commodity markets extended their recent strong run with precious metals in particular the most impressive. Gold (+1.96%) extended its move past $1,260/oz and in the process snapping back into a bull market from the December lows. Meanwhile after a couple of days of rising yields, German 10y yields fell 3.7bps and back down to a shade below 17bps, while 2y Bunds extended their fresh record low in yield to -0.589%. Irish 5y yields joined the chorus of negative yields in that maturity bucket after tumbling nearly 6bps lower to -0.028%, meaning 13 European countries now have negative 5y bond yields.
These moves perhaps reflected the final PMI revisions yesterday which, if anything, keeps the pressure on the ECB this month. The final February composite Euro area PMI was revised up 0.3pts to 53.0 (helped by an equal upward revision to the services number) although as a reminder that’s still the lowest since January 2015. France was the biggest disappointment with the composite revised down 0.5pts to 49.3 (a full 1pt decline on the month), offset slightly by a modest upward revision for Germany to 54.1 (+0.3pts revision). Italy and Spain saw a better than expected performance in the services reading. Our European economists highlighted yesterday that the Euro area composite PMI points to GDP growth of 0.3% to 0.4% qoq, but that the inflation outlook is weakening and therefore keeps the easing pressure on the ECB. Interestingly the UK was a big miss yesterday with the composite PMI down a significant 3.4pts to 52.8 (vs. 55.7 expected), owing to the weakest services reading (52.7) since March 2013.

Looking at the day ahead, with little in the way of notable data out of Europe this morning it’s all eyes on the aforementioned February payrolls and employment indicators in the US this afternoon, while the January trade balance will also be released alongside where a modest widening in the deficit is expected. Away from the data the Fed’s Kaplan is scheduled to speak again this evening (6pm GMT) at an event in Dallas. It might be also worth keeping an eye on any interesting comments from Germany’s Merkel this afternoon speaking at a State Party Convention which of course comes before the state elections on the 13th March.


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Donald Trump Says Military “Won’t Refuse” His Orders to Commit War Crimes

The brief moments of tonight’s Republican presidential debate Make America Commit War Crimes Again.which touched on foreign policy highlighted each of the four remaining candidates’ willingness to engage in bloodthirsty triumphalist rhetoric, and the more specific they got, the more frightening the details became. 

When asked how he would confront ISIS, Sen. Marco Rubio (R-Fl.) repeated his oft-stated preference to put boots on the ground in (count ’em!) Iraq, Syria, and Libya, but that it would only be a “specific number of American special operators” (though he never offered a specific number). Rubio added that the brunt of the force against ISIS would have to be made up of Sunni Arabs and “an increase” in airstrikes, presumably launched by US forces. 

Gov. John Kasich (R-Ohio) took a moment to brag about his 18 years in Congress serving on the Defense Committee before saying it was a mistake on the part of Hillary Clinton to “work aggressively to depose Moammar Gadhafi,” but now that the shit has hit the proverbial fan, Kasich too supports troops in Iraq, Syria, and Libya. 

For some reason, the moderators never put the same question to Donald Trump or Texas Senator Ted Cruz, instead pivoting toward Trump’s previous declarations that he will target the families of suspected terrorists with airstrikes and also deploy “interrogation methods more extreme than waterboarding.”

When moderator Bret Baier noted that several high-ranking military and intelligence officials said they believed the rank-and-file military would refuse to commit war crimes, per their training to refuse illegal orders, Trump replied, “They won’t refuse. They’re not going to refuse me. Believe me.”

Trump then took a moment to insult Ted Cruz for “having a hard time with that question” at a previous debate (it should be noted that at the debate in question, Cruz said he supported waterboarding in certain circumstances, but apparently not vociferously enough to impress Trump).

Defending his call to kill the families of terrorists, Trump made a veiled reference to Saudi Arabia and flat-out lied in depicting the 9/11 hijackers as family men:

Well, look, you know, when a family flies into the World Trade Center, a man flies into the World Trade Center, and his family gets sent back to where they were going — and I think most of you know where they went — and, by the way, it wasn’t Iraq — but they went back to a certain territory, they knew what was happening. The wife knew exactly what was happening.

They left two days early, with respect to the World Trade Center, and they went back to where they went, and they watched their husband on television flying into the World Trade Center, flying into the Pentagon, and probably trying to fly into the White House, except we had some very, very brave souls on that third plane. All right?

For his part, Cruz said gave a fairly stock answer short on specifics:

We will rebuild this military so that it remains the mightiest fighting force on the face of the planet. And then, when I am commander-in-chief, every militant on the face of the Earth will understand that if they go and join ISIS, if they wage jihad against the United States of America, they are signing their death warrant.

Anybody miss Rand Paul‘s squishy non-interventionism yet? 

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Yuan Soars Most In A Month Ahead Of National People’s Congress

With all western eyes firmly focused on US payrolls tomorrow, China is preparing for the biggest leadership gathering of the year this weekend. Offshore Yuan (USDCNH) is soaring (up over 5 handles in the last 24 hours) ahead of The National People’s Congress as PBOC Deputy Governor hinted at support for the currency saying that it isn’t “strictly” pegged to the new basket.

 

This is the biggest surge in Yuan in a month…

Chart: Bloomberg

Pushing Yuan back to 3-week highs…

Chart: Bloomberg

This is the richest Offshore Yuan has been to Onshore Yuan since 29th Sept…


Chart: Bloomberg


“The currency move is likely a psychological reaction to the National People’s Congress because the market is expecting to hear more comments from top officials stressing the importance of financial stability, curbing outflows and encouraging inflows,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “It’s unlikely to be any intervention.”


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