"Pause that refreshes?", "Fleshwound?", or "beginning of the end?" Between Bannon's China trade war threats and fears over Cohn leaving, risk was off today, not helped by dismal Industrial Production data and the utter horror in Barcelona... Trannies were worst but this was an ugly say all aropund and losses accelerate iunto the close ahead of tomorrow's OPEX... NOT OFF THE LOWS>>> Small Caps are now back to unchanged year-to-date... S&P closed at critical support around 2430... From "Fire & Fury", Nasdaq is leading the drop... In order, from worst to first, retailers, energy, financials, and tech have tumbled since "fire and fury" with Utes holding gains... Cohn Uncertainty crushed Goldman... S&P VIX surged back to 15 and Russell/Nasdaq back over 18... Thursday Spike, Monday Plunge, Thursday Spike... this is the quickest reversal in VIX since Sept 2016 Over the last few weeks, a cluster of Hindenburg Omens have been erupting across the major equity indices... In fact, as @AlpePinnazzo notes, the size of the cluster is flashing a major warning... The S&P dropped back below its 50DMA... (this is the biggest drop below the 50DMA since before the election) to its lowest in 5 weeks... Tech stocks gave up the week's gains... AAPL was down today but FANG stocks were worse... HY Credit tumbled to stop exactly at its 200DMA ($87.36 HYG)... plunging thru its 50DMA... And stocks catching down to credit... Treasury yields slid further today (again the AMZN rate lock pressure lifted and safe haven demand) with 30Y yields now lower on the week... (10Y ended with a 2.18% handle) With 30Y yields back at one-week lows... The dollar pumped higher overnight (seemingly bid after Bannon's comments) but tumbled after ECB Minutes, Industrial Production, and Cohn rumors... The biggest driver of USD swings today was EURUSD which shifted on ECB Minutes... The drop in the dollar during the day session managed to lift WTI Crude modestly back above $47... Gold jumped again today, pushed higher overnight by Bannon's China trade war threats...
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Submitted by Gary Evans of Global Macro Monitor We’re baaaccck!. We warned in our last post before leaving on holiday, “Look for some large sigma event, which is always the case when we are off the desk.” How about a vol spike caused by worries over a nuclear exchange? Nuclear war! The potential implosion of a presidency? We think yesterday’s presidential presser has a relatively high probability of being a (or the) structured criticality event that we could look back to as the tipping point that leads to a very volatile autumn. Structured criticality is a property of complex systems in which small events may trigger larger events due to subtle interdependencies between elements. This often gives rise to a form of stratified chaos where the general behavior of the system can be modeled on one scale while smaller- and larger-scale behaviors remain unpredictable. For example: Consider a pile of sand. If you drop one grain of sand on top of this pile every second, the pile will continue to grow in the shape of a cone. The general shape, size, and growth of this cone is fairly easy to model as a function of the rate at which new sand grains are added, the size and shape of the grains, and the number of grains in the pile. The pile retains its shape because occasionally a new grain of sand will trigger an avalanche which causes some number of grains to slide down the side of the cone into new positions. These avalanches are chaotic. It is nearly impossible to predict if the next grain of sand will cause an avalanche, where that avalanche will occur on the pile, how many grains of sand will be involved in the event, and so on. – Wikipedia We love applying the conceptual framework of physics and dynamic systems models to economics and the markets, but think the obssession with the math has perverted the analysis and will someday lead to a doozy of a market meltdown when the algos collide and short circuit on a day to be named later. In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy. As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan. To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas. ‘An astrologer’ is, in fact, the Oxford English Dictionary’s second definition of ‘mathematician’. For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs. The best astrology required the best astronomy, and the best astronomy was done by mathematicians – exactly the kind of person whose authority might appeal to bankers and financiers. – Aeon Hat Tip: Jose Cerritelli We have have repeatedly warned our readers of potential political instability and to watch “the American street.” See here and here. Our sense is we are headed for some heated political instability in the United States. How will it affect the markets? Depends on trajectory of events, but unless inflation or interest rates spike providing competition for risk assets, don’t expect a bear market to start tomorrow. We have always lived our financial career by Bagehot’s dictum: “John Bull can stand many things, but he cannot stand 2.0 , [-1.5 or 1.25] percent” – Bagehot We still maintain yield and return chasers will not retreat to their caves, with, the exception of short-term bouts, such as last week, unless policy rates move up another 100-200 basis points and the monetary bases in the G3 shrink by double digit percentage points though quantitative tightening (QT). That is how much liquidity (potential buying firepower) is still in the global system, in our opinion, folks. What we are looking for? We still have high conviction the risk markets will experience a swift, short, and steep sell-off in October – 5 to 10 percent – based on: 1) seasonality; 2) the Fed balance sheet should, or could be shrinking ; 3) China’s Party Congress may have concluded, removing the country’s implicit policy put, and thus increasing the risk of a China policy or economic shock; 4) the new U.S. Federal government fiscal year begins October 1 and if the Trump administration has not passed any significant economic legislation, the markets may begin to throw in the towel; 5) there will be more clarity on ECB tapering; 6) even more elevated asset prices as the risk markets grind higher through the rest of summer as we suspect, setting up for a potential blow-off by the end of September; 7) nervousness over the debt ceiling; and, finally, 8) by then, the markets should be sufficiently overbought, overvalued and very vulnerable to event risk. – GMM Add to that possible key White House resignations. What do you think the markets will do if Gary Cohn resigns? That’s at least worth a 5 percent haircut off the S&P500, in our opinion, and a spike to 20 in the VIX, triggering another round of structured criticality. The exodus of executives sparked talk that Gary Cohn, Trump’s top White House economic adviser and a key liaison to the U.S. business community, might resign in protest as well. Cohn, who is Jewish, was upset by Trump’s remarks, though he is remaining with the administration for now, sources said. – Reuters, August 16, 2017 Cohn may also come to the conclusion that after the August Congressional recess he is wasting his time as he perceives that the Trump administration has lost all credibility on Capitol Hill and none of his policies has any chance of being implemented. If rumors begin to spread in mid-September, market will begin to wobble, bigly. If Chief of Staff, John Kelly, goes? Get shorty, big time. The 1987 Analog Since we know crash talk is surely coming, we’ve put together a two-year trading analog of the S&P500 from end of December 1985/2015 to December 1987 and August 16, 2017. First, over the 20-month trading period, the 1987 S&P500 outperformed the current 2017 S&P500 by over 31 percent as of today’s close. Not much of an analog. Second, the yield on the 2-year increased 287 bps (45 percent) from the beginning of 1987 to the eve of the crash with the 10-year up 252 (33 percent), peaking over 10 percent. The 2-year is up only 13 bps (11 percent) this year with the 10-year down 22 bps (-9 percent). Third, the 1987 S&P500 peaked on August 25th and banged around until October 5th, where it was only down 2.6 percent from the peak. It then fell 13.6 percent from October 5th to Friday, October 16, the trading eve of the crash. On Black Monday, October 19, 1987, the S&P500 closed down 20.47 percent, almost double the 1929 crash. Similarly, the 1929 stock market peaked on September 3, 1929 and fell sharply to close down 32 percent on the eve of Black Tuesday, October 29, 1929. That crash sliced 11.7 percent off Dow Jones Industrial in one day. In both cases, 1929 and 1987 the markets sent a loud signal and warning of an imminent crash as, a matter of fact, the markets were crashing before the big crash. The major difference of the two markets is the Dow didn’t regain the September 3, 1929 peak until November 23, 1954, more than 25 years later. The 1987 S&P500 reclaimed its August 25, 1987 high on July 26, 1989, less than two years. Compliments of easy monetary policy and the circumvention of a great depression. Upshot? It’s probably time to buckle up. We expect volatility to begin to pick up; for the markets to start banging around until October; then experience a Tower of Terror sell-off sometime in October. Though the sell-off may be the day the algos go rogue, there is no doubt, the full firepower of the PPT and the Fed will be put to work. Can they beat this new technology gone wild? Gotta be quick on the draw as it could be over in the blink of an eye. Could be wrong. fter all, isn’t this astrology, folks?
Trump policy doubts, weak inflation to weigh on Wall Street (Reuters) Trump Remarks on Violent Rally Rattle Aides, Risk Agenda (WSJ) Trump blasts Republican senators over Charlottesville criticism (Reuters) Trump's crisis spurs talk of White House departures (Reuters) Apple denounces neo-Nazis as Spotify bans ‘white power’ tracks (Guardian) The 48 Frantic Hours Before CEOs Broke With Trump (BBG) ECB Officials Expressed Concern Over Risk of Euro Overshoot (BBG) Euro dives to three-week low after ECB points to overshoot (Reuters) Saudi Crude Exports Fall Just as Domestic Stockpiles Dwindle (BBG) Goodbye contango? Oil's long march toward backwardation (Reuters) North Korea shows the Capitol Building being obliterated by red missiles (Daily Mail) What will Kim do next? Sixth nuclear test seen critical for North Korea (Reuters) Robert Mueller May Not Be The Savior The Anti-Trump Internet Is Hoping For (NPR) U.S. General Says Trump Has Final Say on Unilateral Korea Strike (BBG) The Growing List of Money Managers Cutting Their Exposure to Junk Bonds (BBG) Despite Economic Growth, Many in Europe Still Lack Steady Jobs (WSJ) For Bull Market in U.S. Stocks, You’re Only as Young as You Feel (BBG) Alibaba beats on earnings as e-commerce remains core revenue driver (Reuters) Bannon Says He Fights Mnuchin, Cohn Daily for Tough China Policy (BBG) Henry Hub Emerges as Global Natural Gas Benchmark (WSJ) Wal-Mart Sales Rise as Retailer Dodges Industry Malaise (WSJ) Overnight Media Digest WSJ - Business leaders disbanded two CEO councils created by the White House, a move they said was protesting Donald Trump's failure to sufficiently condemn racism, marking a dramatic break between U.S. companies and a president who has sought close ties with them. on.wsj.com/2w3vk9d - Apple Inc has set a budget of roughly $1 billion to procure and produce original content over the next year, as the iPhone maker shows how serious it is about making a splash in Hollywood. on.wsj.com/2w3Njwm - Facebook Inc dismantled a popular anonymous discussion board for employees last year that had become a forum for conservative political debate that sometimes degenerated into racist or sexist comments. on.wsj.com/2w3zOMU - Recent moves by tech companies including Alphabet Inc's Google, GoDaddy Inc, Uber and GoFundMe to crack down on white supremacists thrust them into unusual territory for corporations that often take a more hands-off approach. on.wsj.com/2w3R19g - President Trump's comments faulting both sides in Saturday's deadly white nationalist protest in Virginia rattled his staff and risk setting back his policy agenda in Congress. on.wsj.com/2w3LqQ5 FT - The Energy & Utilities Alliance, a group of energy companies, is pressing a Parliamentary inquiry into the consequences of the closure of Centrica Plc's Rough storage site off the Yorkshire coast. - Amazon.com Inc has boost its UK investment with new fulfilment centre in Bristol that will create 1,000 new permanent jobs. Ahead of the facility's opening which is slotted for 2018, Amazon will begin recruiting operation managers, engineers, human resources specialists. - An official data published on Wednesday shows the number of EU nationals working in the UK has hit a record high with an estimated 2.37 million EU workers. This is the highest figure since records began two decades ago and was driven by a large increase in the number of Bulgarian and Romanian citizens who have found employment in the UK. - Hedge fund Elliott Management acquired a specific class of debt worth about $60 million from Fidelity Investments that gives it the power to approve or block Berkshire Hathaway Inc's $18 billion agreement to buy Oncor. NYT - U.S. President Donald Trump announced that he would dissolve two councils of business leaders after a decision by the members of his Strategic and Policy Forum to disband. nyti.ms/2fMFB36 - A growing number of Federal Reserve officials see a need to adjust the central bank's assumptions on the economy, according to an account of the latest policy meeting. nyti.ms/2fMj2eT - Eboni Williams, a host of the show "the Specialists" on Fox News, derided Trump in exceptionally blunt terms over his response to the violence at a white supremacist rally in Virginia on Saturday. In the days since her segment aired, Williams said she had received nearly 150 menacing messages from people who denounced her remarks and called her a traitor, a racist, a "disgrace," and anti-American. nyti.ms/2fNFPH2 - The Trump administration opened talks with Canada and Mexico on the North American Free Trade Agreement by asserting that the current deal had failed. nyti.ms/2fMP7Dg - Some of China's biggest technology players are backing a plan to invest nearly $12 billion in one of the country's telecommunications giants, China Unicom Hong Kong Ltd, the latest move in a broader government push to shake up the country's bloated state-run companies. nyti.ms/2fMH3lP Canada THE GLOBE AND MAIL Fidelity Investments Canada ULC is gearing up to enter the crowded market for exchange-traded funds, with the company on the hunt for an executive to develop ETFs to sell in this country. tgam.ca/2vLtwPw The Saudi Arabian government is defending the recent deployment of Canadian-made armoured vehicles against residents of the kingdom's eastern province, saying security forces found it necessary to use "military equipment" to fight terrorists who threatened the safety of its population. tgam.ca/2w4qlVJ The federal government has pledged more than C$21 million ($21.00 million) in humanitarian assistance to help respond to an unprecedented famine in Yemen and parts of Africa, matching donations made by Canadians to registered charities earlier this year. tgam.ca/2w4b3A9 NATIONAL POST The executive chairman of Sears Canada Inc, Brandon Stranzl, has stepped down in order to focus on making a bid for the insolvent retailer, currently operating under court protection. bit.ly/2w54sWo Grocery chain Loblaw Companies Ltd and Canadian Imperial Bank of Commerce have terminated their 19-year President's Choice Financial partnership as the bank unveiled its own digital brand on Wednesday. bit.ly/2w4CEkK Britain The Times - The U.S. government has filed what could be the largest Libor scandal-related lawsuit yet against some of Britain's biggest lenders, alleging that their role in rigging borrowing rates had played a part in the collapse of American banks once worth more than $400 billion. bit.ly/2w2StIX - The Financial Reporting Council said that it had fined PwC an initial 6 million pound ($7.73 million) and had severely reprimanded it for "extensive" misconduct relating to RSM Tenon Group Plc. bit.ly/2w2StIX The Guardian - U.S. President Donald Trump was forced to disband two White House business councils disintegrating around him on Wednesday in the wake of his controversial remarks about the weekend violence in Charlottesville. bit.ly/2w3lt31 - Figures from the Finance and Leasing Association, which represents about 86 percent of borrowing against vehicles in UK, show the number of used cars bought using finance increased by 7 percent in June compared with the same month a year ago. bit.ly/2w3lt31 The Telegraph - Activist investor Elliott Advisors has shelved its legal battle against Dulux maker Akzo Nobel NV after its bid to oust the company's chairman was last week rejected by a Dutch court. bit.ly/2w2rJIu - Fiat Chrysler Automobiles NV is signing up to the group of BMW, Intel Corp and Delphi Automotive Plc and Continental AG to develop systems for self-driving cars. bit.ly/2w3srFs Sky News - The bakery chain Greggs Plc is in talks to join a truck cartel claim being brought by the Road Haulage Association which could total almost 4 billion pounds ($5.16 billion). bit.ly/2w3n74W - Billing blunders by energy firms cost customers more than 102 million pound ($131.47 million) last year in the UK, figures reveal. A survey by energy switching site uSwitch found around 1.3 million households were overcharged by an average of 79 pound ($101.82) each by suppliers -- and some are still waiting for a refund. bit.ly/2w31AJt The Independent - Amazon.com Inc has unveiled plans for a new warehouse near Bristol in Britain that is set to create over 1,000 jobs in a bid to meet growing customer demand. The online retail company says it will start recruiting engineers, operations managers, HR and IT specialists in 2018 ahead of the Severn Beach site's opening next year. ind.pn/2uHY9YJ - The UK Government is preparing a crackdown on the rapidly increasing proportion of top degrees being awarded by universities, amid fears that the value of higher education is being eroded. ind.pn/2w2NXKk
While hardly a surprise after yesterday's Reuters trial balloon, which killed any speculation that Draghi would use the Jackson Hole podium to announce ECB balance sheet tapering, sending the EUR sliding, moments ago the EUR dumped to fresh session lows after the highly anticipated ECB minutes were released, noting that "concerns were expressed about the risk of the exchange rate overshooting in the future," confirming what we speculated last week, namely that for all the pseudo-hawkish rhetoric from Draghi since Sintra (and before), the ECB simply will not tolerate a Euro which approaches 1.20 and threatens to dent European corporate earnings. The immediate kneejerk result sent the already sliding EURUSD to session lows: There were also a few clues on future policy: "On the other hand, there was a risk that financial conditions could tighten to a degree that was not warranted by the improvement in economic conditions and the outlook for inflation. In this context, the point was made that, looking ahead, the Governing Council needed to gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction." "Measures of underlying inflation, while showing some tentative signs of a pick-up, still needed to show conclusive evidence of a sustained upward trend. Therefore, a very substantial degree of monetary accommodation was still needed..." Among the other highlights from the minutes, which were initially read as dovish across most Wall Street desks, were the following observations: “The appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-a-vis the rest of the world” but “concerns were expressed about the risk of the exchange rate overshooting in the future” “Looking ahead, the Governing Council needed to gain more policy space and flexibility to to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction.” “The overall degree of accommodation was determined by the combination of all the monetary-policy measures” “The asset purchase program would continue to be a key instrument if the Governing Council assessed the sustained adjustment of inflation at risk” And perhaps the key quote, confirming what we have said since 2012, namely that it is the flow, not stock, that matteers: “In this context, it was also suggested that the stock versus flow effects of the asset purchases be considered.” This suggests that Draghi is well aware that stocks will tumble once the ECB stops buying various bonds, or simply reduces the monthly purchases, even if it ultimately keeps its balance sheet constant. And yet, the ECB itself admits it is trapped, because the longer it waits, the more it will have to do in the future to reverse the current dovish path, especially once the ECB hits the red line where it runs out of (German) bonds to buy: “A suggestions was made that some consideration be given to an incremental adjustment in the language on forward guidance, because postponing an adjustment for too long could give rise to a misalignment between the Governing Council’s communication and its assessment of the state of the economy, which could trigger more pronounced volatility in financial markets when communication eventually had to shift” In kneejerk reaction to this latest slide in the Euro, European shares have reversed losses, with the Stoxx 600 rising as much as 0.1% after the minutes, paring an earlier loss of as much as 0.5%, while Germany’s DAX rose up as much as 0.2% before trading little changed. Meanwhile in bond markets, Bund futures spiked higher in kneejerk reaction to the ECB minutes release fueled by the Euro slump to session lows. However, this jump too was quickly retraced, after a read of the the rest of the ECB’s July meeting was deemed to be "more balanced", with “incremental” changes to forward guidance discussed, and some concern over potential financial market volatility if policy adjustments are postponed for too long. As a reminder, when Draghi meets the press after the governing council’s next vote on September 7 he will have to explain why the bank is holding discussions on slowing down the pace of its bond buying in 2018, while at the same time presenting forecasts for weaker inflation. As the FT notes, a decision on tapering is expected at the council’s October meeting. Further recall that it is none other than Draghi to blame for the recent surge in the Euro, and the near record number of spec shorts in the currency: the EUR rose sharply after Draghi's Sintra speech in late June in which the ECB president mentioned “reflationary” forces were emerging in the eurozone economy, and again after his press conference following the July vote. Today's minutes put the currency’s rise down to two factors: the removal, following the election of Emmanuel Macron as France’s president, of the political uncertainty that erupted in the wake of the Brexit vote and market expectations over US interest rates. “These two factors were now largely priced out, leaving the euro back around the levels prevailing before the UK referendum.” Of course, the real reason why the market has been so convinced that the ECB will have to accept a higher Euro - and launch balance sheet tapering 0 is because over the next 3-6 months the amount of bonds the ECB can monetize at the current purchase pace will collapse to virtually nil.
S&P futures, European stocks and bond yields all fell in early trade alongside oil and the euro after the latest Fed minutes expressed concern over weak U.S. inflation, while Asian equities rose overnight ahead of WalMart earnings and the latest ECB minutes. Gold rose as high as $1,290 before fading most gains as the USDJPY rebounded. Fund futures are now pricing in about a 40% chance the Fed will raise rates by December, compared to 50% before the Fed's minutes. Last week's market turmoil and resultant near record jump in volatility in the wake of heightened tensions between the U.S. and North Korea has continued to ease, bringing down gauges of equity and bond volatility and repairing most of the damage done to stock markets, in fact as Bank of America showed, the retracement in the VIX on Monday was among the fastest on record. But political angst isn’t over; investors continue to watch the political trainwreck in Washington where President Trump disbanded two high-profile business advisory councils amid the fallout from his response to the weekend violence in Virginia. "Trump dissolving his major business groups makes the investment community even more pessimistic because this sets the stage for even more failure for him," Naeem Aslam, chief market analyst at Think Markets in London, wrote in a note. Lost in the political noise was the July FOMC minutes, where the most notable takeaway was the reference to “most participants expected inflation to pick up over the next couple of years….and to stabilize around the 2% objective over the medium term”. However, many participants “saw some likelihood that inflation might remain below 2% for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.” The debate on inflation echoed recent comments made public by various Fed presidents, while some members noted the “committee could afford to be patient….in deciding when to increase the rates further and argued against additional adjustments until incoming information confirmed that the recent low inflation were not likely to persist”. However, those comments were balanced by the observation that “…some other participants were more worried about risks arising from a labour market that had already reached full employment and was projected to tighten further from the easing in financial conditions”. Elsewhere, on the balance sheet unwind topic, “several” members favoured an announcement in the July meeting, but most preferred to defer that decision to the next meeting in September. With concerns about weak inflation in the air, the Stoxx 600 Index was down 0.1%, with declines in banking shares offsetting advances in healthcare stocks. Germany's DAX, France's CAC 40 and the UK's FTSE 100 all fell 0.1%. Yesterday's Reuters' trial balloon, according to which Mario Draghi would not say anything of note next week during the Jackson Hole conference, weakened the euro, which traded as low at 1.1700 this morning and gave support to fixed income assets with European government bond yields dropping, and the 10Y Bund yield down nearly 2 bps to 0.42%, down from Wednesday's high of 0.47%. Most other euro zone yields fell 1-2 basis points. In currencies, in addition to the euro sliding before the ECB minutes release, most Asian currencies rose overnight, with the Korean won up 0.3% after tensions over North Korea continued to ease. Overnight, the yen gained for a second day as the dollar decline on declining US rate hike expectations. The Australian dollar rose a second day against the U.S. dollar to reach the highest in nearly 2 weeks after July employment data beat estimates while prior month data was revised higher and iron ore prices erase week-to-date losses. In Europe, the pound rose against the euro after strong U.K. retail sales data. In commodities, London copper, aluminum and zinc hit multi-year highs on expectation China's reform of its metals industry will curb supply against a backdrop of robust demand. Gold and tin were among the best performing metals, and zinc traded near a 10-year high. Oil prices edged higher after new data showed U.S. crude stocks have fallen by 13 percent from a peak in March. Brent crude futures were at $50.36 per barrel, up 0.2 percent from their last close. Today's data include jobless claims, Philadelphia Fed Business Outlook and industrial production. Wal-Mart, Gap, Ross Stores and Madison Square Garden are among companies reporting earnings. Bulletin Headline Summary from RanSquawk Choppy GBP reaction to UK retail sales Financial leading the declines in Europe post last night's FOMC minutes Looking ahead, highlights include ECB minutes, US Philly Fed and jobless claims Market Snapshot S&P 500 futures down 0.1% to 2,465 STOXX Europe 600 down 0.1% to 378.62 MSCI Asia up 0.5% to 159.86 MSCI Asia ex Japan up 0.5% to 526.58 Nikkei down 0.1% to 19,702.63 Topix down 0.07% to 1,614.82 Hang Seng Index down 0.2% to 27,344.22 Shanghai Composite up 0.7% to 3,268.43 Sensex up 0.4% to 31,888.42 Australia S&P/ASX 200 down 0.1% to 5,779.21 Kospi up 0.6% to 2,361.67 German 10Y yield fell 1.0 bps to 0.435% Euro down 0.3% to $1.1738 Italian 10Y yield unchanged at 1.755% Spanish 10Y yield fell 1.0 bps to 1.454% Brent futures down 0.2% to $50.17/bbl Gold spot up 0.3% to $1,287.08 U.S. Dollar Index up 0.2% to 93.70 Top Overnight News Alibaba, Wal-Mart Report Earnings; ECB Minutes Watched for Taper Clues The U.S.’s top general declined to comment on South Korean leader Moon Jae-in’s assertion that he needed to sign off on a war against North Korea, saying President Donald Trump had the final say on a unilateral military strike Trump’s pro-business image tarnished as CEOs abandon president China believes the Korean Peninsula issue can only be solved via dialogue and negotiations, Fan Changlong, Vice Chairman of Central Military Commission said Saudi Arabia shipped the least oil in almost three years in June, just as domestic stockpiles are dwindling. U.K. retail sales rose 0.3% m/m in July, exceeding the median estimate of +0.2%, driven by the biggest jump in purchases of food in almost two years President Donald Trump waded into a longstanding scrap between online retailers and their brick- and-mortar rivals with a Twitter posting Wednesday about Amazon.com Inc. and taxes Fed officials are looking under the hood of their most basic inflation models and starting to ask if something is wrong Investors are about to get their first look at Bill Ackman’s plans for improving the performance of Automatic Data Processing Inc., which the activist investor contends is losing ground to smaller rivals Credit Suisse, JPMorgan and Citigroup have struck the first deals on a new structured debt platform amid a boom in repackaged note transactions Most industrial metals eased back after a rally that took zinc to the highest level in almost 10 years on signs of supply curbs and faster economic growth around the world U.K. consumers are flagging, stripping the economy of its most consistent and important support over the past two years. Air Berlin Plc’s insolvency could open the way for Deutsche Lufthansa AG to add new hubs for inter-continental flights while allowing short-haul discount specialist EasyJet Plc to boost its presence in the German capital South Korea’s Moon says will be no war again on the peninsula Japan July trade 418.8b yen vs 327.1b est; exports 13.4% vs 13.2% est Australia July jobs 27.9k vs 20.0k est; unempl rate 5.6% vs 5.6% est New Zealand Aug ANZ consumer confidence 126.2 vs 125.4; +0.6% m/m Elliott Is Said to Buy Debt in Move to Block Berkshire Oncor Bid For Bull Market in U.S. Stocks, You’re Only as Young as You Feel Credit Suisse’s London Sublease to WeWork Said to Be Blocked Trump’s Pro-Business Image Tarnished as CEOs Abandon President Republican Leaders Duck for Cover After Trump’s Race Remarks Asia equity markets traded indecisive following a relatively tepid close in the US where basic materials outperformed as zinc rose above USD 3000/ton to a decade high, while energy and financials declined on oil weakness and after US yields were pressured post¬FOMC minutes. ASX 200 (-0.10%) was choppy with miners underpinned by strength across the metals complex and as a slew of earnings releases also drove individual stocks, while Nikkei 225 (-0.14%)was subdued by a firmer currency. Shanghai Comp (+0.68%) and Hang Seng (-0.24%) were both initially higher, although the latter then pared gains on profit taking and amid an increase in money market rates. 10yr JGBs traded flat amid an indecisive risk tone in Japan, while the 5yr auction also failed to spur price action as the results were mixed. PBoC injected CNY 60bln in 7-day reverse repos and CNY 40bln in 14-day reverse repos. (Newswires) PBoC set CNY mid-point at 6.6709 (Prey. 6.6779). Japanese Trade Balance (Jul) JPY 418.8bln vs. Exp. JPY 327.1b1n (Prey. JPY 439.9b1n); Exports (Jul) Y/Y 13.4% vs. Exp. 13.2% (Prey. 9.7%);Imports (Jul) Y/Y 16.3% vs. Exp. 17.0% (Prey. 15.5%) Top Asian News Economic Growth in the Philippines Exceeds 6% for Eighth Quarter Casino Giants Look for Clarity as Japan Begins Public Debate Series of Gaffes Taint Unicom’s $11.7 Billion Sale Announcement Gemadept Seeks $125M From Stake Sales in 2 Units: CEO Minh Tokyo Stocks Slip as Yen Strengthens After Dovish Fed Minutes Taiwan Blackout Seen Pressuring Tsai to Reconsider Energy Policy BOJ Seen Trimming Bond Purchases Further If Yields Extend Slide China Kickstarts Privatization Push With Unicom Share Sale Tencent’s Appetite for AI Sends Sector Stocks Surging in China European equities trade modestly lower (Eurostoxx 50 -0.2%) with financials underperforming in the wake of yesterday's FOMC minutes which received a somewhat dovish response given concerns at the Fed regarding inflation. To the upside, material names outperform in response to the gains seen overnight in the metals complex with Dalian iron ore prices up over 6% during Asia-Pac trade. In fixed income markets, prices were originally supported by the softness seen in European equities and the fallout of yesterday's FOMC minutes with the 10yr Bund approaching 164.00 to the upside. Looking ahead, investors will likely turn towards today's ECB minutes release for any views on concerns surrounding scarcity of core paper and any potential biases the central bank could have in purchasing paper from across the continent. Top European News U.K. Said to Plan Visa-Free Travel for Europeans After Brexit U.K. July Retail Sales Rise, Led by Surge in Demand for Food Nets CEO Opens Door to European Expansion Amid Deals Speculation Axa, NN Are Said to Near Deal for Billionaire March’s Encampus Seadrill Shields Seadrill Partners From Impact of Chapter 11 Novo’s Diabetes Drug Bests Lilly’s in Aiding on Weight Loss Vestas Maintains Outlook, Begins $706 Million Share Buy Back Lufthansa Swoop for Air Berlin Would Add Lower-Cost U.S. Routes In currencies, sterling was once again a key focus for FX markets amid further tier 1 data from the region, this time with retail sales on the data slate. Upon the release, GBP/USD saw a spike higher after 3/4 headline metrics exceeded expectations before prices were dragged lower to pre-announced levels with all 4 components revised lower. USD has regained some ground against its major counterparts following the losses seen last night in the wake of the FOMC minutes. USD has particularly out-muscled EUR with participants looking for further insight via the ECB minutes into the current train of thought at the central bank given yesterday's source reports. AUD has regained some ground amid firmer metals prices, subsequently shrugging off the domestic jobs data overnight. In commodities, the metals complex traded higher overnight with gold prices extending on gains seen following the FOMC minutes. Elsewhere, Copper traded higher alongside broad strength across basic materials with Dalian iron ore prices up nearly 6%, while WTI traded quiet overnight and failed to make any significant recovery from yesterday's post-DoE declines. Saudi Arabia June output rose 190K bpd M/M to10.07mln bpd, while Saudi Arabia June crude exports fell 40K bpd M/M to 6.889mn bpd, according to JODI data. Libya's NOC said that the Sharara oil field is "working normally and the situation is currently stable" following recent security breaches. Looking at the day ahead, we’ve got a fair bit of data due today including July IP (0.3% mom expected), capacity utilisation, conference board US leading index (0.3% expected), the Philadelphia Fed business outlook survey (19 expected), initial jobless claims and continuing claims stats. Away from the data, the ECB will publish the account of its July policy meeting and the Fed’ Kaplan will also speak. Further, Wal-Mart will report its results today. US Event Calendar 8:30am: Initial Jobless Claims, est. 240,000, prior 244,000; Continuing Claims, est. 1.96m, prior 1.95m 8:30am: Philadelphia Fed Business Outlook, est. 18, prior 19.5 9:15am: Industrial Production MoM, est. 0.3%, prior 0.4%; Capacity Utilization, est. 76.7%, prior 76.6% 9:45am: Bloomberg Consumer Comfort, prior 51.4, Bloomberg Economic Expectations, prior 47 10am: Leading Index, est. 0.3%, prior 0.6% 1pm: Fed’s Kaplan Speaks in Lubbock, Texas DB's Jim Reid - or in this case not - concludes the overnight wrap Don't panic. Jim's absence today isn't because his twins have arrived early. Although we're not totally sure which of the following shocks he's getting over this morning. The fact that it's 25 years today since his A-Level results, his 4th wedding anniversary today or being told last night by the consultant that the twins will be coming a little earlier than planned and to expect to be called in anytime in the next 10 days. Luckily we haven’t had to alert him to any super important market related news this morning although things did get a bit more interesting towards the end of the US session last night. Initially the news that one of President Trump’s business advisory groups was disbanding in reaction to events in Virginia over the weekend saw risk assets initially pare some gains. Then after that we got the release of the FOMC minutes which showed a relatively healthy debate amongst policy makers about inflation and which the market appeared to take slightly dovishly given the decent rally for Treasuries into the close. We’ll jump into both of events those shortly. Prior to that the lack of any more updates or news on the North Korea/US front seemed to be helping keep things fairly calm overall and in fact after all the excitement of last week the S&P 500 and Stoxx 600 have clawed back nearly three-quarters of last week’s moves lower after ticking up another +0.14% and +0.69% yesterday. The VIX is also back down to 11.74 after nudging down another -2.5% yesterday and having peaked at just over 16 last week. We’ve been saying for a while that we are likely in for a quiet spell although after Amazon’s $16bn bond deal attracted orders equivalent to the GDP of Belarus ($47bn) it seems that markets are still some way from a taking a full holiday just yet. Back to the FOMC minutes, the most notable takeaway was the reference to “most participants expected inflation to pick up over the next couple of years….and to stabilize around the 2% objective over the medium term”. However, many participants “saw some likelihood that inflation might remain below 2% for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.” The debate on inflation echoed recent comments made public by various Fed presidents, while some members noted the “committee could afford to be patient….in deciding when to increase the rates further and argued against additional adjustments until incoming information confirmed that the recent low inflation were not likely to persist”. However, those comments were balanced by the observation that “…some other participants were more worried about risks arising from a labour market that had already reached full employment and was projected to tighten further from the easing in financial conditions”. Elsewhere, on the balance sheet unwind topic, “several” members favoured an announcement in the July meeting, but most preferred to defer that decision to the next meeting in September. So while the tone of the minutes was actually fairly balanced much of the focus was on the inflation references and particularly the dovish elements. Treasuries were a bit stronger heading into the minutes although yields nosedived a bit further after the text was digested and we saw 10y yields end 5bps lower at 2.223%. 2y yields were also a couple of basis points lower, while the USD (-0.33%) ended weaker for the first time this week. Gold also rallied +0.90% along with the wider precious metals space while EM currencies also benefited from the weaker Greenback (South African Rand +1.08%, Mexican Peso +0.85%, Ruble +0.58%). That was interestingly also in the context of a weaker day for Oil with WTI falling -1.62% following the latest US crude production data. Staying with the US, President Trump’s political agenda appeared to take another blow yesterday, as he was effectively forced to disband two of his business advisory councils pre-emptively, given reports (per Bloomberg) that one of the groups, led by the Blackstone CEO is planning to quit. The story is taking up plenty of column space in the papers this morning and while the impact on markets wasn’t huge the S&P 500 did end up paring a gain of closer to +0.50% just before the headlines broke with some suggestion that this might make fiscal progress more difficult. It feels like one to keep an eye on. Closer to home yesterday, European govies had a very very brief moment of excitement too at the open when a Reuters report hit the wires suggesting that President Draghi won’t deliver any new messages at the Jackson Hole conference next week on 25th. Instead the article quoted an ECB spokesman as saying that the focus will be on the “theme of the symposium, fostering a dynamic global economy”. That sounds about as vague as you can get which probably fits the bill that he’s looking for. There had been a fairly decent buzz building around the event although in fairness the ECB did suggest that the debate over tapering was more likely to take place at the September council meeting so it probably would have been a big surprise to hear anything prior to this of any substance. In terms of the moves for rates, as we noted it was very brief with Bunds at best 2bps stronger in a short period of time, only then to completely reverse and edge a little higher in the mid-morning which is roughly where they held into the close to finish up 1.2bps at 0.439%. The Euro also mostly recovered a temporary dip lower to end just +0.3% on the day. Jumping over to the latest in Asia this morning, markets are broadly speaking flat to slightly firmer. The Nikkei is back to unchanged following a weak start, while the ASX and Hang Seng are also little changed. China bourses are up around +0.35% and the Kospi is +0.6%. US equity futures are slightly in the red however. Away from markets, Sky news reported late last night that the next phrase of Brexit talks are likely to be delayed until December (from October), in part driven by the challenge and timing of getting a more formal engagement from a new German government as federal elections will occur in September. However, it does mean leaving less than a year for talks on the future trading relationship between the UK and the EU, and another two months of the two-year Article 50 timetable being used up. The reaction for Sterling has been fairly subdued however and if anything it’s a little stronger this morning. Moving on. In terms of data yesterday most of the focus was on GDP numbers in Europe. The eurozone print of +0.6% qoq was in line while the annual rate pushed up one-tenth to +2.2% yoy, which is the highest since March 2011. The Netherlands (+3.3% yoy vs. +2.3% expected) and Italy (+1.5% yoy vs. +1.4% expected) in particular stood in some of the details after coming in stronger than expected. This follows decent GDP data in Germany on Tuesday too. In the US yesterday the July housing data were a tad lower than expected, with housing starts falling 4.8% mom to 1.16m (vs. 1.22m expected), largely due to a 15.3% mom decline in the multi-unit sector. Building permits fell 4.1% in July to 1.22m (vs. 1.25m expected), but this follows an upward revision to the prior month, leaving a still solid annual growth of 4.1%. Elsewhere, MBA mortgage applications dipped 0.1%. Looking at the day ahead, the Eurozone’s July CPI came in as expected (-0.5% mom) while UK July retail sales ex fuel printed at 0.5%, above the 0.2% expected. In the US we’ve got a fair bit of data due today including July IP (0.3% mom expected), capacity utilisation, conference board US leading index (0.3% expected), the Philadelphia Fed business outlook survey (19 expected), initial jobless claims and continuing claims stats. Away from the data, the ECB will publish the account of its July policy meeting and the Fed’ Kaplan will also speak. Further, Wal-Mart will report its results today.
Authored by Kevin Muir via The Macro Tourist blog, Yesterday, a few different readers emailed to ask my opinion about the European Junk Bond versus US Treasury yield chart that Tiho Brkan from The Atlas Investor Blog recently published. Well, I have to give Tiho credit, his chart certainly stirred up a lot of primal urgings from investors eager to short European junk bonds. Although I am a huge Kodiak Grizzly of a bond bear, I think there are better ways to express this view than shorting European junk. Let me tell you why. I couldn’t replicate Tiho’s chart exactly as I don’t pay for the Bank of America / Merrill Lynch bond indexes, but I found a Barclays/Bloomberg index that is close enough. So here is my version. I also couldn’t determine Tiho’s term for the US Treasury yield in his chart, but it sure looks like the 10 year yield, so I am going with that. So when comparing these two series, let’s start with the obvious. The current on-the-run US 10 year treasury note has a modified duration of a little less than 9 years. This compares to the European Junk bond index that comes in at under 4 years. The sensitivity to changes in interest rates will therefore be much higher in the US treasury notes. Comparing these two assets with such different term lengths is a little misleading. But you might say, “I don’t care - look at past yield levels for European junk! I can afford to have less duration because the credit part will skate me onside.” And yes, if credit spreads blow out, then shorting junk is much better than sovereigns. What do I mean by that? When an investor buys junk bonds, they are typically rewarded with an extra yield to compensate for the increased risk. The amount of this extra yield is called the option-adjust-spread, and we can chart it. Currently, European junk bonds only offer 2.67% over the equivalent sovereign yield. Wait! How can that be? The US year yield is 2.22% and the two series have recently converged, so that doesn’t seem to make any sense. But you have to remember that 4 year German bunds are yielding negative 42 basis points, so that means European junk bonds are trading at roughly 2.25% (267 bps more than sovereigns). As you can see from the OAS chart, these junk bonds have often yielded considerably more than sovereigns. During the Great Financial Crisis they spiked to 20% more, and even during the 2011 European credit crisis, they got as high as 10% over. So yeah, I understand the attraction to shorting European junk. It’s easy to look dreamily at this chart and imagine spreads doubling to 5% without batting an eye. But there are a couple of problems with this trade. There are no easily traded derivatives on European junk bonds. So unless your friendly neighborhood GS salesperson lets you buy CDS protection on this index, it is kind of a non-starter. Yeah, you might find some ETF and leverage it up a bit, but with a 4 year duration, your returns are going to be mediocre, even if you nail the timing perfectly. Yet even if I worked in a big fixed income shop and could execute this trade seamlessly, I don’t think I would bother with junk, and would instead focus on the sovereigns. Getting all hot and bothered about the juiciness of European junk is doing nothing more than repeating the US mistake made by all the hedge funds over the past few years. Remember Carl Icahn’s “Danger Ahead” video? It has now been two years since good ‘ole Uncle Carl blessed you with his advice to put on all the same hedges that worked so fabulously in 2008. Go ahead and watch the video again. See how he recommends shorting credit? And no wonder. This trade worked so well in 2008, it is tough to not look at the tight spreads and think they offer a great asymmetrical risk reward profile (to use the buzzwords from all the hedge fund gurus). And I don’t mean to pick on Carl, practically all these mavens have been positioned the same way. Everyone hedges for the last crisis - even legendary hedge fund managers. For the last two years, these hedges in the US markets have been a disaster, and I suspect they are about to experience the same sort of pain in Europe. Don’t mistake my lack of bearishness for European junk bonds as a belief they offer good value. Nope. Not a chance. I wouldn’t buy an asset that offers so little upside, but with the potential for so much downside, in a million years. Yet I do think shorting sovereigns is a much better trade than betting against European junk. What is going to cause European OAS spreads to blow out? Economic weakness. And what will be the result of more economic weakness? Yup - you got it - more quantitative easing. The ECB is already running out of sovereigns to buy, so what will happen the next time? They will venture even further out the risk curve. I believe European junk bond yields are headed higher, but only on the back of higher sovereign yields. So if the only way junk bonds are going down is if sovereigns go down, why even bother contemplating shorting junk? Why not just short the actual security that will cause the other security to decline? I guess I could sum it up by explaining that I am negative on European bonds, but neutral on option-adjusted-credit spreads. Governments are going to keep spending and printing until we finally get the nominal growth they so desperately desire (note how I specified nominal growth - they will find it more difficult to generate real growth). If you accept this argument, then it makes way more sense to short sovereigns than junk. I have argued that the European cycle is mirroring the US experience since the Great Financial Crisis, only a few years behind. If that is the case, then there will be plenty of time to short European junk bonds in the coming years. In the meantime, I am focusing on shorting the government bonds that are the true bubble. It is funny how so many look at junk and salivate over the possibility of shorting a security yielding 2.25%, yet quietly ignore government bonds yielding negative real rates of return with Central Banks intent on creating the very inflation that bond investors fear the most. I will leave you with these wise words from the Urban Camel: Remember, those good looking trades that everyone wants to put on are usually trouble. Instead, look for the more reliable, underappreciated one that is often staring right at you.
Spanish Bond Yields Plunge To Record Lows As 'Economy Improves' (Just Don't Tell The Nation's Youth)
Spain’s two-year bond yields have collapsed to a record low -35bps this week and Portugal's followed suit, plunging near record low levels as Draghi's "whatever it takes" has benefitted all those front-running bondholders but left youth unemployment hovering still near record-high levels. As a strong euro weighs on the region’s inflation outlook, it makes it harder for the European Central Bank to end quantitative easing and negative interest rates, said Peter Chatwell, head of European rates strategy at Mizuho International Plc in London, and sure enough today's reports that Draghi's Jackson Hole appearance will be a nothing burger has sparked more anticipation that QE isn't ending anytime soon, despite better-late-than-never complaints from the Germans. "Whatever it takes" to keep asset prices high!
Authored by James Rickards via The Daily Reckoning, Visa recently unveiled its own offensive in the war on cash. Visa is offering certain merchants a $10,000 reward if they refuse to accept cash in the future. Not surprisingly, Visa’s competitor is also part of the war on cash. Mastercard is increasing its efforts to encourage merchants to refuse cash. Here’s Bloomberg, quoting the CEO of Mastercard: “Mastercard Chief Executive Officer Ajay Banga has been one of the most ardent supporters of ditching paper currency in the U.S. The 57-year-old first declared his war on cash in 2010.” These private efforts by Visa and MasterCard exist side by side with official efforts to eliminate or discourage the use of cash coming from governments in India, Australia, Sweden as well as the United States. These efforts are always portrayed in the most favorable light. Private parties talk about convenience and lower costs. Governments talk about putting pressure on tax cheats, terrorists and criminals. Governments always use money laundering, drug dealing and terrorism as an excuse to keep tabs on honest citizens and deprive them of the ability to use money alternatives such as physical cash and gold. But the so-called “cashless society” is just a Trojan horse for a system in which all financial wealth is electronic and represented digitally in the records of a small number of megabanks and asset managers. Once that is achieved, it will be easy for state power to seize and freeze the wealth, or subject it to constant surveillance, taxation and other forms of digital confiscation. The war on cash has two main thrusts. The first is to make it difficult to obtain cash in the first place. U.S. banks will report anyone taking more than $3,000 in cash as engaging in a “suspicious activity” using Treasury Form SAR (Suspicious Activity Report). The second thrust is to eliminate large-denomination banknotes. The U.S. got rid of its $500 note in 1969, and the $100 note has lost 85% of its purchasing power since then. With a little more inflation, the $100 bill will be reduced to chump change. Last year the European Central Bank announced that they were discontinuing the production of new 500 euro notes. Existing 500 euro notes will still be legal tender, but new ones will not be produced. This means that over time, the notes will be in short supply and individuals in need of large denominations may actually bid up the price above face value paying, say, 502 euros in smaller bills for a 500 euro note. The 2 euro premium in this example is like a negative interest rate on cash. The real burden of the war on cash falls on honest citizens who are made vulnerable to wealth confiscation through negative interest rates, loss of privacy, account freezes and limits on cash withdrawals or transfers. The whole idea of the war on cash is to force savers into digital bank accounts so their money can be taken from them in the form of negative interest rates. An easy solution to this is to go to physical cash. The war on cash is a global effort being waged on many fronts. My view is that the war on cash is dangerous in terms of lost privacy and the risk of government confiscation of wealth. India provides the most dramatic example. How would you like to go to bed one night and then wake up the next morning to discover that all bills larger than $5.00 were no longer legal tender? That’s essentially what happened in India not long ago. The good news is that cash is still a dominant form of payment in many countries including the U.S. The problem is that as digital payments grow and the use of cash diminishes, a “tipping point” is reached where suddenly it makes no sense to continue using cash because of the expense and logistics involved. Once cash usage shrinks to a certain point, economies of scale are lost and usage can go to zero almost overnight. Remember how music CDs disappeared suddenly once MP3 and streaming formats became popular? That’s how fast cash can disappear. Once the war on cash gains that kind of momentum, it will be practically impossible to stop. That’s why I’m always saying that savers and those with a long-term view should get physical gold now while prices are still attractive and while they still can. Given these potential outcomes, one might expect that citizens would push back against the war on cash. But in some places, the opposite seems to be happening. A recent survey revealed that more than a third of Americans and Europeans would have no problem at all giving up cash and going completely digital. Specifically, the study showed 34% of Europeans and 38% of Americans surveyed would prefer going cashless. Notably, Germans are the most resistant to going cashless. Almost 80% of transactions in Germany are done in cash, and many Germans never use credit cards. The German experience with hyperinflation after WWI and additional monetary chaos after WWII certainly plays a part in this resistance to the cashless society. Incidentally, the German word for debt, schuld, also means guilt. Other countries, such as Romania and Bulgaria, which have recent experiences with currency and financial crises, also tend to use cash extensively. Of course, there’s no denying that digital payments are certainly convenient. I use them myself in the form of credit and debit cards, wire transfers, automatic deposits and bill payments. The surest way to lull someone into complacency is to offer a “convenience” that quickly becomes habit and impossible to do without. The convenience factor is becoming more prevalent, and consumers are moving from cash to digital payments just as they moved from gold and silver coins to paper money a hundred years ago. But when the next financial panic comes, those without tangible wealth will be totally at the mercy of banks and governments who will decide exactly how much of your own money you’re allowed to have each day. Just ask the citizens of Cyprus, Greece and India who have gone through this experience in recent years. It will come to the U.S. soon enough. Other dangers arise from the fact that digital money, transferred by credit or debit cards or other electronic payments systems, are completely dependent on the power grid. If the power grid goes out due to storms, accidents, sabotage or cyberattacks, our digital economy will grind to a complete halt. That’s why it’s a good idea to keep some of your liquidity in paper cash (while you can) and gold or silver coins. The gold and silver coins in particular will be money good in every state of the world. I hold significant portion of my wealth in nondigital form, including real estate, fine art and precious metals in safe, nonbank storage. I strongly suggest you do the same.
Yesterday, as the VIX was setting up for one of its biggest one day jumps in history, we reminded readers just how massive the short-vol overhang was courtesy of the following chart from JPMorgan showing that the net Vega on VIX-related ETFs was at an all time high, suggesting that the risk of a vol-buying feedback loop was significant, because as VIX rose and markets fell, it would prompt more vol-shorters to cover, selling more risk assets in the process, leading to an even higher VIX, and so on. So what happens next to the VIX, and the vol-complex in general? Below we share the latest thoughts from RBC's head of cross-asset strategy, Charlie McElligott, who notes WITH THIS MUCH NEGATIVE CONVEXITY FROM A LOW ABSOLUTE LEVEL…IT SURE DIDN’T TAKE MUCH TO ‘SET IT OFF’: So this is awkward: the hedges pushed last week ‘hit’…but with the ‘wrong’ event-risk catalyst. Yesterday was pure ‘comeuppance’ for the ‘short vol’ / ‘negative convexity’ crowd, off of the crescendo-ing cacophony of self-fulfilling expectations for a market ‘volatility event.’ I know this sounds ‘chicken or the egg,’ but I truly believe that it was this volatility positioning which was the core of the issue yesterday, and not wholesale buyside de-risking of underlying core portfolio longs as the catalyst. Yes, crowded trades and themes came off sharply in some cases--but relatively-speaking, the index move was rather small (from a ratio of index % move vs move in vols), especially considering the nose-bleed levels of index returns YTD. And client conversations certainly weren’t indicative of ‘panic’ or liquidation. In fact, shorts were pressed and performed very well…this wasn’t ‘gross down’ stuff. Under the hood, stretched positioning in SPX leading ‘Tech’ sector / ‘Growth’ factor was the ‘right’ place to look for asymmetry (S&P Tech’s worst day since the June 9th ‘Momentum Unwind,’ while 12m Growth market-neutral experienced its worst day since January 31st). China Internet, Biotech, Internet, Semiconductors / Equip/ Semicaps, SMID Cap Software, Cloud were all areas which saw outsized underperformance…but of course coming from very strong YTD levels. The impact of this ‘crowding’ (as I have been highlighting risk of ‘tipping’) was seen in my model equity L/S hedge fund model, which not surprisingly generated its 3rd worst drawdown of the year (following the May 17th and June 9th unwinds), but really just from longs due to still-high net exposure levels (shorts were pressed and did travel lower, offsetting the long losses). But in this case, the ‘butterfly flapping its wings’ moment—beyond the aforementioned market ‘anticipation’ / almost ‘willing’ of a vol event, as ‘short volatility’ had crowded itself into a tight corner—actually came via the mounting geopolitical discomfort in the Korean Penninsula…and not an ‘interest rate volatility’ blast which I had predicated my thesis around. Instead / conversely, the still relatively-tame FTQ-bid in fixed income has seen 10s push through 2.20 with bull-flattening in curves. WHERE TO FROM HERE ON VOL TRICKLE-DOWN: After the crazy move around the US equities open in VIX, it looked as if VIX hedges were likely later being monetized in the US session afternoon yesterday. This makes sense, as we’ve become conditioned to shorter-and-shorter ‘half-lives’ of these ‘negative gamma’ bursts in recent years, because the Pavlovian response of ‘selling more vol into the squeezes’ has been rewarded with very handsome returns. But the final hour and a half in the US cash equities trade again saw an acceleration of short convexity ‘stop-ins’ likely generated from the VIX ETP universe (leveraged and inverse VIX ETFs, in addition to dealer gamma), which had to buy a ton of futures to rebalance on account of the massive percentage change in spot. It’s painfully clear that these products have contributed to a huge amount of ‘vega’ in the marketplace (driving large ‘feedback’ in both VIX futures AND SPX index options). As mentioned earlier, VIX has again continued higher this morning. Indeed it did when this note was sent out just before 7am... However, following another disappointing CPI miss, the 5th in a row, the VIX has plunged as expectations of a December rate hike now been firmly off the table, sending the VIX sharply lower and futures in the green. McElligott's conclusion: It should be noted however that from a ‘vol control’ fund deleveraging perspective, we still aren’t likely to have seen heavy de-risking flows from the masses yet (many targets at 8 or 10), as SPX realized vol—even of the short-term 20d varietal—remains painfully low at 6.5. So, in order to ‘trigger’ it would either require another violent jump in vol, or a few more days further in this 15-16-17 vols level to ‘drag up’ the trailing number. Which, of course, won't happen if the Swiss National Bank, BOJ... or Fed, ECB, and BOE for that matter, have anything to say about it.
Authored by Thorstein Polleit via The Mises Institute, If you invest your money, you will have to deal with numerous risks. For instance, if you buy a bond, you run the risk of the borrower defaulting or being repaid with debased money. As a stock investor, you face the risk that the company's business model will not live up to expectations, or that it, at the extreme, will go bankrupt. In an unhampered financial market, prices are formed for these and other risk factors. For instance, a bond with a high default risk will typically carry a high yield. The same goes for debt denominated in an unsound currency. Stocks of companies that are deemed risky tend to trade at a lower valuation level than those considered low risk. All these risk premiums, if determined in the unhampered market, constitute a portion of an asset’s price, be it a bond or a share. They play a vital role in the way capital is allocated in an economy. Risk premiums are meant to compensate investors for the risk of losses resulting from adverse developments. If you buy a stock at a depressed price relative to the firm’s earnings power, it tends to reduce your downside (while offering the chance of great gains). At the same time, risk premiums increase investors’ cost of capital. This, in turn, discourages them from engaging in overly risky investments. Decline in risk premiums: In other words, risk premiums determined in an unhampered market align the interests of savers and investors. Of course, one cannot be sure that ex ante risk premiums are always correct. Sometimes it turns out that risks were overestimated, sometimes they were underestimated. However, the unhampered market is still the best and most efficient means to determine the price of risk. Central Banks Suppress Risk Premiums Central banks, however, interfere and corrupt the best practice of the formation of the price of risk. In the last financial and economic crisis, central banks had lowered interest rates to unprecedented low levels and ramped up the quantity of (base) money to keep financially ailing governments and banks afloat and the economy going. In fact, they effectively put out a ‘safety net’, providing insurance to financial markets against potential systemic losses. Decline in risk premiums: By doing so, central banks have put investor risk aversion to sleep: Under their guidance, financial markets are now betting on, and have high confidence in, monetary policy makers successfully fending off any new problems in the economic and financial system. This seems to be the message the price action in financial markets is conveying to us. For instance, stock price fluctuations have returned to very low levels, accompanied by strong stock market gains and high valuations. The yield spread of risky corporate bonds over US Treasuries has returned to levels last seen in early 2008. Or look at the prices for credit default insurance for bank bonds. They also have returned to pre-crisis levels, suggesting investor credit concerns have markedly declined. In other words, investors are back again, eagerly taking on additional credit risk and willingly financing corporates’ investments at suppressed costs of capital. Central banks have thus not only artificially reduced interest rates by lowering credit costs, they have also artificially reduced risk premiums by (explicitly or implicitly) signaling to the financial markets that they are prepared to basically ‘do whatever it takes’ to prevent another meltdown as witnessed in 2008/2009. The consequence is that financial markets and economies depend on central bank action more than ever before. There is no easy way out of this situation. If interest rates go up — be it through rate hikes or the elimination of the ‘safety net’ — the current recovery will most likely come to a halt, if it does not turn into a bust straight away: With higher interest rates, the economic structure, built on artificially low interest rates, would run into serious trouble. The idea of central banks ‘normalizing’ interest rates without output losses or even a recession appears illusionary at best. Against this backdrop, it is interesting to see that, for instance, the US Federal Reserve and the European Central Bank (ECB) may want to bring short-term interest rates back up (further). At the same time, however, there is no evidence that monetary policymakers have any plans to remove the ‘safety net’ that has so successfully brought down risk premiums in asset markets and thus the cost of capital. That said, even an increase of central banks’ short-term funding will not bring about a normalization of the cost of capital — as risk premiums will most likely remain artificially suppressed. Capital misallocation will continue and the artificial boom is kept alive and well. Investors, therefore, face quite a challenge: Malinvestments continue, and downside risks increase, while it might be too early to jump ship.
The global rout resulting from tensions over the North Korean nuclear standoff continued on Friday as world stocks tumbled for the fourth day, on course for their worst week since November following a third day of escalating verbal exchanges between Trump and Kim, as European and Asian shares tumlbed, volatility spiked, and the selloff in US futures continued albeit at a more modest pace as the escalating war of words over North Korea drove investors on Friday to safe havens such as the yen, Swiss franc and gold. In addition to North Korea, attention will be closely focused on today's US CPI print, which could result in even more currency volatility, should it surprise significantly in either direction. "What has changed this time is that the scary threats and war of words between the U.S. and North Korea have intensified to the point that markets can't ignore it," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "Of course, it's all come at a time when share markets are due for a correction, so North Korea has provided a perfect trigger." All eyes remained on the sharp short squeeze in the VIX, which exploded more than 50% above 16 on Thursday from single digits the day before - the highest print since Trump's election victory - and extended gains on Friday rising nearly 5% to 16.80, after briefly topping 17, a potential "margin calling" nightmare for countless vol sellers over the past year. Thursday also saw the highest VIX volume day on record as 937K VIX futures traded across the curve. The Global Financial Stress Indicator surged positive after trading in negative territory since April. The global rout that sent the Nasdaq lower by 2% on Thursday, spread to China which saw the Shanghai Composite tumble by 1.6% to 3,208, its biggest drop this year, led by mining and resource stocks, with nearly 20 names halted limit down, after Chinese metals prices tumbled by 5%. The Chinese volatility index jumped by the most since January 2016 to its highest level in more than seven months. While there wasn't a specific catalyst for the rout, a driver for the sharp commodity selling was the announcement by the China Steel Industry Association which said the recent surge in steel futures was not due to market demand but misunderstanding by some institutions. Adding fuel to the fire was a Reuters report that the Shanghai Futures Exchange told its members it may raise margins on steel rebar contracts if market trade volume is too large. As a result, metals also led declines on the mainland CSI 300 Index: Xiamen Tungsten slides as much as 9.3%, most intraday since September; Jiangxi Copper falls as much as 8.3%; China Molybdenum slips as much as 7.7%; the Bloomberg China Steel Producers Valuation Peers Index tumbled 5.9%, with Nanjing Iron & Steel, Maanshan Iron & Steel, Angang Steel dropping at least 6.9%. "Chinese investors locked in profits on commodity shares following strong gains which had been driven by bets that capacity cuts would boost prices", said Helen Lau, Hong Kong-based analyst with Argonaut Securities. "Stock markets are in a risk-off mode due to escalating geopolitical risks, so recent outperformers would be the first to take a hit amid a selloff." In HK trading Aluminum Corp. of China tumbles as much as 7.4%, the biggest intraday drop since February 2016, while China Shenhua Energy dropped as much as 4.8%, among the worst performers on Hang Seng Index. Also hurting Chinese sentiment was the plunge in Tencent, with the Chinese tech giant dropping as much as 5% in Hong Kong, its biggest intraday decline in more than a month, following news of a Chinese probe into Tencent, Sina and Baidu for cyber-security law violations. Stocks of related tech companies were all lower with Sina down 3%, Weibo down 4.5%, and Baidu down 2.5%. Earlier in the session, the onshore Chinese yuan dropped as much as 0.43% vs USD to 6.7080, its biggest drop since Jan. 19, after the PBOC set the fixing at a weaker level than expected. As Bloomberg reported overnight, the PBOC strengthened fixing by 0.19% to 6.66420, compared with forecasts of 6.6477 from Commerzbank, 6.6552 from Mizuho Bank, 6.6559 from Scotiabank and 6.6549 from Nomura. At the same time, the offshore yuan dropped as much as 0.28% to 6.6853, most since June 26, although putting the drop in context, just one day earlier, the CNY rose to its strongest level since August 2016 on Thursday, prompting Bloomberg to call the Yuan the new "safe haven" currency. Elsewhere in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had skidded 1.55 percent, its biggest one-day loss since mid-December, to leave it down 2.5 percent for the week. Australia’s S&P/ASX 200 Index fell 1.2 percent at the close in Sydney. The Hang Seng Index in Hong Kong tumbled 2 percent and China’s Shanghai Composite Index was down 1.6 percent. The Japanese yen rose 0.2 percent to 108.96 per dollar, the strongest in more than 15 weeks. Japanese markets are closed for the Mountain Day public holiday. South Korea's KOSPI fell 1.8 percent to an 11-1/2-week low, but its losses for the week are a relatively modest 3.2 percent; volatility on the Kospi 200 surged as much as 27 percent. "Pretty remarkable, perhaps even extraordinary, considering," said fund manager BlueBay strategist Tim Ash. The Korean won also continued to skid, down 0.45 percent to 1,147.2, falling below its 200-day moving average for the first time in a month. European markets continued sliding into risk-off mode although at a slower pace; even so Europe's where regional indices were set for the worst week of losses this year as sentiment on ongoing fears about escalation between the US and North Korea. Euro zone volatility jumped to the highest since April, when France's election was rattling the region. Weakness has been seen across the board (Eurostoxx 600 -1.0%), however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. The iTraxx Crossover extended its recent widening, leading sentiment as hedges are placed into the weekend. European equity markets opened lower led by mining sector, as base metals sell off heavily in Asia after a report saying the Shanghai exchange may raise margins on steel rebar contracts, which was later confirmed. DAX futures dip to approach 200-DMA, financials under pressure after HSBC warns low-vol environment could hit 2H revenues. CHF and JPY marginally outperform in G-10, EMFX weaker against USD across the board. Core fixed income extends rally and bund curve flattens further, yet UST/bund spread widens 3bps as USTs lag amid focus on U.S. CPI data which may add to the recent dollar pains should inflation come in weaker than expected. U.S. treasury yields fell to their lowest in more than six weeks ahead of inflation data expected to show a pickup in price growth, which could boost the chances of a further rate hike this year, while the Fed’s Kaplan and Kashkari are due to speak. The dollar declined against the Japanese yen for a fourth day as North Korea tensions remained elevated. The yield on 10-year Treasuries fell one basis point to 2.19 percent, the lowest in more than six weeks. Germany’s 10-year yield decreased three basis points to 0.38 percent, the lowest in more than six weeks. Oil was modestly higher even though the IEA cuts its OPEC demand estimates for this year and next year by by 400bpd after revising down its demand estimates going back to 2015, rejecting OPEC's own assessment of rising demand growth for the near future. Aside from North Korea, inflation data is where the market is most sensitive to a surprise at the moment, even if yesterday's weak US PPI doesn't suggest an imminent rise. For the US CPI today, consensus expected core CPI inflation to rise +0.2%, and should finally snap its streak of four consecutive monthly misses which could be important. As recent Fed statements have emphasized, policymakers will be monitoring near-term inflation trends closely. Hence, an in line print would provide tentative evidence that the recent downshift in core inflation may be behind us. New York Fed President William Dudley cautioned that it will “take some time” for inflation to reach the central bank’s 2 percent target, the latest official warning that price pressures remain muted. The Federal Reserve Bank Dallas President Fred Kaplan speaks this afternoon. Also today, Moody’s may publish a review of South Africa’s credit rating, two months after reducing its foreign- and local-currency assessments to one level above junk. JC Penney, Magna International and Telus are due to release results. July consumer price data is also due later. Bulletin Headline Summary From RanSquawk Geopolitical tensions continue to act as a driving force for markets amid the latest exchange between the US and NK This has seen downside in EU equities (Eurostoxx 50 -1.0%) and a FTQ in other assets Looking ahead, highlights include US CPI, Fed's Kashkari and Kaplan Market Snapshot S&P 500 futures down 0.1% to 2,434.25 STOXX Europe 600 down 1.0% to 372.26 DAX down 0.3% to 11,980 MSCI ASIA down 0.8% to 158.49 MSCI ASIA ex JAPAN down 1.5% to 515.81 Nikkei down 0.05% to 19,729.74 Topix down 0.04% to 1,617.25 Hang Seng Index down 2% to 26,883.51 Shanghai Composite down 1.6% to 3,208.54 Sensex down 1.1% to 31,193.00 Australia S&P/ASX 200 down 1.2% to 5,693.14 Kospi down 1.7% to 2,319.71 German 10Y yield fell 3.5 bps to 0.38% Euro down 0.1% to 1.1759 per US$ Brent Futures down 0.9% to $51.45/bbl US 10Y yields unchanged at 2.19% Italian 10Y yield rose 2.1 bps to 1.743% Spanish 10Y yield fell 0.6 bps to 1.452% Brent Futures down 0.4% to $51.70/bbl Gold spot up 0.1% to $1,287.31 U.S. Dollar Index up 0.04% to 93.44 Top Overnight News China Urges Restraint as Futures Slide; FOMC Voters to Speak After CPI Data; Snap Slammed Amid Facebook Pressure The escalating war of words between Trump and North Korean leader Kim Jong-Un sent Asian markets tumbling as the region braced for more provocations from his regime next week President Donald Trump stepped up his campaign of pressure on North Korea, warning the regime not to follow through with a missile test near Guam and promising massive response to any strike against the U.S. or its allies Treasury yields may climb from a six-week low if Friday’s U.S. consumer- price data merely meet expectations, as the market is on high- alert for evidence that inflation is heating up and supporting the Fed’s case for higher interest rates For all the talk that Chair Janet Yellen’s plan to shrink the Fed’s balance sheet will hurt Treasuries, U.S. mortgage bonds face a bigger test The International Energy Agency cut estimates for the amount of crude needed from OPEC this year and in 2018, after lowering its historical assessments of consumption in emerging nations including China and India All that stands between German Chancellor Angela Merkel and a fourth term is six weeks of campaigning Morgan Stanley added its voice to a growing chorus of skepticism surrounding debt valuations, with Pacific Investment Management Co. writing in a report released Wednesday that investors should pare relatively expensive assets like corporate bonds in favor of safer investments like Treasuries Credit Suisse Group AG is barring its traders from buying or selling certain Venezuelan securities and business as the political and economic crisis in the South American country intensifies Gold advanced to the highest in two months as the spike in tensions between the U.S. and North Korea fanned demand, with hedge fund billionaire Ray Dalio flagging rising risks, including “two confrontational, nationalistic, and militaristic leaders playing chicken with each other” President Donald Trump laid out a path for Senate Majority Leader Mitch McConnell to get back in his good graces: replace Obamacare, overhaul the U.S. tax code and find a way to pay for big infrastructure improvements RBA’s Lowe says next interest rate move likely up, but could be some time away; RBA prepared to intervene in A$ in ’extreme’ situations Snap, Blue Apron Fall Flat as the Incumbents Smash the Upstarts IEA Cuts Estimates for Crude Needed From OPEC This Year and Next Chinese Regulator Starts Probe Into Tencent, Weibo and Baidu Stolen 1MDB Funds Are Focus of U.S. Criminal Investigation Health Insurers Face Long Odds to Win Reprieve of Obamacare Tax U.S. Stocks Gain, Hong Kong Loses Weight in MSCI Indexes: SocGen FBI Says ISIS Used EBay to Send Cash to U.S.: WSJ Anbang Ownership Secrets Subject of U.S. Workers’ Complaint Hollywood Heads For Its Worst Summer Box Office in a Decade Asia stock markets were heavily pressured amid continued geopolitical tensions after further fighting talk between US and North Korea, which also saw US indices close negative for a 3rd consecutive day. The fresh goading came from both sides as US President Trump suggested his fire and fury comments maybe was not tough enough and warned North Korea to get its act together or it will be in trouble like few nations have ever been. This evoked a response from North Korea which vowed to mercilessly wipe out the provocateurs and stated the US will suffer a shameful defeat. As such, ASX 200 (-1.2%), KOSPI (-1.7%) Hang Seng (-2.0%) and Shanghai Comp (-1.7%) all traded with firm losses, while Nikkei 225 was shut due to public holiday. PBoC injected CNY 70bln in 7-day reverse repos and CNY 60bln in 14-day reverse repos, for a net weekly drain of CNY 30bln vs. CNY 40bln drain last week. Top Asian News War of Words Between Trump and Kim Has Asia Bracing for Conflict South Korean Banks Follow Won Lower Amid Rising Trump Rhetoric China Data Dump and Alternative Gauges Both Signal Steady Output Maker of India’s Aircraft Carrier Surges 22% on Trading Debut Biggest India Lender Slumps as Bad-Loan Surprise Hits Profit KKR Completes 26 Investments in China as of Aug. 1 Freeport Urged to Reinstate Workers to End Indonesian Strike India July Local Passenger Vehicle Sales Gain 15% Y/y to 298,997 BlackRock’s James Lenton Joins Fidelity as Trader in Hong Kong European indices are set for the worst week of losses this year as sentiment is weighed by the war of words between the US and North Korea. Weakness has been seen across the board (Eurostoxx 50 -1.0%), however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. EGBs supported by flight to quality with Bunds printing fresh session highs, while there had been reports of 5k lots tripping stops at 164.50. Peripherals underperform this morning, led by BTPs, subsequently the GER-ITA spread has widened to 162bps Top European News Morgan Stanley Makes ‘Multi-Year Call’ For Strong Euro on Reform Europe Miners Slump as Metals Fall on China Steel Body’s Warning Tullow Oil, Genel Energy Drop; GMP Cuts Both Stocks to Reduce Old Mutual First-Half Profit Climbs as Insurer’s Split Looms Merkel’s Bloc Holds All the Coalition Options in Latest Poll Buy BNP Paribas, Credit Suisse; Sell Barclays, Goldman Says Nordea Chairman Hints HQ Review Isn’t Limited to the Nordics In currencies, safe-haven support for the currency has continued as USD/JPY made a brief break below 109.00 overnight. Although, with the war of words showing no signs of stopping, JPY could make a push back to the April low at 108.11. So far, the pair have traded in a narrow range with investor focus for the USD shifting to the US inflation figures due out later in the session. AUD softened in Asian trade as commodities prices slipped. Crude prices fell over 0.5%, despite Saudi Arabia and Iraq's announcement to ensure that all major producers comply to the OPEC production cut, while Saudi also left the door open to deeper cuts. Additionally, Chinese iron ore prices fell some 5%, further weighed on the currency, subsequently pushing AUD to the mid 0.78. In commodities, China state run newspaper editorial comments state China will remain neutral if North Korea launches an attack on US, but if US strikes first and tries to overthrow North Korean government, China will stop them. Saudi Arabia Energy Minister Al-Falih stated the possibility for continuation of output cuts is on the table and if the size of cuts need to be adjusted, this will be examined and subject to approval by 24 countries. North Korea vows to mercilessly wipe out the provocateurs, says US will suffer a shameful defeat, according to North Korean state media. IEA raises 2017 global oil demand forecast to 1.5mln bpd vs. 1.4mln bpd, global oil supply rose by 520k, while OPEC compliance fell to 75%. Looking at the day ahead, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% yoy. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today. US Event calendar 8:30am: US CPI MoM, est. 0.2%, prior 0.0%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1% US CPI YoY, est. 1.8%, prior 1.6%; CPI Ex Food and Energy YoY, est. 1.7%, prior 1.7% Real Avg Weekly Earnings YoY, prior 1.09%; Real Avg Hourly Earning YoY, prior 0.8% DB's Jim Reid concludes the overnight wrap I'm hoping I'll be on this planet for as close to 36,525 days as I can get and I'm also hoping tomorrow will be the only day of that stint that I'm stupid enough to be picking up a brand new car with no miles on it. So in some ways it's exciting and in some way it’s very annoying as I vowed never to waste money on a new car. The twins have forced the issue and I'll be figuratively setting light to wads of bank notes as I roll out the forecourt. I'm driving 80 miles to Poole to collect it and I'm setting off very early as I have to get back to make sure everything is ready at home for the new arrival. The excitement is building, I'm very nervous and hopes and dreams come in abundance with such a fresh start. Yes Liverpool kick off their season at lunchtime tomorrow and I need to make sure I'm back in time to watch it. Wish me luck. The markets and more importantly the world is wishing for a bit of luck at the moment and a peaceful solution to the North Korean spat. The nuclear fallout from this week's high stakes geopolitical jaw boning couldn't completely unsettle markets on Wednesday but Thursday was a different story. We finally broke the 15 day run of sub 0.3% closes in either direction with the S&P 500 -1.45% after a day where the news we covered yesterday morning concerning North Korea's threat to attack Guam by mid-August increasingly spooked global investors as the day progressed. Mr Trump then raised the temperature another notch late in the US session last night, saying his ‘fire and fury” comment earlier in the week “wasn’t tough enough” and that “things will happen to them (NK) like they never thought possible..” and has “declined” to rule out a pre-emptive strike on NK, noting “we’ll see what happens”, all of which helped the US close at the lows for the session and shatter the recent low vol environment. Given the previous record low vol run was 10 days in 1966, if I do live to be 100 I'm statistically unlikely to witness anything like what we saw in the 15 days before yesterday. The S&P 500 had its worse day since mid-May this year when it fell 1.8%. Over at the Vix, the fear gauge broadly traded up most of the day and surged 44% higher to close at 16.04, which is actually the first day the index closed above 16 in CY2017. Across the pond, the Vstoxx was up 26% to 18.9, the highest level since April when Europe had heightened political risks in the run up to the French elections. Investors pushed safe haven assets higher again, with gold up 0.7% to a 9 week high, the Swiss franc up 0.1% (was +1.1% the day before) and JPY/USD +0.8% higher. Over in European government bonds, changes in core yields were more tempered following the ~5bp fall the day before. Bunds fell 1bp (2Y: unch; 10Y: -1bps), with Gilts down 3bps (2Y: +0.3bp; 10Y: -3bps) at the long end of the curve, while French OATs were broadly flat (2Y: unch; 10Y: -0.5bp). Peripheral bond yields were up slightly across the curve, with Italian BTPs (2Y: +1bp; 10Y: +2bps) and Portuguese yields (2Y: -0.5bp; 10Y: +2bps) not sure whether they were a flight to quality instrument or a high beta asset. Across the pond, the UST10Y fell 5bps yesterday (2Y -1bp) but is fairly flat this morning. In Asia, markets have continued to fall. The Kospi recovered a little to be 1.6% down as we type, the Won/USD dipping another 0.2%. The Hang Seng fell for the 3rd consecutive day (-1.9%), with Chinese bourses down 1.1% to 1.6%. We also got a glimpse of what China might be thinking, with the Global times (English paper under the People's Daily) writing that China should make clear that: i) it will stay neutral if the US retaliates after NK launches missile that threaten American soil, but ii) if countries try to overthrow the NK regime, China will prevent them from doing so. Moving on, if we can pull out attention away from the nuclear threat, inflation data is probably where the market is most sensitive to a surprise at the moment, even if yesterday's weak US PPI doesn't suggest an imminent rise. For the US CPI today, our economists expect core CPI inflation (+0.2% vs. +0.1%) should finally snap its streak of four consecutive monthly misses which could be important. They also remind us that as recent Fed statements have emphasized, policymakers will be monitoring near-term inflation trends closely. Hence, an in line print would provide tentative evidence that the recent downshift in core inflation may be behind us. Following on the theme of inflation, DB’s Luzzetti examined the impact of recent US dollar depreciation on the inflation outlook. Based on their own inflation models and analysis cited by Fed officials, they think that recent dollar weakness – assuming that it does not reverse – could lift year-over-year core PCE inflation by about 0.2pps by mid-2018 and 0.1pps by mid-2019. More details here. Turning to Europe, the flip-side of recent currency moves is discussed by DB’s Mark Wall who has written on how euro appreciation will be balanced against growth momentum in determining the ECB’s exit from QE. He argue that all else unchanged the euro’s appreciation since June could reduce the ECB staff core inflation forecast for 2019 from 1.7% yoy to 1.5% yoy. More details here Returning to the equity market sell-off in a little more depth, US bourses all weakened yesterday, with the S&P (-1.5%), the Dow (-0.9%) and the Nasdaq (-2.1%) sharply lower. Within the S&P, only the utilities sector was up (+0.3%) versus larger losses elsewhere (IT -2.2%; Financials -1.8%). European markets also fell across the board, the Stoxx 600 was down 1% to the lowest level since March with all sectors in the red. Across the region the FTSE 100 (-1.4%), the DAX (-1.2%), Italian FTSE MIB (-0.8%) and CAC (-0.6%) were all lower. Currencies were mixed but little changed, the USD dollar index dipped 0.2% post the lower than expected PPI data. The Euro continued to edge ahead against the USD and Sterling, up 0.1% and 0.3% respectively, while the Sterling/USD was down 0.2%. In commodities, WTI oil fell 2%, despite OPEC raising its demand forecast for oil and two of the largest OPEC producers (Saudi Arabia & Iraq) agreeing to strengthen their commitments to production cuts. Notably, Iraq's recent compliance to production targets is not exactly great (29% in July). Elsewhere, precious metals were modestly up (Gold +0.7%; Silver +1%) and aluminium continues to gain (Copper -0.3%; Aluminium +0.9%). Agricultural commodities were broadly lower, with corn, wheat and cotton all down ~4%, while soybeans, coffee and sugar were down ~3%. This follows a USDA report which suggest US farmers will produce more corn and soybeans than analyst forecasts. Away from the markets, Trump has made his disappointment with Senate majority leader McConnell well known, tweeting “can you believe that McConnell, who has screamed repeal & replace (Obamacare) for 7 years, couldn’t get it done…” and “…Mitch, get back to work…”. However, Trump was more conciliatory on special counsel Mueller, saying he “hasn’t given it any thought about firing Mueller” and that “I’m not dismissing anybody”. Elsewhere, NY Fed president Dudley cautioned that it will "take some time" for inflation to reach the Fed's 2% target, which is consistent with comments made by his colleagues earlier in the week. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the July PPI report was softer than expected. The core measure (ex-food & energy aggregate) was -0.1% mom (vs. 0.2% expected) and 1.8% yoy (vs. 2.1% expected). The PPI for healthcare services, which is closely correlated with that within the PCE deflator, rose a steady 1.4% yoy. Elsewhere, claims data were mixed, with initial jobless claims up 3k to 244k (vs. 240k expected) and continuing claims at 1,951k (vs. 1,960k expected). In Europe,France’s June industrial production (IP) was modestly lower than expectations at -1.1% mom (vs. -0.6% expected, 1.9% previous) and 2.6% yoy (vs. 3.1% expected), while manufacturing production was slightly better at -0.9% mom (vs. -1% expected) and 3.3% yoy (vs. 3.2% expected), which is just a bit weaker than Markit PMI readings had foreshadowed. Over in UK, IP for June was higher than expectations at 0.5% mom (vs. 0.1% expected) and 0.3% yoy (vs. -0.1% expected), while June manufacturing production was flat and in line, at 0% mom and 0.6% yoy. The UK’s trade deficit also unexpectedly widened in June as exports fell but imports rose. Looking at the day ahead, the final CPI figures for Germany (1.5% yoy expected), France (0.8% yoy expected) and Italy (1.2% yoy expected) will be released. Over in the US, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% yoy. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today.
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Authored by Jeffrey Snider via Alhambra Investment Partners, Ben Bernanke, then Chairman of the Federal Reserve, told Congress in March 2007 that subprime was contained. He will rightfully be remembered in infamy for that, but that wasn’t the most egregious example of being wrong. Even putting it in those terms risks understating the problem and why it stubbornly lingers. Being really wrong is claiming that IOER will establish a floor for money market rates, and then finding out it actually doesn’t. No, what policymakers did especially in the early crisis period was altogether worse; they demonstrated conclusively that though they shared this world with the rest of us, they inhabited and continue to inhabit a totally different planet. Given the anniversary date and our human affinity for round numbers (ten years or a lost decade), there is a desire to revisit some of the worst of the list which happened just before August 9, 2007. My favorite has always been Bill Dudley, as I recounted last at the ninth anniversary of nothing being done: As far as the issue of material nonpublic information that shows worse problems than are in the newspapers, I’m not sure exactly how to characterize that because I guess I wouldn’t know how to characterize how bad the newspapers think these problems are. [Laughter] We’ve done quite a bit of work trying to identify some of the funding questions surrounding Bear Stearns, Countrywide, and some of the commercial paper programs. There is some strain, but so far it looks as though nothing is really imminent in those areas.” [emphasis added] He spoke those words, recorded for posterity, on August 7, 2007, at the regular FOMC policy meeting. As noted earlier today, both Countrywide and the whole commercial paper market would be decimated really within hours from his “inspiring” confidence. What really stands out is for Dudley to have been the one who said them, because as head of the Open Market Desk he had to be technically proficient in a way that the others could avoid (and why so often in its history policy discussions especially about these great things would often flow through whomever was the Open Market Desk chief at that moment in time). He proved still to be an empty suit like the rest, but he was always that much less of one. So if the best the Fed had to offer was so thoroughly unaware, is it any wonder what happened then and continues to happen now? One day after Dudley’s private embarrassment, one Bank of England governor and future chief perhaps joined his level in the Hall of Fame of Famous Last Words. Meryn King remarked on August 8, 2007: So far what we have seen is not a threat to the financial system. It’s not an international financial crisis. He said these words at the behest of the ECB in front of the assembled press ostensibly to impart calm. Also noted earlier today, it was the European Central Bank that made the first crisis move the very next day in a record liquidity injection. If officials didn’t realize what was happening monetarily, and they didn’t, there was obviously no way for them to predict what would happen economically. One follows the other, so if you think the monetary system is infected only with raw, mistaken emotion to be easily cleaned up by genius and effective policy intervention, then you will likewise believe the consequences to the real economy quite small and completely manageable. In its bland policy statement that accompanied the August 7, 2007, policy meeting, the FOMC voted affirmatively (and quite purposefully) for this language: Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy. [emphasis added] I could go on and on with these examples, but you get the point; the main of which is to paraphrase one religious sentiment. No Money, No Economy; Know Money, Know Economy. These last ten years have proved beyond any doubt in gross empirical fashion policymakers and economists (redundant) don’t get either money or economy.
In our "WTF Chart of the day" from last Friday, we showed something stunning: European junk bonds yields were the same, and in some cases lower, than comparable-maturity 10Y US Treasurys. In other words, the distortion unleashed by Mario Draghi's CSPP, or corporate bond buying program unveiled last March, has made European junk bonds "safer" than US government-issued paper. These observations prompted BofA's Barnaby Martin to ask overnight "Is Euro High-Yield the new US Treasury market?." Picking up where we left off, Martin writes that "inflow surges mean bubbles…and bubbles mean tight spreads. Perhaps no better example of this is the rapid price appreciation in Euro high-yield bond prices lately. In less than a month, Euro HY yields have declined (another) 55bp, reaching an all-time low of just 2.3%." Next, Martin redoes the chart up top, and repeats that "European HY yields have almost declined to the yield on BofAML’s US Treasury index" adding that while "there are indeed duration differences between the two markets, it doesn’t detract from the eye-watering levels that European high-yield has now reached." The results become even more eyewatering if one drills down on the "higher rated" European junk bonds, those in the BB bucket: here the relative value is "even more eye-watering" as over 60% of BBs rated HY bonds yield less than similar-maturity USTs and, "ironically, €23bn of Italian BBs now yield less than Treasuries." As Martin adds here, "note that this is not just because some BBs are CSPP-eligible. There are plenty of non CSPP-eligible Euro-denominated BBs that yield less than US Treasuries." The next chart shows that the plunge in bonds yielding more than matched-maturity Treasurys started roughly around the time Draghi unleashed the CSPP, confirming yet again (in addition to the chart on top), that it was the ECB that made European junk bonds "safer" than US government paper. Finally, in an insult to fundamental analysis and credit strategists everywhere, the chart below shows what Martin calls "irony", but is instead a beautiful demonstration to what extent the ECB broke the European bond market: around €23bn of Italian Euro BB-rated junk bonds yield less than equivalent-maturity US Treasuries.
European and Asian market and S&P futures have resumed their slide, as geopolitical tensions between North Korea and the U.S. spiked again overnight after Pyongyang responded to the latest set of warnings by Trump, revealing a plan to fire 4 ballistic missiles at Guam by mid-August. Gold gains for a third day while Brent rose above $53. Following de-escalation attempts by Rex Tillerson, and a NYT report that Trump's "fire and fury" statement had been improvised, markets saw a tentative recovery in risk appetite in overnight U.S. and early Asian trading, but a risk off mood returned again as Asian stocks fell back and London, Frankfurt and Paris dropped 0.5-1.2 percent in Europe, spooked by North Korea’s latest response to Trump, which dismissed as a "load of nonsense" warnings by President Trump that it would face "fire and fury" if it threatened the United States and in which a general outlined a detailed plan on state TV to fire four Hwasong-12 ICBM at Guam by mid-August, sending virtually every Asian market lower. "Sound dialogue is not possible with such a guy bereft of reason and only absolute force can work on him" North Korea said of its diplomacy with Trump. Asia took the brunt of tonight's selloff, with Japan’s Topix index ended less than 0.1 percent lower, while South Korea’s Kospi index slid 0.4 percent, adding to a 1.1 percent drop on Wednesday. The Hang Seng Index in Hong Kong fell 1.1 percent. Australia’s S&P/ASX 200 Index lost 0.1 percent. The MSCI Asia Pacific Index fell 0.5 percent. The won dropped to a four-week low and was trading 0.6 percent down, while the Japanese yen rose 0.2 percent to 109.80 per dollar, the strongest in eight weeks. "We saw a tentative recovery in risk appetite yesterday from the sell off inspired by North Korea but I think, justifiably that move is fading a little bit today," said Saxo Bank's head of FX strategy John Hardy. With the escalating war of words rumbling on, Europe's German bund yield held near six-week lows. U.S. and British equivalents were also trading a touch above Wednesday's six-week lows. "We would currently be careful with a whiff of risk aversion in the air and, by extension, also stay away from shorts in the rates market," RBC's global macro strategist Peter Schaffrik said. As a result of the ongoing diplomatic fiasco, the Stoxx Europe 600 Index headed for a second day of declines, following declines in markets from Hong Kong to Tokyo to Sydney, which also pressured S&P index futures fell. The greenback was firmer against most of its G-10 peers. Japan’s yen edged higher, extending yesterday’s increase as havens including gold continued to find support. Oil held gains above $49 a barrel as U.S. production eased and crude inventories extended declines. “The North Korea situation is still unstable and investors are controlling risk and taking profit after recent gains,” said Sam Chi Yung, a Hong Kong-based senior strategist at South China Financial Holdings Ltd. Geopolitical tensions also pushed euro-area volatility sharply higher, with the VStoxx Index surging 27% since Tuesday’s close as European stocks added to their losses. The Stoxx 600 falls 0.6%, set for biggest back-to-back declines in three weeks, as the DAX hits lowest since April 21, down 2% so far this week. All European industry groups declined, with miners and energy shares faring the worst. Utilities outperform selloff, sector is recommended by HSBC as a defensive refuge should European equities undergo a correction In currencies, as noted above, South Korea’s won led losses in emerging Asian currencies as tensions over the peninsula heightened. “USD/Asia should be somewhat supported today given the rise in geopolitical risk as North Korea and Trump keep up their back and forth,” said Julian Wee, a senior market strategist at National Australia Bank Ltd. in Singapore. “The weakness in equity markets suggests that the incendiary rhetoric has spooked the markets.” Traders added to positions in haven currencies such as the yen and Swiss franc, and pushed up the dollar index by unwinding some of the recent bets on the euro; the yen rose for a third day, outperforming all other Group-of-10 currencies. Unrelated to Korea, the NZD was the notable underperformer overnight after the RBNZ monetary policy decision. The rate decision itself was met with choppy price action. However, the downside largely stemmed from comments by RBNZ Assistant Governor McDermott who stated that "NZD needs to adjust lower", which saw NZD break through 0.7300, and was trading at 0.726 last. In China, the onshore yuan rises for 10th straight day vs trade-weighted basket to highest in nearly five months as People’s Bank of China strengthens fixing by most since June. As Bloomberg reports, as global investors turn increasingly risk averse amid tense relations between North Korea and the U.S., China’s currency is becoming an unlikely winner. The yuan is the best performer among 31 major peers since Friday, rising 1.1 percent to 6.6605 against the greenback. That compares with a 1.5 percent tumble by the South Korean won or a 0.5 percent drop by the Australian dollar. While China is North Korea’s key ally, the nation’s central bank has been supporting the yuan with a series of strong fixings, and bearish bets against the currency have receded after it rose above 6.7 per dollar. In addition to geopolitics, some of the biggest names in the asset management industry have already been warning that it’s time to take risk off the table. As reported yesterday, Pimco told investors to pare exposure to U.S. equities and junk bonds, but keep exposure to real assets, including commodities and gold. Separately, T. Rowe Price said it cut its stock allocation to the lowest level since 2000. Morgan Stanley strategists said investors should consider betting against U.S. junk-bonds as recent price weakness may be the beginning of a correction. In commodities, safe haven gold rose 0.1 percent to $1,278.04 an ounce, the strongest in two months. West Texas Intermediate crude climbed 0.4 percent to $49.75 a barrel, the highest in more than a week, while Brent traded 0.8%, to $53.20 Today we get July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) and initial jobless claims and continuing claims figures. Fed’s Dudley will also speak today. Notable companies reporting include Nvidia, Snap, Macy’s and Newscorp. Bulletin headline summary from RanSquawk Lingering geo-political concerns continue to weigh on Asian equities. NZD underperforms as the RBNZ kept a somewhat dovish-to-neutral tone. Looking ahead, highlights include US PPI and comments from Fed's Dudley. Market Snapshot S&P 500 futures down 0.3% to 2,465.50 STOXX Europe 600 down 0.4% to 378.41 MSCI Asia down 0.5% to 159.73 MSCI Asia ex Japan down 0.7% to 525.33 Nikkei down 0.05% to 19,729.74 Topix down 0.04% to 1,617.25 Hang Seng Index down 1.1% to 27,444.00 Shanghai Composite down 0.4% to 3,261.75 Sensex down 0.5% to 31,644.07 Australia S&P/ASX 200 down 0.08% to 5,760.93 Kospi down 0.4% to 2,359.47 German 10Y yield rose 0.5 bps to 0.433% Euro down 0.3% to 1.1729 per US$ Italian 10Y yield rose 0.8 bps to 1.722% Spanish 10Y yield fell 0.6 bps to 1.424% Brent Futures up 0.6% to $53.03/bbl Gold spot up 0.1% to $1,278.98 U.S. Dollar Index up 0.2% to 93.70 Top Overnight News South Korea and Japan warned North Korea that it would face a strong response if it carried through with a threat to launch a missile toward the U.S. territory of Guam North Korea says ‘sound dialogue not possible’ with Trump; considering plan for striking at Guam through simultaneous fire of four missiles U.S. inflation is finally picking up -- or at least that’s the expectation of economists who have been wrong-footed by sub-par readings four months in a row Glencore Plc built a war chest in the first half of the year, continuing to cut debt as the world’s largest commodities trading house prepares to ramp up acquisitions West Virginia Governor Jim Justice said Donald Trump is “really interested” in his plan to prop up Appalachian mining by giving federal money to power plants that burn the region’s coal U.K. June Industrial Production m/m: 0.5% vs 0.1% est; ONS notes North Sea oil fields did not shut down for summer maintenance as normal, supporting production Norway July CPI y/y: 1.5% vs 1.4% est; core CPI 1.2% vs 1.1% est. RBNZ’s Wheeler: Would like to see a lower exchange rate, intervention in FX market is always open to us; Assistant Governor McDermott says RBNZ changed NZD language in a step toward intervention China Securities Journal: Govt. will soon release a package of measures to reduce leverage of state-owned enterprises; especially investments by central SOEs in financial sector Trump Seen Bypassing Acting FTC Chief in Favor of Outsider Disappointing U.K. Manufacturing, Trade Cap Sluggish Quarter Facebook Introduces Watch as New Platform for Shows NY Orders Con Edison to Take Action on Subway Power Reliability Perrigo Full Year Adjusted EPS Forecast Tops Estimates Monsanto Judge Angered by Lawyer’s Release of Roundup Documents Pepper Group Accepts KKR’s A$3.60-a-Share Cash Offer Facebook’s ‘Dazzling’ Stock May Belie Long-Term Risks: Grant’s MUFG Realizes Money Alone Can’t Build a Truly Global Bank Glencore Slashes Debt as It Positions for M&A in Commodities Asian indices tried to pick themselves up from the recent geopolitical-triggered losses, but failed and the upside gradually fizzled out throughout the session which saw the region's bourses negative across the board. ASX 200 (-0.2%) and Nikkei 225 (-0.1%) failed to sustain the early gains as financials dragged Australia lower, while Japanese stocks reversed ahead of tomorrow's Mountain Day holiday. Markets in China lagged with the Shanghai Comp (-0.4%) dampened by a lukewarm liquidity operation and with China considering measures for deleveraging in state-owned enterprises, while Hang Seng (-1.1%) underperformed as investors used the escalation of global tensions as an opportunity to book profits in the index which had already surged by around 25% YTD. Finally, 10yr JGBs traded flat as the risk sentiment in Japan lacked conviction and with the BoJ's Rinban announcement somewhat tepid. On Thursday, the PBoC injected CNY 50bln in 7-day reverse repos and CNY 40bln in 14-day reverse repos. The PBoC set CNY mid-point 6.6770 at (Prey. 6.7075 Top Asian News Toshiba Reports Loss With Auditor’s Qualified Endorsement China Mobile Shares Surge as Carrier Adds Special Dividend SEC Delays Decision on Chinese Buyout of Chicago Exchange It’s Hard to Price an ‘Extinction Event’ Like a North Korea War South Korea, Japan Warn Kim Against Firing Missile at Guam Philippines Keeps Benchmark Rate at 3%, in Line With Forecasts Natco Tumbles to 6- Month Low on Expected Delay in Sclerosis Drug Malaysia Warns Traders Against Ringgit Derivatives in Singapore Billionaire Wang Plans Overhaul of Property Assets, Wanda Unit Another morning of declines in Europe with geo-political tensions at the forefront of investors' minds. Slight underperformance in the FTSE 100 amid a slew of Ex-Divs from a number of large cap names taking off roughly 40ppts. On a stock specific basis, much of the price action has been dictated by earnings with Adecco, Lanxess and Henkel among the worst performers following soft financial reports. Very quiet on this front with yields ticking up slightly across the German curve, peripheral spreads wider, albeit mildly so. Top European News Prudential Interim Dividend Per Share 14.5p Thyssenkrupp Debt Soars on Negative Third-Quarter Cash Flow Zurich Insurance CEO Greco Sees ‘Positive’ Signs for Dividend Dong Sees Early Shareholder Returns as Offshore Costs Tumble Adecco Slides as Sales Miss Estimates Amid Downturn in Hiring Mail.ru’s Russian Food Deliveries Surge as Sales Beat Estimates U.K. Homebuilders Slip as Residential Price Growth Slows Further Russian Gas Link Offshoot Taps Investors as Sanctions Swirl Shopping Cart Shows ECB Buying Italy Over France as Bonds Mature In currencies, the NZD was the notable underperformer overnight post the RBNZ monetary policy decision. The rate decision itself was met with choppy price action. However, the downside largely stemmed from comments by RBNZ Assistant Governor McDermott who stated that "NZD needs to adjust lower", which saw NZD break through 0.7300. USD at better levels against its counterparts today, tensions remain at elevated levels between the US and North Korea, although focus is slightly edging towards key US data with US CPI figures to be released tomorrow. But, before that we get the PPI numbers out at midday. GBP saw a brief uptick to pare some of its losses this morning following firm than expected industrial output figures, however much of the other data had been erring to the softer side with the trade balance showing a wider deficit than analysts had expected. In commodities, oil prices up this morning with Brent breaking through USD 53 for the first time since May, however failed to consolidate above and has since retraced some of its gains. Precious metals also hovering at elevated levels. Gold rose 0.1 percent to $1,278.04 an ounce, the strongest in two months. US Event Calendar 8:30am: Initial Jobless Claims, est. 240,000, prior 240,000; Continuing Claims, est. 1.96m, prior 1.97m 8:30am: PPI Final Demand MoM, est. 0.1%, prior 0.1%; Ex Food and Energy MoM, est. 0.2%, prior 0.1%; Ex Food, Energy, Trade MoM, est. 0.2%, prior 0.2% 8:30am: PPI Final Demand YoY, est. 2.2%, prior 2.0%; Ex Food and Energy YoY, est. 2.1%, prior 1.9%; Ex Food, Energy, Trade YoY, prior 2.0% 9:45am: Bloomberg Consumer Comfort, prior 49.6 2pm: Monthly Budget Statement, est. $52.0b deficit, prior $90.2b deficit Looking at the day ahead, there is the July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) as well as the initial jobless claims and continuing claims figures. Fed’s Dudley will also speak today. Notable companies reporting include Macy’s and Newscorp. DB's Jim Reid concludes the overnight wrap Over the last few days we've been wondering what it would take to knock the S&P 500 out of its 90 year record low trading range of no moves of bigger than 0.3% in either direction. After yesterday we can possibly rule out the threat of nuclear war as a catalyst as despite a sudden end to the peaceful markets of late, and a fairly notable global risk aversion, the S&P 500 managed to close only -0.04% lower and extend the daily record to 15 days without a closing move of bigger than 0.3%. Before we sound the all clear though as we'll see below, Asia is having a difficult session after markets initially opened up stronger. They have been seemingly tracking North Korea’s response to Mr Trump. According to the FT they have outlined a detailed plan on state TV to fire four Hwasong-12 ICBM at Guam by mid-August. As we type, the Nikkei is slightly lower (-0.2%), and the Kospi (-1%), Hang Seng (-1.6%) and Chinese bourses between -1% and -1.2% lower. The Hang Seng is on course for its worst day of 2017. The Korean Won has dipped a further 0.2% this morning and S&P futures -0.25% lower. This follows a day of relatively large intra-day moves across various market. The VIX surged ~15% higher to an intra-day peak of 12.63, before range trading and then finally sharply falling to close only 1.5% higher for the day (+0.15pts to 11.11). Over at UST 10Y, yields initially fell ~2bp before increasing back to be broadly flat for the day. The calming influence on the markets was likely due to US Secretary of State Tillerson signalling military confrontation was not imminent, saying that “Americans should sleep well tonight, have no concerns about this particular rhetoric of the last few days” while on a plane post a tour of Southeast Asia. Trump was also a bit more tempered later on and said via twitter, that the “…US nuclear arsenal is now far stronger than ever…but hopefully we will never have to use this power”. Nonetheless, the preference for safe haven assets was still apparent yesterday, with gold (+1.3%) and Swiss franc both modestly up (+1.1%). Over in European government bonds, core yields fell ~5bps at the longer end of the curve with bunds (2Y: -3bps; 10Y: -5bps), Gilts (2Y: -1bp; 10Y: -5bps) and French OATs (2Y: -1bp; 10Y: -4bps) rallying hard. Peripheral bond yields were a bit more mixed, with Portugal’s yield modestly down (2Y: -3bps; 10Y: -2bps), but the Italian BTPs actually up slightly (2Y: unch; 10Y: +1bp). Back to the non nuclear war part of the day, overnight two more Fed speakers echoed prior comments made by their colleagues earlier in the week. St. Louis Fed President Bullard cautioned that failure to get inflation to the Fed’s 2% target could undermine its credibility, “the misses add up over time”. Elsewhere, the Chicago Fed Chief Evans noted it would be “reasonable” to announce the start of balance sheet unwind next month. As far as conventional monetary policy is concerned, he noted the possibility that "We might be pretty close to neutral", and that despite the economy doing very well "...inflation might have some trouble getting up to 2%". Turning to market performance overnight, US bourses closed slightly lower despite the intraday actions, with the S&P (-0.1%), the Dow (-0.2%) and the Nasdaq (-0.3%) all lower but recovering into the close as discussed above. Within the S&P, modest gains in the Health care and materials sector were broadly offset by losses in utilities (-0.5%), consumer and telco names. After the bell, Twenty- First century Fox was up ~+1.5% post a result beat. In Europe, markets also weakened, with the Stoxx 600 down -0.7%. Within the index, only the utilities sector was up (+0.1%), while financials saw heavier losses (-1.5%). Across the region, indices all fell, with the DAX (-1.1%), FTSE 100 (-0.6%), CAC (-1.4%) and Italian FTSE MIB (-0.9%). Currency markets ended the day broadly unchanged, the US dollar index dipped 0.1% yesterday, but is slightly up this morning. Elsewhere, the Euro and Sterling both edged 0.1% higher against the USD, while Euro/Sterling softened for the second consecutive day. In commodities, WTI oil was up 0.8% following EIA’s report of a drop in crude inventories, although intraday gains were slightly pared back due to reports of a build-up in US gasoline stockpiles. Precious metals were higher yesterday (Gold: +1.3%; Silver +3%) but have softened a little this morning. Industrial metals were higher with Copper up 0.7% and Aluminium up 3.9%, marking a cumulative gain of ~9% over three days, likely reflecting reports of China increasing efforts to curtail illegal or polluting capacity. Away from the markets, the Washington Post has reported the FBI has searched a home belonging to Paul Manafort, who was Trump’s former campaign chairman. The search took place on 26th of July, but could be another sign that the federal probe into Russian involvement in the 2016 election is expanding. To recap, Manafort was Trump’s election campaign chairman from March to August 2016, but was forced to resign post increased scrutiny of his past work consulting for the Kremlin backed former Ukrainian president. Elsewhere, a $23bn 10-year US note sale drew a yield of 2.25%, with a bid-to-cover ratio of 2.23, the second-weakest in the last eight years, which contrasts the strong demand for the three-year note yesterday where it’s bid-to-cover ratio was the highest since Dec. 15. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the preliminary 2Q nonfarm productivity stat was a little firmer than expectations at 0.9% (vs. 0.7% expected), leaving throughyear growth at the unrevised 1.2% yoy rate seen in 1Q. However, the growth in unit labour costs were weaker than expected at 0.6% (vs. 1.1%), although this quarter follows a large upward revision in the prior reading. Elsewhere, the final wholesale inventories for June was marginally higher at 0.7% mom (vs. flash estimate of 0.6%) and the MBA’s new purchase mortgage applications index rose 0.8% last week, with the four-week average rising 7.5% yoy. In Italy, industrial production for June was higher than expectations at 1.1% mom (vs. 0.2%), taking annual growth to 5.3% yoy (vs. 3.5% expected) – a bit closer to what the Markit manufacturing PMI has been suggesting. Looking at the day ahead, UK and France’s industrial production and manufacturing production data will be out in the morning, with expectations for UK’s IP at 0.1% mom (-0.1% yoy) and manufacturing production at flat mom (0.6% yoy). Further, June trade balance stats for UK (-£2500 expected) and Italy are also due. Over in the US, there is the July PPI data (for core, 0.2% mom and 2.1% yoy expected), the monthly budget statement (-$54bn) as well as the initial jobless claims and continuing claims figures. Onto other events, the Fed’s Dudley will speak today. Notable companies reporting include Macy’s and Newscorp in the US and ABN Amro closer to home.
Authored by Adam Tooze via ProspectMagazine.co.uk, Accounts of the financial crisis leave out the story of the secretive deals between banks that kept the show on the road. How long can the system be propped up for? It is a decade since the first tremors of what would become the Great Financial Crisis began to convulse global markets. Across the world from China and South Korea, to Ukraine, Greece, Brexit Britain and Trump’s America it has shaken our economy, our society and latterly our politics. Indeed, it has thrown into question who “we” are. It has triggered both a remarkable wave of nationalism and a deep questioning of social and economic inequalities. Politicians promise their voters that they will “take back control.” But the basic framework of globalisation remains intact, so far at least. And to keep the show on the road, networks of financial and monetary co-operation have been pulled tighter than ever before. In Britain the beginning of the crisis was straight out of economic history’s cabinet of horrors. Early in the morning of Monday 14th September 2007, queues of panicked savers gathered outside branches of the mortgage lender Northern Rock on high streets across Britain. It was—or at least so it seemed—a classic bank run. Within the year the crisis had circled the world. Wall Street was shaking, as was the City of London. The banks of South Korea, Russia, Germany, France, Belgium, the Netherlands, Ireland and Iceland were all in trouble. We had seen nothing like it since 1929. Soon enough Ben Bernanke, then chairman of the US Federal Reserve and an expert on the Great Depression, said that this time it was worse. But the fact that the tumult assumed such spectacular, globe-straddling dimensions had initially taken Bernanke by surprise. In May 2007 he reassured the public that he didn’t think American subprime mortgages could bring down the house. Clearly he underestimated the crisis. But was he actually wrong? For it certainly wasn’t subprime that brought down Northern Rock. The British bank didn’t have any exposure in the United States. So what was going on? The familiar associations evoked by the Northern Rock crisis were deceptive. It wasn’t panicking pensioners all scrambling to withdraw their savings at once that killed the bank. It wasn’t even the Rock’s giant portfolio of mortgages. The narrative of Michael Lewis’s The Big Short, of securitisation, pooling and tranching, the lugubrious details of trashy mortgage dealing, the alphabet soup of securitised loans and associated derivatives (MBS, CDO, CDS, CDO-squared) tell only one part of the story. What really did for banks like Northern Rock and for all the others that would follow—Bear Stearns, Merrill Lynch, Lehman, Hypo Real State, Dexia and many more—and what made this downturn different— so sharp, so sudden and so systemic, not just a recession but the Great Recession—was the implosion of a new system not just of bank lending, but of bank funding. It is only when we examine both sides of the balance sheet—the liabilities as well as the assets—that we can appreciate how the crisis was propagated, and then how it was ultimately contained at a global level. It is a story that the crisis-fighters have chosen not to celebrate or publicise. Ten years on, the story is worth revisiting, not only to get the history right, but because the global fix that began to be put in place in the autumn of 2007 is in many ways the most significant legacy of the crisis. It is still with us today and remains largely out of sight. The hidden rewiring of the global monetary system provides reassurance to those in the know, but it has no public or political standing, no resources with which to fight back if attacked. And this matters because it is increasingly out of kilter with the nationalist turn of politics. In the wake of the crash and its austere aftermath, voters in many countries have pointed the finger at globalisation. The monetary authorities, however, have quietly entwined themselves more closely than ever before—and they have done so in order to provide life support to that bank funding model which caused such trouble a decade ago. Ten years on, the question of whether this fix is sustainable, or indeed wise, is a question of more than historical interest. “To keep the show on the road, networks of financial and monetary co-operation have been pulled tighter than ever before” In 2007 economists were expecting a crisis. Not, however, the crisis they got. The standard crisis scenario through to autumn that year involved a sudden loss of confidence in American government debt and the dollar. In the Bush era, the Republicans had cut taxes and spent heavily on the War on Terror, borrowing from China. So what would happen, it was asked anxiously, if the Chinese pulled the plug? The great fear was that the dollar would plunge, interest rates would soar and both the US economy and the Chinese export sector would crash land. It was what Larry Summers termed a balance of financial terror. America’s currency seemed so doomed that in autumn 2007, the US-based supermodel Gisele Bündchen asked to be paid in euros for a Pantene campaign, and Jay-Z dissed the dollar on MTV. But somewhat surprisingly, like the nuclear stand-off in the Cold War, the financial balance of terror has become the basis for a precarious stability. Crucially, both Beijing and Washington understand the risks involved, or at least they seemed to until the advent of President Donald Trump. Certainly during the most worrying moments in 2008 Hank Paulson, Bush’s last Treasury Secretary, made sure that Beijing understood that its interests would be protected. Beijing reciprocated by increasing its commitment to dollar assets. In 2007, it was not the American state that lost credibility: it was the American housing market. What unfolded was a fiasco of the American dream: 8.7m homes were lost to foreclosure. But the real estate bust wasn’t limited to the US. Ireland, Spain, the UK and the Netherlands all had huge credit booms and suffered shattering busts. As homeowners defaulted some lenders went under. This is what happened early on to predatory lenders such as New Century and Countrywide. Bankruptcy also came to the Anglo Irish Bank and Spain’s notorious regional mortgage lenders, the cajas. In the fullness of time, it was—perhaps, though not necessarily—the fate that might well have befallen Northern Rock too. But before it could suffer death by a thousand foreclosures, Northern Rock was felled by a more fast-acting kind of crisis, a crisis of “maturity mismatch.” Banks borrow money short-term at low interest and lend long at marginally higher rates. It may sound precarious, but it is how they earn their living. In the conventional model, however, the short-term funding comes from deposits, from ordinary savers. Ordinarily, in a well-run bank, their withdrawals and deposits tend to cancel each other out. Fits of uncertainty and mass withdrawals are always possible, and perhaps even inevitable once in a while. So to prevent them turning into bank runs, governments offer guarantees up to a reasonable amount. Most of the Northern Rock depositors had little to fear. Their deposits were, like all other ordinary savers, guaranteed by then Chancellor Alistair Darling. The investors who weren’t covered by government backing were those who had provided Northern Rock with funding through a new and different channel—the wholesale money market. They had tens of billions at stake, and every reason to panic. It was the sudden withdrawal of this funding that actually killed Northern Rock. As well as taking in money from savers, banks can also borrow from other banks and other institutional investors. The money markets offer funds overnight, or for a matter of weeks or months. It is a fiercely competitive market with financial professionals on both sides of every trade. Margins are slim, but if the volumes are large there are profits to be made. For generations this was the preserve of investment bankers—the ultimate insiders of the financial community. They didn’t bother with savers’ deposits. They borrowed in the money markets. From the 1990s commercial banks and mortgage lenders began to operate on a similar model. It was this new form of “market-based” banking combined with the famous securitisation of mortgages that enabled the huge expansion of European and US banking that began to crash in 2007. Run for the hills: Northern Rock depositors rush to start taking out their money. By the summer of 2007 only 23 per cent of Northern Rock’s funding came from regular deposits. More than three quarters of its operation was sustained by borrowing in capital and money markets. For these funds there were no guarantees. For a run to develop in the money market, the mortgages did not need to default. All that needed to happen was for the probability of some of them defaulting to increase. That was enough for interbank lending and money market funding to come abruptly to a halt. The European money markets seized up on 9th August. Within a matter of days Northern Rock was in trouble, struggling to repay short-term loans with no new source of funding in prospect. And it was through the same funding channel that the crisis went global. The attraction of money market funding was that it freed you from the cumbersome bricks-and-mortar branch network traditionally used to attract deposits. Using the markets, banks could source funding all over the world. South Korean banks borrowed dollars on the cheap to lend in Won. American banks operating out of London borrowed Yen in depressed Japan, flipped them into dollars and then lent them to booming Brazil. The biggest business of all was the “round tripping” of dollars between America and Europe. Funds were raised in America, which for reasons of history and the nation’s sheer scale, is the richest money market in the world. Those dollars were exported to institutions and banks in Europe, who then reinvested them in the US, very often in American mortgages. The largest inflow of funds to the US came not from the reinvestment of China’s trade surplus, but through this recycling of dollars by way of Europe’s banks. Barclays didn’t need a branch in Kansas any more than Lehman did. Both simply borrowed money in the New York money markets. From the 1990s onwards, Europe’s banks, both great and small, British, Dutch, Belgian, French, Swiss and German, made themselves into a gigantic trans-Atlantic annex of the American banking system. All was well so long as the economy was buoyant, house and other asset prices continued to go up, money markets remained confident and the dollar moved predictably in the direction that everyone expected, that is gently downwards. If you were borrowing dollars to fund a lending business the three things that you did not want to have happen were: for your own loans to go bad; money markets to lose confidence; or for dollars to suddenly become scarce, or, what amounts to the same thing, unexpectedly expensive. While the headlines were about sub-prime, the true catastrophe of the late summer of 2007 was that all three of these assumptions were collapsing, all at once, all around the world. “The Fed effectively established itself as a lender of last resort to the entire global financial system” The real estate market turned down. Large losses were in the pipeline, over years to come. But as soon as Bear Stearns and Banque Nationale de Paris (BNP) shut their first real estate funds, the money markets shut down too. Given the global nature of bank funding this produced an acute shortage of dollar funding across the European and Asian banking system. It was the opposite of what the best and brightest in macroeconomics had expected: strong currencies are, after all, meant to be built on thrift and industry, not shopping splurges and speculative debts. But rather than the world being glutted with dollars, quite suddenly banks both in Europe and Asia began to suffer periodic and panic-inducing dollar shortages. The paradigmatic case of this counterintuitive crisis would eventually be South Korea. How could South Korea, a champion exporter with huge exchange reserves be short of dollars? The answer is that in the years of the recovery from the 1997 East Asian crisis, while Korean companies Hyundai and Samsung had conquered the world, Korea’s banks had been borrowing dollars at relatively low interest rates to lend out back home in Won to the booming home economy. Not only was there an attractive interest rate margin, but thanks to South Korea’s bouyant exports, the Won was steadily appreciating. Loans taken out in dollars were easier to repay in Won. As such these loans cushioned the losses suffered by South Korean firms on their dollar export-earnings. By the late summer of 2008 the South Korean banks operating this system owed $130bn in short-term loans. Normally this was no problem, you rolled over the loan, taking out a new short-term dollar credit to pay off the last one. But when the inter-bank market ground to a halt the South Koreans were painfully exposed. Barring emergency help, all they could do was to throw Won at the exchange markets to buy the dollars they needed, which had the effect of spectacularly devaluing their own currency and making their dollar obligations even more unpayable. South Korea, a country with a huge trade surplus and a large official dollar reserve, faced a plunging currency and a collapsing banking system. In Europe the likes of RBS, Barclays, UBS and Deutsche had even larger dollar liabilities than their South Korean counterparts. The BIS, the central bankers’ bank, estimated that Europe’s mega-banks needed to roll over $1-1.2 trillion dollars in short-term funding. The margin that desperate European banks were willing to pay to borrow in sterling and euro and to swap into dollars surged. Huge losses threatened—and both the Bank of England and the European Central Bank (ECB) could not do much to help. Unlike their East Asian counterparts, they had totally inadequate reserves. The one advantage that the Europeans did have over the Koreans, was that the dollars they had borrowed had largely been invested in the US, the so-called “round-tripping” again. The huge portfolios of American assets they had accumulated were of uncertain value, but they amounted to trillions of dollars and somewhere between 20 and 25 per cent of the total volume of asset- and mortgage-backed securities. In extremis the Europeans could have auctioned them off. This would have closed the dollar-funding gap, but in the resulting fire sales the European banks would have been forced to take huge write downs. And most significantly, the efforts by the Fed and the US Treasury to stabilise the American mortgage market would have been fatally undercut. “In the 60s, swaps were about stabilising exchange rates. Now they’re all about stabilising oversized banks” This was the catastrophic causal chain that began to emerge in August 2007. How could the central banks address it? The answer they found was three-pronged. The most public face of crisis-fighting was the effort to boost the faltering value of the mortgage bonds on the banks’ books (typically securitised versions of other banks’ mortgage loans, which were becoming less reliable in the downturn), and to provide the banks with enough capital to absorb those losses that they would inevitably suffer. This was the saga of America’s Troubled Asset Relief Programme, which played out on Capitol Hill. In the case of Northern Rock this prong involved outright nationalisation. Others took government stakes of varying sizes. Warren Buffett made a lucrative investment in Goldman Sachs. Barclays has now been charged by the Serious Fraud Office with fraudulently organising its own bailout, by—allegedly—lending money to Qatar, which that state is then said to have reinvested in Barclays. Without the bailout, you ended up with Lehman: bewildered bankers standing on the pavements of the City and Wall Street carrying boxes of their belongings. The masters of the universe plunged to earth. It half-satisfied the public’s desire for revenge. But it did nothing for business confidence. With enough capital a bank could absorb losses and stay afloat. But to actually operate, to make loans and thus to sustain demand and avert a downward spiral of prices and more bankruptcies, the banks needed liquidity. So, secondly, the central banks stepped in, taking over the function, which the money market had only relatively recently assumed but was now suddenly stepping back from, of being the short-term lenders. The ECB started as early as August 2007. The Bank of England came in late, but on a large scale. The Fed became the greatest liquidity pump, with all of Europe’s banks benefiting from its largesse. The New York branches of Barclays, Deutsche, BNP, UBS and Credit Suisse were all provided with short-term dollar funding on the same basis as Citi, Bank of America, JP Morgan and the rest. But it was not enough. The Europeans needed even more dollars. So the Fed’s third, final and most radical innovation of the crisis was to devise a system to allow a select group of central banks to funnel dollars to their banks. To do so the Fed reanimated an almost-forgotten tool called the “swap lines,” agreements between central banks to trade their currencies in a given quantity for a given period of time. They had been used regularly in the 1960s, but had since gone out of use. Back then, the aim was stabilising exchange rates. This time, the aim was different: to stabilise a swollen banking system that was faltering, and yet abjectly too big to fail. At a moment when dollars were hard to come by, the new swap lines enabled the ECB to deposit euros with the Fed in exchange for the dollars that the eurozone banks were craving. The Bank of England benefited from the same privilege. Not that they were welcome at first. When the Fed first mooted the idea in the autumn of 2007, the ECB resisted. It did not want to be associated with a crisis that was still seen largely as American. If Gisele didn’t want to be paid her modelling fees in US dollars, why on earth should the ECB be interested? But as the European bank balance sheets unravelled, it would soon become obvious that Frankfurt needed all the dollars it could get. Initiated in December 2007, the swap lines would rapidly expand. By September all the major European central banks were included. In October 2008 the network was expanded to include Brazil, Australia, South Korea, Mexico, New Zealand and Singapore. For the inner European core, plus Japan, they were made unrestricted in volume. The sums of liquidity were huge. All told, the Fed would make swap line loans of a total of $10 trillion to the ECB, the Bank of England the National Bank of Switzerland and other major banking centres. The maximum balance outstanding was $583bn in December 2008, when they accounted for one quarter of the Fed’s balance sheet. It was a remarkable moment: the Fed had effectively established itself as a lender of last resort to the entire global financial system. But it had done so in a decentralised fashion, issuing dollars on demand both in New York and by means of a global network of central banks. Not everyone was included. Russia wasn’t, which was hardly surprising given that it had come to blows with the west over Georgia’s Nato membership application only weeks earlier. Nor did the Fed help China or India. And though it helped the ECB, it did not provide support to the “new Europe” in the east. The Fed probably imagined that the ECB itself would wish to help Poland, the Baltics and Hungary. But the ECB’s president Jean-Claude Trichet was not so generous. Instead, eastern Europe ended up having to rely on the International Monetary Fund (IMF). Swapsies? As a scholar of the Great Depression, the Fed’s Ben Bernanke knew the importance of swap lines. Photo: MARK WILSON/GETTY IMAGES The swap lines were central bank to central bank. But who did they really help? The reality, as all those involved understood, was that the Fed was providing preferential access to liquidity not to the “euro area” or “the Swiss economy” as a whole, but to Deutsche Bank and Credit Suisse. Of course, the justification was “systemic risk.” The mantra in Washington was: you have to help Wall Street to help Main Street. But the immediate beneficiaries were the banks, their staff, especially their highly-remunerated senior staff and their shareholders. Though what the Fed was doing was stabilising the global banking system, it never acknowledged as much in so many words, certainly not on the record, where it said as little as it decently could about the swap line operation. The Fed’s actions have global effects. But it remains an American institution, answerable to Congress. Its mandate is to maintain employment and price stability in the US economy. The justification for the swap lines, therefore, was not global stability, but the need to prevent blowback from Europe’s de facto Americanised banks—to avoid a ruinous, multi-trillion dollar fire sale of American assets. Once the worst of the crisis had passed, Bernanke would assist the European banks in liquidating their American assets by way of the Fed’s three rounds of asset purchases, known as Quantitative Easing (QE). The swaps were meticulously accounted for. Every cent was repaid. No losses were incurred—the Fed even earned a modest profit. They were not exactly covert. But given the extraordinary extension of its global influence that the swaps implied, they were never given publicity, nor even properly discussed. Bernanke’s name will be forever associated with QE, not swap lines. In his lengthy memoirs, The Courage to Act, the swaps merit no more than a few cursory pages, though Bernanke as a scholar of the 1930s knows very well just how crucial these instruments were. Is this an accident? Surely not. In the case of the swap lines, the courage to act was supplemented by an ample measure of discretion. The Fed did everything it could to avoid disclosing the full extent and range of beneficiaries of its liquidity support operations. They did not want to name and shame the most vulnerable banks, for fear of worsening the panic. But there are politics involved too. Given the rise of the Bernanke-hating Tea Party in 2009, the likely response in Congress to news headlining the scale of the Fed’s global activity was unpredictable to say the least. When asked why no one on Capitol Hill had chosen to make an issue of the swap lines, one central banker remarked to me that it felt as though “the Fed had an angel watching over it.” One other reason for the tight lips is that the story of the swap lines is not yet over. The network was rolled out in 2007 and 2008 as an emergency measure, but since then it has become the under-girding of a new system of global financial crisis management. In October 2013, as the Fed prepared finally to begin the process of normalisation by “tapering” its QE bond purchases, it made another decision which made plain that the new normal would not be like the old. It turned the global dollar swap line system into a standing facility: that is to say, it made its emergency treatment for the crisis into a permanent feature of the global monetary system. On demand, any of the core group of central banks can now activate a swap line with any other member of the group. Most recently the swap line system was readied for activation in the summer of 2016 in case of fallout from the Brexit referendum. As the original crisis unfolded in 2008, radical voices like Joseph Stiglitz in the west, and central bankers in the big emerging economies called for a new Bretton Woods Conference—the meeting in 1944, which had decided on the post-war currency system and the creation of the IMF and the World Bank. The Great Financial Crisis had demonstrated that the dollar’s exorbitant privilege was a recipe for macroeconomic imbalances. The centre of gravity in the world economy was inexorably shifting. It was time for a new grand bargain. “Central banks has staged Bretton Woods 2.0. But they had not invited the public or explained their reasons” What these visionary suggestions failed to register was that foundation of the world’s de facto currency system were not public institutions like the IMF, but the private, dollar-based global banking system. The introduction of the swap lines gave that system unprecedented state support. The Fed had ensured that the crisis in global banking did not become a crisis of the dollar. It had signalled that global banks could rely on access to dollar liquidity in virtually unlimited amounts, even in the most extreme circumstances. The central banks had, in other words, staged their Bretton Woods 2.0. But they had omitted to invite the cameras or the public, or indeed to explain what they were doing. The new central bank network created since 2008 is of a piece with the new networks for stress testing and regulating the world’s systemically important banks. The international economy they regulate is not one made up of a jigsaw puzzle of national economies, each with its gross national product and national trade flows. Instead they oversee, regulate and act on the interlocking, transnational matrix of bank balance sheets. This system was put in place without fanfare. It was essential to containing the crisis, and so far it has operated effectively. But to make this technical financial network into the foundation for a new global order is a gamble. It worked on the well-established trans-Atlantic axis. But will it work as effectively if it is asked to contain the fallout from an East Asian financial crisis? Can it continue to operate below the political radar, and is it acceptable for it to do so? With the Fed in the lead it places the resources, expertise and authority of the world’s central banks behind a market-based system of banking that has shown its capacity for over-expansion and catastrophic collapse. For all the talk of “macroprudential” regulation, Basel III and Basel IV, rather than disarming, down-sizing and constraining the global banking system, we have—through the swap lines—embarked on, if you like, a regulatory race to the top, where the authorities intervene heavily to allow the big banks in some countries to continue what they were doing before the unsustainable ceased to be sustained. And without even the political legitimacy conferred by G20 approval. Not everyone in the G20 is part of the swap line system. The Fed’s safety net for global banking was born at the fag-end of the “great moderation,” the era when economies behaved nicely and predictably, and when a “permissive consensus” enabled globalisation. Though a child of crisis, it bore the technocratic, “evidence-based” hall marks of that earlier era. It bears them still. Can it survive in an age when the United States is being convulsed by a new wave of economic nationalism? Is there still a guardian angel watching over the Fed on Capitol Hill? And with Trump in the White House, how loudly should we even ask the question?
Authored by Daniel Lacalle via The Mises Institute, The Bank of International Settlements (BIS) has warned again of the collateral damages of extremely loose monetary policy. One of the biggest threats is the rise of “zombie companies.” Since the “recovery” started, zombie firms have increased from 7.5% to 10.5%. In Europe, BofA estimates that about 9% of the largest companies could be categorized as “walking dead.” What is a zombie company? It is — in the BIS definition — a listed firm, with ten years or more of existence, where the ratio of EBIT (earnings before interest and taxes) relative to interest expense is lower than one. In essence, a company that merely survives due to the constant refinancing of its debt and, despite re-structuring and low rates, is still unable to cover its interest expense with operating profits, let alone repay the principal. This share of zombie firms can be perceived by some as “small.” At the end of the day, 10.5% means that 89.5% are not zombies. But that analysis would be too complacent. According to Moody’s and Standard and Poor’s, debt repayment capacity has broadly weakened globally despite ultra-low rates and ample liquidity. Furthermore, the BIS only analyses listed zombie companies, but in the OECD 90% of the companies are SMEs (Small and Medium Enterprises), and a large proportion of these smaller non-listed companies, are still loss-making. In the Eurozone, the ECB estimates that around 30% of SMEs are still in the red and the figures are smaller, but not massively dissimilar in the US, estimated at 20%, and the UK, close to 25%. The rise of zombie companies is not a good thing. Some might say that at least these companies are still functioning, and jobs are kept alive, but the reality is that a growingly “zombified” economy is showing to reward the unproductive and tax the productive, creating a perverse incentive and protecting nothing in the long run. Companies that underperform get their debt refinanced over and over again, while growing and high productivity firms struggle to get access to credit. When cheap money ends, the first ones collapse and the second ones have not been allowed to thrive to offset the impact. Low interest rates and high liquidity have not helped deleverage. Global debt has soared to 325% of GDP. Loose monetary policies have not helped clean overcapacity, and as such zombie companies perpetuate the glut in many sectors, driving down the growth in productivity and, despite historic low unemployment rates, we continue to see real wages stagnate. The citizen does not benefit from the zombification of the economy. The citizen pays for it. How? With the destruction of savings through financial repression and the collapse of real wage growth. Savers pay for zombification, under the mirage that it “keeps” jobs. Zombification does not boost job creation or buy time, it is a perverse incentive that delays the recovery. It is a transfer of wealth from savers and healthy companies to inefficient and obsolete businesses. The longer it takes to clean the overcapacity — which stands above 20% in the OECD — and zombification of the economy, the worse the outcome will be. Because, when the placebo effect of monetary policy disappears, the domino of bankruptcies in companies that have been artificially kept alive will not be offset by the improvement in high added-value sectors. Policymakers have decided to penalize the high productivity sectors through taxation and subsidize the low productivity ones through monetary and fiscal policies. This is likely to create a vacuum effect when the bubble bursts. The jobs and companies that they try to protect will disappear, and the impact on banks’ solvency and the real economy will be much worse. Avoiding making hard decisions from a crisis created by excess and overcapacity ends up generating a much more negative effect afterward.
On this day 10 years ago, money markets started to seize up, requiring heavily-coordinated central bank action that launched an extraordinary period of central bank activity that is still in full swing today. As DB's Jim Reid reminds us, the announcement by BNP Paribas that they were closing three funds linked to US mortgages became the catalyst for the collapse of trust in money markets over the coming days and weeks. Just over a month later we had the bank run on Northern Rock. As an example of the impact BNP's announcement had - and how rigged Libor had been throughout the days preceding the crisis to telegraph stability - 3 month dollar Libor, which hadn't moved all year, spiked 20bps in the ensuing 48 hours. Also on this day 10 years ago all the major central banks were forced to inject liquidity, with the ECB doing so for the first time since 9/11, effectively ushering in what would later become known as the Great Financial Crisis. As Bloomberg continues this less than marry stroll down memory lane, the ECB's €95 billion emergency loan to banks on Aug. 9, 2007, "was the initial response to a financial crisis that would force the Frankfurt-based institution to expand its balance sheet by trillions of euros." The ECB - together with international peers such as the Federal Reserve and the Bank of England - took center stage in an unprecedented battle against bank failures, recessions and sovereign-debt turmoil that changed the economic landscape and forced a complete rethink of what monetary policy can and should do. Here is the blow by blow of events on that fateful day: on August 9, 2017 years ago, ECB President Jean-Claude Trichet was in St. Malo, northwest France, for a sailing holiday when the U.S. subprime crisis reached Europe in full swing, forcing French bank BNP Paribas SA to halt withdrawals from three investment funds. Using faxes and telephones, he and his colleagues crafted the central bank’s response - a statement that officials were monitoring money-market tensions, followed by a pledge to lend financial institutions as much money overnight as they asked for. Demand for the so-called fine-tuning operation exceeded the 69.3 billion euros given on the day after the Sept. 11 terror attacks. The ECB made three similar offerings in the days through Aug. 14. However, in a harbinger of the difficulties it would face in the coming years, the ECB’s would be hampered by an incomplete currency zone weighed down by infighting and paralysis. Ironically, just days earlier then presidents of the ECB, Jean-Claude Trichet, and BOE, Mervyn King, had their own "subprime is contained" moment: Trichet had warned of a repricing of risks since 2005, but in the summer of 2007, he didn’t heed the signs of trouble, and neither did his peers. Just one week earlier, the Frenchman had summoned the press to an impromptu briefing to telegraph that an interest-rate increase was imminent. Mervyn King, Bank of England governor at the time, was also sanguine, declaring on the day before the market turmoil struck: “So far what we have seen is not a threat to the financial system,” he said. “It’s not an international financial crisis.” It was - and it turned out to be the biggest international financial crisis in history. And Looking back exactly one decade later at what this day unleashed, James Nixon a former economist at the central bank, who now works for Oxford Economics in London said that “the ECB has literally thrown the kitchen sink at the crisis,” adding that “they are deep, deep into non-standard monetary policy, and getting back from there is a process that’s going to take a decade. It’s going to be extraordinarily protracted.” One look at the chart below shows how deep inside bizarro world the central bank with the negative interest rates has gone: For those traders who were active at the time, and who enjoy visual trips down the memory hole, here are ten charts from Goldman recapping the ten years of the crisis: * * * Ten years on, Bloomberg adds, as the world’s central banks slowly unwind the unprecedented stimulus their economies came to rely on, the ECB is a different institution... or so it would like to believe. Policy makers of the old school have been replaced by a new generation, Trichet’s insistence to never pre-commit gave way to Draghi’s forward guidance, and the Governing Council’s remit was expanded to include banking supervision. Draghi, who took over the ECB baton from Trichet in late 2011, may signal his future course of policy in Jackson Hole, Wyoming, where he will attend the Fed’s annual symposium on Aug. 24-26. Looking optimistically ahead, "with the recovery finally holding up after years of stimulus and hard-fought economic reforms", Bloomberg writes that central bankers have started to contemplate a return to more normal policies. One of many milestones on that path is expected in the fall, when ECB President Mario Draghi may offer an outline of a gradual exit from a 2.3 trillion euro bond-buying plan. This will take place at a time when the market is habituated to not only ultra-low interest rates, but over $10 trillion in asset purchases by central banks over the past decade. Whether it will work remains to be seen. And while we wait for the climax to the greatest monetary experiment in human history, Jim Reid notes that one of the great ironies of the period since is that returns in major global assets have been very healthy albeit with some major exceptions. Of the 38 major global assets we usually track for this purpose 27 are higher and 11 lower in dollar adjusted terms. Top of the pack is the S&P 500 (+106%) followed by US HY (+95%) and Gold (87%). Other DM fixed income markets are generally in the 35%-80% range. The Dax (+38%) leads the way in an underperforming European equity story. The Stoxx 600 is up 22% and the FTSE 100 only 12% higher in Dollar terms largely due to a 36% fall in Sterling over the period. Of the 11 assets that has seen negative dollar returns over the last 10 years the highlights are Greek equities (-82%), Stoxx Euro Banks (-54%), Portuguese equities (-42%), the CRB commodity index (-42%), Italian equities (-33%), and Oil (-32%). EM equities were up 29% but Chinese (-2%), Brazilian (-26%) and Russian (-32%) bourses were selective under-performers. Ironically, as even Deutsche Bank admits, while there has - so far - been little economic impact from this unprecedented decade of central bank interventions, with central banks lamenting daily the lack of (wage) inflation, so critical to erase the record $217 trillion in global debt... ... this unprecedented takeover of capital markets by central planners has led to record asset price inflation over the last decade, even if it hasn't been universally seen across the board. "There have been clear winners and losers" Jim Reid notes, and asks "were you the one who during late afternoon on August 8th 2007 decided to switch out of their portfolio of Greek equities to buy the S&P 500 and then go on a 10 year sabbatical? If you were then I have nothing but respect, admiration and jealousy towards you. If you did the reverse trade then I suspect you might not be reading this now but you have my sympathies!!" Finally, when previewing the question of what we will be writing about on August 9, 2027, the jury is still out: as UBS chief European economist Reinhard Cluse writes, “If you look at all the pain which the ECB had in rolling out these facilities - the crises, the politics, the time it took them to start QE - perhaps this was also necessary in the ECB’s growing-up process. But now that these policy tools have been invented and implemented, the effect could be that in the future - even after having normalized - we will reach for these instruments again and that they might not have been as extraordinary as we once believed them to be.” Reach for them we will, and if this time they fail to achieve the same "stabilizing" results which have come at a tremendous cost to efficient markets, then our expectation that we will be writing on this day ten years from today, may prove to be overly optimistic...
US futures are set for a sharply lower open (at least in recent market terms) following a steep decline in European stocks and a selloff in Asian shares, following yesterday's sharp escalation in the war of words between the U.S. and North Korea. In a broad risk-off move U.S. Treasuries rose, the VIX surged above 12 overnight, while German bund futures climbed to the highest level in six weeks. The Swiss franc gained 1.2 percent to 1.1320 per euro its biggest daily advance since February 2015, while the yen surged as much as 0.8% against per euro, its strongest level in three weeks while gold rose. "Trump's comments about North Korea have created nervousness and the fear is if the President really means what he said: "fire and fury"," said Naeem Aslam, chief market analyst at Think Markets in London. "The typical text book trade is that investors rush for safe havens." Gold was headed for it’s largest gain this month while the yen and Swiss franc were the biggest advancers among G-10 currencies after President Donald Trump ratcheted up his rhetoric against North Korea. Treasuries and most European government bonds climbed amid the shift to safer assets, while almost every sector of the Stoxx Europe 600 Index fell and emerging markets equities were poised for the biggest drop since June 15. The rand extended losses after South Africa’s president survived a no-confidence vote. Earlier on Tuesday, volatility from the U.S. to Japan rose after Trump said in response to a Washington Post report on North Korea’s nuclear capabilities that further threats from the country would be met with “fire and fury.” North Korea said it’s examining an operational plan for firing a ballistic missile toward Guam. The VIX jumped above the 200-DMA as equity markets continuously push lower. The financial sector lagged, while defensive healthcare sector outperforms; gold and crude were supported in tandem. The heightened geopolitical tensions between the US and North Korea dampened global risk sentiment, which snapped the DJIA's streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of "fire and fury", which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. “Trump in his reactions is something new for all of us,” Geraldine Sundstrom, portfolio manager at Pimco Europe, said in an interview on Bloomberg TV. “Given the nature of the threats, given the players are new, it makes the situation a little bit unusual,” said Sundstrom, who recommended safe haven trades and minimizing risks through duration. As a result, global assets have slumped in a "classic, risk-off reaction" as Bloomberg puts it. The MSCI EM Asia Index of shares slid the most in a month. “We’re seeing a bit of risk aversion due to concerns over North Korea,” said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore. “Besides the geopolitics, the market will also be focused on the Friday’s U.S. CPI print and what clues that might give us on the path for inflation.” The Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY. The Nikkei Stock Average Volatility Index soared as much as 38%, most since August 2015, with the VNKY Index closing +24% at 16.00. The Korean KOSPI (-1.1%) was also, so to say, "weighed down" by the increased threat of nuclear war. In retrospect, that the South Korean market dipped just over 1% on the prospect of a mushroom cloud, is rather impressive. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. Elsewhere, the Stoxx Europe 600 Index declined 0.6 percent as of 9:54 a.m. in London, the largest drop in more than a week on a closing basis. The U.K.’s FTSE 100 Index declined 0.6 percent, the first retreat in a week. Germany’s DAX Index sank 1.2 percent in the biggest tumble in almost three weeks. Futures on the S&P 500 Index sank 0.4 percent, the largest decrease in almost five weeks. The MSCI Emerging Market Index sank 0.9 percent, the biggest dip in almost eight weeks. "Heightened geopolitical risks overnight have seen the markets flip from risk-on to risk-off and we have to wait and see how long this move runs before adding some positions," said Viraj Patel, an FX strategist at ING in London. In overnight FX trading, risk aversion dominated trading as the Swiss franc and the yen led gains among Group-of-10 currencies, while the dollar index steadied as EM currencies halted a three-day rally. The yen appreciated as much as 0.8 percent to 128.61 per euro, its strongest level in three weeks. During previous occasions of political turmoil between the U.S. and North Korea, the Japanese currency over performed, yet the Swiss franc’s sharp decline in the past two weeks made for stretched positioning versus the euro, resulting in a bigger gain. The Australian dollar and New Zealand dollar both weakened. South Korea’s won fell to a three-week low amid heightened geopolitical tensions over North Korea. CNH and CNY both rally through 6.70/USD, highest since October 2016 after another stronger PBOC fixing. Core fixed income gains sharply, curves bull flatten with heavy volume noted in USTs. VIX jumps above 200-DMA as equity markets continuously push lower. Financial sector lags, while defensive healthcare sector outperforms; gold and crude supported in tandem. Some remain skeptically optimistic: at the moment the tensions increasing around North Korea’s nuclear weapons program does remain an “exchange of rhetoric,” and under normal expectations it’s difficult to think that any “real action” will be taken from here, says Takuya Yamada, a senior money manager in Tokyo. •If something actually happens, it won’t be surprising to see the market fall 5%, 10% in no time at all. However investors are aware of the fact that if North Korea takes action it will mean self- destruction, so their premise is that this is merely “trash talking.” "We've had some competing forces play out over the past 12 hours - the U.S. dollar was stronger off economic data, but that was quickly reversed with President Trump's comments about North Korea earlier today (Wednesday)," said ANZ analyst Daniel Hynes. In rates, the yield on 10-year Treasuries decreased two basis points to 2.24 percent. Germany’s 10-year yield declined four basis points to 0.44 percent, the lowest in six weeks. Britain’s 10-year yield fell four basis points to 1.117 percent, the lowest in six weeks. France’s 10-year yield dipped three basis points to 0.73 percent. In commodities, gold gained 0.6 percent to $1,267.99 an ounce, heading for the biggest one-day increase since July 28. West Texas Intermediate crude climbed 0.4 percent to $49.36 a barrel. Looking at the day ahead, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox. Market Snapshot S&P 500 futures down 0.4% to 2,463 MSCI Asia down 0.4% to 160.58 MSCI Asia ex-Japan down 0.6% to 528.93 STOXX Europe 600 down 0.8% to 379.60 Nikkei down 1.3% to 19,738.71 Topix down 1.1% to 1,617.90 Hang Seng Index down 0.4% to 27,757.09 Shanghai Composite down 0.2% to 3,275.57 Sensex down 0.5% to 31,859.44 Australia S&P/ASX 200 up 0.4% to 5,765.66 Kospi down 1.1% to 2,368.39 German 10Y yield fell 3.7 bps to 0.437% Euro down 0.2% to 1.1730 per US$ Brent Futures up 0.02% to $52.15/bbl US 10Y yield fell 2 bps to 2.24% Italian 10Y yield rose 1.1 bps to 1.714% Spanish 10Y yield fell 4.3 bps to 1.411% Brent Futures up 0.02% to $52.15/bbl Gold spot up 0.6% to $1,268.77 U.S. Dollar Index down 0.03% to 93.62 Top Overnight News President Donald Trump’s threat to hit North Korea with “fire and fury” jolted markets from New York to Seoul even as U.S. lawmakers questioned the president’s willingness to back up the heated rhetoric N. Korea can strike before any U.S. pre-emptive attack; considering firing ballistic missiles “at areas around Guam” where U.S. strategic bombers are stationed: KCNA Trump’s presidential campaign, his son Donald Trump Jr. and former campaign manager Paul Manafort have started turning over documents to the Senate Judiciary Committee as part of the panel’s expanded investigation of Russian election- meddling South African President Jacob Zuma narrowly overcame a bid by opposition parties to topple him through a no-confidence motion in parliament. The real loser may be his own party, the African National Congress Morgan Stanley beat Goldman Sachs Group Inc. to become the most profitable foreign securities firm in Japan last fiscal year after it boosted structured-product sales and managed the two biggest initial public offerings BOE Agents’ Summary of Business Conditions: some manufacturers reported that initial pass-through of weaker sterling near completion Italian June Industrial Production m/m: +1.1% vs +0.2% est. China July CPI y/y: 1.4% vs 1.5% est; PPI 5.5% vs 5.6% est. API inventories according to people familiar w/ data: Crude -7.8m; Cushing +0.3m; Gasoline +1.5m; Distillates -0.2m Disney’s Iger Sees a Future Without Netflix, Comcast or DirecTV Goldman Sells U.K. Insurer Stake to GIC, Blackstone, MassMutual Canada Mulls Nicotine Cut as New Front Opens Against Smoking British American Tobacco Is Said to Extend Debt Binge in Europe New iPhone Models Are Said to Enter Mass Production: DigiTimes U.S. FDA Is Said to Issue Form 483 to Baxter Ahmedabad Site: CNBC Fox Is Said to Have Declined to Settle Suits for $60M: NYT Novo Sees Price of Insulin in U.S Dropping Again Next Year Ford Repairs Over 50 Police Units on Carbon Monoxide Concerns In Asia, increased geopolitical tensions after a war of words between US and North Korea dampened global risk sentiment, which ensured the DJIA snapped a 9-day streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of fire and fury, which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY, while KOSPI (-1.1%) was also weighed on by the increased threat of nuclear war. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. RBA Assistant Governor Kent states that fixed-income funding is available at favourable rates and that banks' use of wholesale debt is much lower than a few years ago. Further stating that AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. South Korea Finance Minister sees limited risk impact on markets from North Korea. Chinese CPI (Jul) M/M 0.1% vs. Exp. 0.2% (Prey. - 0.2%) Chinese PPI (Jul) Y/Y 5.5% vs. Exp. 5.6% (Prey. 5.5%) Chinese CPI (Jul) Y/Y 1.4% vs. Exp. 1.5% (Prey. 1.5%) Top Asian News Morgan Stanley Tops Goldman Sachs With Biggest Profit in Japan S. Korea Official Says Tension High, But Not A Crisis: Yonhap Markets on Edge in Seoul as Trump Escalates North Korea Warnings China Remains Inflation Backstop as Mills and Smelters Close India Is Said to Tweak HPCL Share Sale Terms to Skip Open Offer Gold Imports by India Are Said to Have More Than Doubled in July Wharf Soars to Highest Since ’86 on $29 Billion Spinoff Plan Abu Dhabi’s FAB Is Said to Appoint Pant International FIG Head In European bourses, the selling persisted across virtually all markets with Trump's comments in North American trade has been the catalyst for the selling pressure seen in Global equities. US President Trump warned North Korea that a US response to any threats would be 'fire and fury the likes of which the world has never seen'. Comments followed from North Korea, with the state media stating that the US war hysteria will bring a miserable end, and also warns of operation on signs of US provocation, further saying that they are seriously mulling striking Guam. Adding to the downbeat was rather subdued inflation figures out of China. EGB yields falling to the lows amid the aforementioned escalating tensions between the US and North Korea. Peripheral bonds wider by around lbps against the German benchmark. Elsewhere, BATs have begun marketing form their multi-currency (GBP, EUR) 5 tranche after yesterday's chunky USD-denominated 8 part. Technically uncovered German Bobl auction. Top European News Brexit Will Strain BOE’s Supervisory Resources, PRA’s Woods Says Italy Industrial Production Jumps, Pointing to Faster Recovery ABN Amro Bolsters Capital as Dutch Growth Drives Profit Rise Carl Zeiss Meditec Slides as Valeant Shuts Door on Target Assets Ahold Delhaize Boosts Synergy Goal as Competition Concerns Grow Russia Readies $4 Billion Eurobond Swap in Face of Sanctions EON Plots Growth Strategy as Profit Rebounds, Debt Falls Santander Sells Control of Popular Real Estate to Blackstone In currencies, the initial mover following the exchange from the USA and North Korea was USD/JPY, breaking through August's low, however finding some bids just below this 109.80 level. USD/CHF saw similar price action, attempting to test August's low around 0.9650. Traffic was clear at these levels, becoming key support in the pair, with bids clearly stacked around 0.9650. Sterling saw some early bullish pressure this morning, as cable broke 1.30 to the upside, with GBP/USD struggling to find any real direction as Brexit concerns continue. EUR/GBP saw some selling, however, failed to attempt to test 0.90 as bids are evident ahead of this key psychological level. The geopolitical uncertainties between Australia and China did cause some suffering of AUD, as AUD/NZD fell from 1.08, further weight was put on the currency with Central bank commentary from the RBA, as Kent said AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. In commodities, safe haven flow supporting precious metals with Gold prices up a modest 0.6%, while crude prices have recoup from yesterday's lows following last night's large drawdown in the API report. Saudi and Iraqi oil ministers are to hold a joint press conference on Thursday in an attempt to stabilise oil markets. US Event Calendar 7am: MBA Mortgage Applications, prior -2.8% 8:30am: Nonfarm Productivity, est. 0.7%, prior 0.0%; Unit Labor Costs, est. 1.1%, prior 2.2% 10am: Wholesale Trade Sales MoM, est. 0.0%, prior -0.5%; Wholesale Inventories MoM, est. 0.6%, prior 0.6% DB's Jim Reid concludes the overnight wrap A bit more going on in the last 12 hours with Trump inflaming already elevated tensions between the US and North Korea late in yesterday's session and this morning we have seen Chinese inflation numbers. If that’s not enough today is a special financial crisis anniversary. More on that later but first to China. China’s July PPI was up 5.5% yoy, but a tad softer than expectations of 5.6% (5.5% previous), the National Bureau of statistics noted mom producer price growth turned positive on the back of steel and non-ferrous metal price rebounds, with ~50% of the industrial sectors seeing price gains in July. CPI was up 1.4% yoy in July (vs. 1.5% expected; 1.5% previous) with food costs decline partly offsetting gains in other consumer goods. Focus remains on the extent of economic growth in 2H, as China’s policy makers had previously indicated a preference for slower growth This morning in Asia, markets are sharply lower on the back of the North Korea story rather than the above inflation numbers. The Nikkei is -1.2%, the Kospi down -0.8%, the Hang Seng -0.8% with Chinese bourses ranging from -0.2% to +0.1%. The Korean won has also dipped 0.5% against the USD. This follows another soporific session yesterday, albeit one that awoke from its slumber in the last hour of trading following defiant comments from Mr Trump concerning North Korea. As per Bloomberg, he said the country would be "met with fire and fury and, frankly, power the likes of which the world has never seen before" if it continues to threaten the US. The VIX spiked from 9.54 just after Europe went home and around 10 when the comments were reported to a peak of 11.29 with 30mins left in the session before closing at 10.96. However even with the late shake-up the S&P 500 only lost around 0.4% after the news and (closed -0.24%) extending the record closing run of sub 0.3% moves in either direction to 14 days. Remember this record covers 90 years of daily data with the previous record being 10 days without a bigger move. Trading volumes in the S&P were again very thin, with the daily value traded at 0.15% of the index market cap, which is ~45% of the historical average. Elsewhere, the Dow dipped 0.2%, with Trump’s comments helping to break a run of 8 consecutive days of fresh all-time highs. Staying with Trump, an earlier article by the Washington post suggested North Korea’s nuclear capabilities may be more advanced than prior expectations. According to US intelligence reports the state: i) can now produce small nuclear warheads that fit inside its missiles, ii) is outpacing expectations in building missiles that are capable of striking the US mainland, and that iii) the state may have up to 60 nuke warheads, this compares to ~7,000 each in US / Russia, 260 in China and 215 in the UK. These reports coupled with increased rhetoric from Pyongyang and a flat refusal to negotiate on their nuclear program may have added to Trump’s fury. Senator McCain said Trump needs to be more cautious in his statements because he may not be able to make good on the implied threats. For now, we watch and wait. Before we review the rest of the last 24 hours, from the prospective of a research analyst that has to write something about financial markets every day, 2017 and 2018 are a great source of ongoing material given the regular 10 year financial crisis anniversaries that we'll see. Today is one of those such days as we mark a decade to the day that money markets started to seize up thus requiring heavily coordinated central bank action that marked an extraordinary period of central bank activity that is still in full flow today. The announcement by BNP Paribas that they were closing three funds linked to US mortgages was the catalyst for a complete lack of trust in money markets over the coming days and weeks. Just over a month later we had the bank run on Northern Rock. As an example of the impact BNP's announcement had, 3 month dollar Libor hadn't moved all year but over the course of two days spiked 20bps. Not a great deal but on this day 10 years ago all the major central banks were forced to inject liquidity with the ECB doing so for the first time since 9/11. One of the great ironies of the period since is that returns in major global assets have been very healthy albeit with some major exceptions. Of the 38 major global assets we usually track for this purpose 27 are higher and 11 lower in dollar adjusted terms. Top of the pack is the S&P 500 (+106%) followed by US HY (+95%) and Gold (87%). Other DM fixed income markets are generally in the 35%-80% range. The Dax (+38%) leads the way in an underperforming European equity story. The Stoxx 600 is up 22% and the FTSE 100 only 12% higher in Dollar terms largely due to a 36% fall in Sterling over the period. Of the 11 assets that has seen negative dollar returns over the last 10 years the highlights are Greek equities (-82%), Stoxx Euro Banks (-54%), Portuguese equities (-42%), the CRB commodity index (-42%), Italian equities (-33%), and Oil (-32%). EM equities were up 29% but Chinese (-2%), Brazilian (-26%) and Russian (-32%) bourses were selective under-performers. So the huge intervention and general asset price inflation over the last decade hasn't been universally seen across the board. There have been clear winners and losers. Were you the one who during late afternoon on August 8th 2007 decided to switch out of their portfolio of Greek equities to buy the S&P 500 and then go on a 10 year sabbatical? If you were then I have nothing but respect, admiration and jealousy towards you. If you did the reverse trade then I suspect you might not be reading this now but you have my sympathies!! Back to the market’s performance, US bourses all softened ~0.2% overnight. Within the S&P, only the utilities sector was up (+0.3%), while the materials (-0.9%) and Telco sector dipped the most. After the bell, Disney traded ~4% down post its result on softer revenue trends and has said it will stop selling movies to Netflix. Back in Europe, markets broadly strengthened. The Stoxx 600 gained 0.2%, aided by the softer Euro and advances in the utilities sector (+0.6%). Regional indices were also slightly up, with the DAX (+0.3%), FTSE 100 (+0.1%), CAC (+0.2%) and FTSE MIB (+0.1%). Over in government bonds, yields were modestly higher across maturities, with the bunds (2Y: +2bp; 10Y: +2bps), Gilts (2Y: +2bp; 10Y: +2bps) and OATs (2Y: +2bps; 10Y: +2bps) all up ~2bp at the long end of the curve, while Italian BTPs (2Y: unch; 10Y: +1bp) ticked up a bit less. The UST 10Y has dipped overnight (2Y: -1bp; 10Y: -1bp) after yields rose 2-3bps yesterday. PPI/CPI data tomorrow and Friday will be key though for global yields. Currencies were little changed, the US dollar index gained 0.2%, while the Euro/ USD fell 0.4% and the sterling dipped 0.3%. Elsewhere, the Euro/Sterling was broadly flat. In commodities, WTI oil retreated 0.4%, with the EIA increasing its US output forecasts and OPEC noting they had fruitful talks and agreement on compliance (but likely shy of tangible takeaways the market may be hoping for). Elsewhere, precious metals were slightly up (Gold +0.5%; Silver 0.7%) and aluminium increased 5% following reports of China increasing efforts to curtail illegal or polluting capacity. Agricultural commodities were fairly mixed but little changed, with cotton (+0.8%), coffee (+0.5%), soybeans (flat), corn (-0.1%), wheat (-0.2%), and sugar (-0.6%). Away from the markets, Republicans are discussing some kind of compromise to get the tax reforms through, potentially involving a hybrid approach that include permanent tax revisions with temporary cuts for individuals and business. House Speaker Ryan is said to be more resistant to the idea, preferring for corporate tax rate cuts to be permanent. Back in April, the plan was for corporate tax rate to be cut from 35% to 15% and individual tax rates to be reduced from 7 bands to 3, with the top rate down from 39.6% to 35%. Elsewhere, the US treasury's $24bn three-year note sale drew a yield of 1.52%, with a bid-to-cover ratio of 3.13, the highest since December 2015. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the JOLTS survey reported a record 6.163m job openings in June (vs. 5.75m expected), which should partly support the state of US labour demand. Elsewhere, the July NFIB small business optimism index was higher than expectations at 105.2 (vs. 103.5 expected), the best reading since February. In Europe, June trade reports in both German and France were a bit weaker than market expectations. Germany’s June export posted a -2.8% mom (vs. 0.2% expected) and imports at -4.5% (vs. 0.2% expected). However, despite these declines, exports were still solid on an annual basis, up 5.7% yoy and imports up 6.9% yoy. French’s trade deficit also widened in June, as a 2.8% mom decline in exports dominated a 2.0% mom decline in imports. Elsewhere, Spain’s home sales rose 19.0% yoy in June. Looking at the day ahead, Bank of France’s July business sentiment indicator (103 expected) will be out early in the morning, followed by Italy’s June industrial production data (0.2% mom and 3.4% yoy expected). Over in the US, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox.
Курс евро достигается максимумов с января 2015 относительно курсов ведущих торговых партнеров. Что вообще происходит с Еврозоне и с политикой ЕЦБ?С декабря 2014 действия ЕЦБ характеризуются чрезвычайно агрессивными действиями на открытом рынке по скупке всего, что «к полу не приколочено». За это время на баланс ЕЦБ пришло свыше 1.9 трлн евро активов. Интенсивность операция ЕЦБ сопоставима с периодом наибольшего свирепства ФРС США.В дополнение к этому, ЕЦБ понизил ставку до отрицательного значения в июне 2014 и усилил до минус 0.4% в марте 2016Так что же скупает ЕЦБ и какие программы?Corporate sector purchase programme – выкуп корпоративных облигаций со сроком погашения от 6-месяцев до 30-лет инвестиционного класса нефинансовых компаний, созданных в зоне евро. Программа действует с июня 2016. На 14 июля 2017 объем покупок корпоративных облигаций составил 100 млрд евро. В среднем ежемесячно скупают 7.5 млрд евро корпоративных бондов.История покупок отражена ниже.Covered bond purchase programme – Выкуп покрытых активами облигаций эмитентов Еврозоны. Оценочная стоимость всех покрытых активами облигаций составляет около 3 трлн евро для всех евро эмитентов. Со стороны ЕЦБ в период с октября 2014 выкуплено на 14 июля 2017 224 млрд евро.Средние темпы покупок имеют затухающую тенденцию: в 4 квартале 2014 были 12.5 млрд евро в месяц, в 2015 году 9.5 млрд евро, в 2016 году 5.5 млрд евро, а в 2017 чуть больше 3 млрд.ЕЦБ устанавливает лимит до 70% владения на совокупный объем эмиссии каждой конкретной облигации эмитента в рамках покрытых облигаций. Однако нет лимитов на дюрацию облигации и объем эмиссии.Asset-backed securities purchase programme – выкуп структурированных продуктов/деривативов, обеспеченных активами. Также, как и с покрытыми облигациями, лимит на транш составляет 70% В отличие от облигаций, объем выкупа смехотворный, хотя программа действует с ноября 2014. К июлю 2017 всего лишь 24.2 млрд евро, при этом с июня 2016 интенсивность покупок резко снизилась в среднем до 300 млн евро в месяц.Public sector purchase programme – основная программа ЕЦБ, через которую проходит прокачка ликвидности. Это выкуп государственных облигаций стран Еврозоны. Начало действия программы – март 2015. В первый год работы программы выкуп активов достигал 50 млрд евро в месяц, с апреля 2016 по конец 2016 резко вырос до 70 млрд, а в 2017 составляет 61 млрд, при этом с апреля 2017 объем выкупа балансирует около 50 млрд евро в месяц. Совокупный выкуп составил 1.64 трлн евро! Сведение для всех программ:С кумулятивным эффектом выходит почти 2 трлн евро для всех программ, из которых 1.64 трлн приходится на выкуп государственных облигаций.Период наибольшего обострения и агрессивности у ЕЦБ по скупке активов пришелся на апрель 2016-ноябрь 2016 – тогда скупали почти по 82 млрд евро в месяц, сейчас спустились до среднего уровня в 60 млрд евро, т.е. это под 720 млрд евро годовых.ЕЦБ планирует скупать активы, как минимум до декабря 2017, а это еще 350-380 млрд евро в рынок. Таким образом, вся программа QE от ЕЦБ может превысить 2.3 трлн евро. Для сравнения, все фазы QE от ФРС составили 3.7 трлн долларов или 3.3 трлн от равновесного уровня активов 2007 года. ЕЦБ вышел на рынок через неделю после того, как ФРС завершил свои «эпохальные» QE. Принцип согласованной эмиссии в новой нормальности заключается в том, что поступление ликвидности от ЦБ мира должно идти бесперебойно и перманентно. Как только заканчивает ФРС, начинает ЕЦБ и/или Банк Японии и наоборот.Баланс ЕЦБ достиг 4.2 трлн евроРаньше основным источников фондирования контрагентов в еврозоне были кредиты, теперь ЕЦБ перешел к современной практике - скупке активов.Структура баланса ЕЦБУчитывая, что инфляция в Еврозоне уже подходит к 2%, а финансовая и макроэкономическая ситуации остаются стабильными, мотивов для расширения или даже для сохранения программы не так много. А это значит, что как это бывает в новой нормальности, рынком и первичными дилерами будут создаваться соответствующие условия, стимулирующие ЕЦБ и другие центральные банки к продолжению монетарного безумия.Что касается курса евро, то 1.15 является избыточным, приняв во внимание сопоставление баланса ЕЦБ и ФРС, дифференциал процентных ставок и трансграничные потоки капитала. Отсюда следует евро продавать. Что касается курса валют, то это в продолжении обзора центральных банков (планирую рассмотреть остальных безумцев).
Мягкость без конца: Марио Драги рассказал, что обсуждалось на заседании ЕЦБ. И что не обсуждалось: точное время сворачивания программы количественного смягчения. Сэкономили на дебатах: Трамп и Клинтон рассказали, как их экономические программы сберегут для страны деньги и обеспечат рост. Это, конечно, на словах. $55 за баррель: столько будет стоить нефть по мнению Игоря Сечина. Очень похожие цифры накануне озвучил министр нефти Саудовской Аравии Халид Аль Фалих. Совпадение?
Андрей Клепач предположил, что при нефти за 50 долларов, сам доллар будет стоить 50 рублей. Или, как говорится, бабушка надвое сказала? С протоколами прокол: ЕЦБ опубликовал "минутки" с последнего заседания. Никаких намеков на сворачивание программы смягчения в них нет. 15 миллиардов долларов на ветер: во столько оценили потенциальный урон от урагана "Мэтью". Он уже потрепал Гаити и повернул к Флориде.
Zerohedge.com: Йеллен говорит, что скупка акций – это “хорошая вещь, о которой стоит подумать”, и эта мера может помочь в случае рецессии
Намекнув прошлым вечером о том, что “возможно, в будущем” Федрезерв мог бы начать скупать акции, Джанет Йеллен опять проболталась, подтвердив, что Федрезерв рассматривает возможность скупки прочих активов, помимо долгосрочного долга США. Несмотря на полный и оглушительный провал политики Национального банка… читать далее → Запись Zerohedge.com: Йеллен говорит, что скупка акций – это “хорошая вещь, о которой стоит подумать”, и эта мера может помочь в случае рецессии впервые появилась .
Прошло уже 16 месяцев с тех пор, как в марте 2015 года Европейский Центральный банк начал свое путешествие в неведомое. Как пишет Financial Times, эта неделя стала вехой в истории монетарной политики, поскольку с момента начала QE покупки со стороны… читать далее → Запись Zerohedge.com: Один триллион евро потрачен, и вот чем может похвастаться Драги впервые появилась .
Концепция согласованной эмиссии проста – как только один из ведущих ЦБ заканчивает фазу расширения активов, то эстафету подхватывает другой ЦБ. Это цикл повторяется до бесконечности. Работает исправно, без сбоев. Концепция согласованной эмиссии не только закрывает кассовые разрывы в фин.секторе, помогает покрывать потребность в финансировании дефицитов государственных бюджетов , но и поддерживает активы от обрушения, также демпфирует процессы делевереджа. Ни к какому стимулированию экономического роста, очевидно, все это не имеет ни малейшего отношения, по крайней мере напрямую.Причем механизмы кросс финансирования и трансграничной катализации денежных потоков настолько сильно развились в последнее время, что эмиссия одного из ведущих ЦБ может закрывать гэпы в ликвидности и сдерживать обрушение активов в другой стране. Например, QE от ФРС с осени 2012 по октябрь 2014 не только насыщало балансы контрагентов в пределах США, но и способствовало насыщению в Европе и частично в Японии. Другими словами, QE от ФРС, как прямо, так и косвенно по различным финансовым каналам поддерживало балансы европейских структур. Это же применимо с небольшими отличиями к ЕЦБ.С осени 2008 балансы четырех ведущих ЦБ (ФРС, ЕЦБ, Банк Японии и Банк Англии) выросли в три раза с 4.2 трлн долларов до 12.8.До кризиса среднее значение было 3.4 трлн. Вне всяких сомнений происходящие процессы уникальны и не имеют аналогов в истории. Степень концентрации центральной ликвидности в балансах негосударственных финансовых контрагентов рекордная.С марта 2015 совокупные балансы увеличились без малого на 3 трлн долларов. Для сравнения, в кризис 2008-2009 совокупный прирост активов ЦБ составил 2.5 трлн. С осени 2010 по осень 2014 еще +3 трлн. Как видно текущие темы эмиссии с точки зрения интенсивности, так и абсолютного значения - рекордные. Активно работают ЦБ Японии и ЕЦБ, тогда как раньше системы насыщал в основном ФРС.Когда-то мы обсуждали, что QE2 на 600 млрд от ФРС невероятен, но кто бы мог подумать, что во-первых, это только начало, а во-вторых, эмиссия вырастет в разы.Кстати, расширение баланса Банка Японии столь велико, что уже к осени 2016 они превзойдут баланс ФРС!Первая фаза расширения началась с ФРС осенью 2010 и закончилась в мае 2011, через несколько месяцев подключился ЕЦБ с их LTRO. Вторая фаза расширения началась также с ФРС осенью 2012 и продолжалась до октября 2014. С марта 2013 в работу вступил Банк Японии и последовательно разгонял темпы эмиссии. Как только ФРС закончил, то начали ЕЦБ, практически сразу - с 2015. Сейчас япоцны держат свыше 420 трлн иен активов, у Банка Англии около 350 млрд фунтов, у ФРС около 4.2 трлн долларов, а ЕЦБ нарастил баланс свыше 1 трлн евро за 1.5 года до исторического максимума - 3.15 трлн евро.ПО формальным критериям система пока устойчива:Активы на долговых и фондовых рынках на исторических максимумахПравительства имеют возможность беспрепятственного финансирования дефицита бюджета, как по причине радикального снижения потребности в финансировании, так и из-за высокого профицита ликвидности в системеИм пока удается удерживать инфляцию около нуляТакже им удается эффективно депревировать стоимость драгоценных металловВалютный рынок в целом стабильный, особых потрясений не наблюдаетсяСпрэды на денежных и долговых рынках прижаты к нулю, что свидетельствует о высоком доверии контрагентов между собой и доступности кросс финансированияСтоимость CDS также находится на многолетних минимумах, что показывает отсутствие закладывания премии за риск и отсутствие среднесрочного опасения за стоимость активов и устойчивость системыЗа счет манипуляции с отчетностью, скрытого финансирования проблемных банков и искусственной поддержки активов удается держать большинство зомби банков – банкротов на плаву.По сути, все сводится к согласованной эмиссии, к отключению обратных связей, что позволяет по предварительному сговору между ЦБ и крупнейшими операторами торгов вмешиваться в ценообразование активов, задавая нужные границы при помощи прямой манипуляции и информационному прикрытию через ручные СМИ. Тактика с 2008 сменилась радикально. Если раньше все проблемы так или иначе просачивались наружу, теперь решено замалчивать и кулуарно, тихо решать все, не привлекая общественное внимание, закрывая глаза даже на неприкрытые факты жульничества с отчетностью, особенно сейчас у европейских банков. Говоря иначе, решили тянуть время, вовремя закрывая разрывы ликвидности и поддерживая активы и банки на плаву.Сколько это продлится сказать сложно, потому что имеется лоббирование этой схемы на самом высоком уровне с прямым интересом от мировой элиты. Теоретически, это может продолжаться еще очень долго, потому что все острые углы оперативно сглаживаются. В отличие от 2008, сейчас никто не заинтересован грохать систему, ради перезагрузки. Тогда, напомню, ФРС с прайм дилерами намеренно грохнули Lehman Brothers, имея возможность его удержать, чтобы ребутнуть систему и оправдать перед общественностью беспрецедентную программу помощи банкам и QE. Это сейчас все стало таким привычным. Раньше были другие нравы ))
Предприниматель и колумнист vc.ru Иван Колыхалов написал материал о текущей ситуации на мировом финансовом рынке. По мнению Колыхалова, рынок близок к кризису и практически любое событие может спровоцировать обвал экономики. Кризис в Греции, Brexit, банковский кризис в Италии, отрицательные ставки доходности по государственным облигациям — всё это падающие доминошки одной последовательности. Последовательности начавшегося и активно идущего мирового финансового кризиса. И пусть вас не смущают растущие рынки на волне тут и там появляющихся новостей о развале финансовой и политической системы — этому есть одно совершенно чёткое объяснение: отчаянная попытка двух мировых центробанков (ЕЦБ и Банка Японии) любыми способами оттянуть катастрофу выкупая с рынка все что можно.
Одним из главных событий конца января стала 46-я сессия Всемирного экономического форума (ВЭФ), проходившая с 20 по 22 января в швейцарском Давосе. Основатель и бессменный руководитель Давосского форума швейцарский профессор Клаус Шваб только что издал свою книгу о «четвёртой промышленной революции» (The Fourth Industrial Revolution, by Klaus Schwab. World Economic Forum, 2016), название которой и послужило обозначением главной темы форума 2016 года: «Возглавляя...
На прошлой неделе Марио Драги пообещал к концу года ввести новые стимулы и снизить депозитную ставку еще дальше на отрицательную территорию. Рынок не только поверил, но и заложил это в цену облигаций. Но на этом приключения долгового рынка не закончились.
Так уж получилось, что медийное покрытие обеспечивается в сторону ФРС и ЕЦБ и в значительно меньшей степени Банка Японии. Но что с остальными странами и ЦБ? Кто там сколько накуралесил? Кто является основным поставщиком центральной ликвидности в мире?Будет правильнее сравнивать не активы ЦБ, а денежную базу, как непосредственно деньги, попавшие в банковскую систему. Далее я приведу сведенные данные по денежной базе крупнейших 50 валютных зон планеты, за исключением Ирана, Вьетнама и Норвегии, где данные либо неполные, либо не совсем корректные. Сортировка по размеру экономики за 2013-2014 по ППС. Данные достаточно уникальные и редкие, т.к. затрагивают страны Африки и Ближнего Востока + страны третьего мира в Азии. По ним информация получена от МВФ, по ведущим странам из нац.источников.Наибольшая денежная базы не в США, а в Китае.В долларовом выражении это 4.7 трлн, в США около 4 трлн, на третьем месте Япония – 2.5 трлн долл, в Еврозоне 1.7 трлн. Но тут же стоит пояснить. Впрыск в банковскую систему Китая происходит совершенно иначе, чем в США и Японии. Практически весь прирост активов ЦБ Китая и соответственно денежной базы Китая – это избыточный валютный приток в Китай (как по линии счета текущих операций, так и по линии финансовых операций), который конвертировался ЦБ Китая и перенаправлялся на формирование ЗВР Китая.В США и Японии с 2009 года на 99% прирост денежный базы формируется за счет необеспеченной эмиссии (попросту QE). В Еврозоне прирост денежной базы во время кризиса формировался через программы кредитования (LTRO и MRO) в 2009-2012, с конца прошлого года перешли на QE.Еще важный нюанс. Ликвидность, полученная банками Китая более, чем на 93% замыкается непосредственно внутри Китая, и примерно на 90% идет на различные кредитные схемы, в том числе непосредственное кредитование экономики Китая.В США все иначе. Практически все деньги, которые получены первичными дилерами от ФРС попали на финансовые рынки, как через выкуп государственного долга США (трежерис), так и через участие в принудительном раллировании активов на фондовом рынке. Плюс к этому, ликвидность от ФРС не концентрируется только в США и более того, далеко не только в долларах. Трансграничное проникновение QE от США очень высокое. Другими словами, деньги распределены в различных финансовых активах во многих странах мира. Трансграничное проникновение QE от Банка Японии весьма низкое. Почти все идет на внутренний рынок. У ЕЦБ структура распределения другая и больше похожа на модели, которые работают в США. У Банка Англии почти также, как в США.В России денежная база в 25 раз меньше, чем в США, Китае и примерно на уровне Бразилии.Оценочный объем денежной базы для ведущих 50 валютных зон составляет 16.5 трлн долл на май 2015, из которых 13.9 трлн приходится на 6 ЦБ - ЦБ Китая, ФРС, ЕЦБ, Банк Японии, Банк Англии и Швейцарский Нац.банк. Т.е. все остальные страны – это около 2.5 трлн.Удивительно, но масштаб кумулятивного QE от ФРС за 6 лет более, чем в 1.3 раза превышает СОВОКУПНУЮ денежную базу 42-44 валютных зон (не считая ЦБ перечисленные выше) и в 1.2 раза больше, чем активы ЦБ в этих 44 валютных зон. Чистое приращение долларовой ликвидности от ФРС за 6 лет более, чем в ТРИ раза больше, чем приращение активов ЦБ и денежной базы для 44 валютных зон. Это чтобы понимать масштабы QE.НЕ считая ТОП 6 ЦБ свыше 100 млрд денежной базы у ЦБ Индии, России, Бразилии , Кореи, Турции, Тайваня, Гонконга. Т.е 13 стран (ЦБ) или 11 стран, если Тайвань и Гонконг считать частью Китая.За 6 лет чистое приращение денежной базы в долларом выражении составляет почти 10 трлн долл. Основные поставщики ликвидности – это США + 3.1 трлн, Китай + 3.1 трлн, Япония + 1.7 трлн, Великобритания и Швейцария по 430-450 млрд, а ЕЦБ лишь 222 млрд, что обуславливается прежде всего сильным падением евро относительно уровней в 2008 году до кризиса. Т.е. свыше 9 трлн пришло от указанных ЦБ.Еще интересно, что свыше 2/3 глобальной денежной базы контролируется США, как прямо, так и косвенно.В таблице подробно указано, как изменялась денежная база от мая 2015 по сравнению к выбранным датам в млрд долл.За последний год деньги пришли в основном от Китая и Японии, при этом совокупная денежная база выросла на жалкие 264 млрд долл (из-за укрепления доллара).Если за точку сравнения брать май 2011, как момент перед отключением обратных связей на рынках и тотальной рассинхронизации , то 4.9 трлн поступило, из которых Китай + 1.6 трлн, США +1.4 трлн, Япония + 1.13 трлн.В национальной валюте все иначе.За последний год сократили ден.базу только Россия и Бразилия, если брать крупнейшие страны. Относительно России это выглядит полным идиотизмом, учитывая дефицит ликвидности в системе (в том числе по причине низких темпов роста денежной массы), инвестиционный голод и необходимость в рефинансировании внешних долгов. Но об этом в другой раз.У ЦБ Японии башню оторвало знатно. Плюс 80 трлн иен за год, 150 трлн за 2 года и почти 190 трлн иен за 3 года. Для сравнения, дефицит бюджета центрального правительства около 45-50 трлн. Т.е. масштаб эмиссии в разы больше, чем дефицит бюджета.Тоже самое, но в процентах.Среди ведущих стран за последние 3 года наиболее агрессивная эмиссия только в Японии. Еще стоит отметить, что в начале 2015 ЦБ Дании неплохо вжарил и ЦБ Швеции с QE активизировался.Изменение денежной базы за последние 13 лет в национальной валюте.Что я бы отметил?Свыше 90% глобальной центральной ликвидности формируют 6 ведущих ЦБ (Китай, ФРС, ЕЦБ, Банк Англии, Банк Японии и ШНБ).Почти 60% от глобальной денежной базы сосредоточено в Китае и СШАЦентральная ликвидность, генерируемая в Китае и Японии почти не выходит за пределы страны.Ликвидность от ФРС и Банка Англии имеет очень высокую трансграничную степень проникновения.Ликвидность от ФРС, ЕЦБ, Банка Англии и ШНБ на 90% идет на выкуп активов, монетизацию гос.долга и поддержку банков.Основные поставщики ликвидности за последний год – Китай и Япония.Основной поставщик ликвидности для абсорбации на фин.рынках раньше был ФРС, а теперь эстафету принял ЕЦБ.
О настоящем и обозримом будущем корреляции Денежной базы США, нефти и евро.Когда и как может возобновиться долговое производство?Обновлён исторический рекорд по сокращению Денежной базы США.Интерактивный графикПредыстория:Вопрос salomeya_69 от 2015-05-06:А доллар уже начал своё падение к евро?Последнюю неделю европейцы пошли как-то дружно в рост, какие на ваш взгляд причины?Ответ 2015-05-13:Фундаментальной причины для долгосрочного падения доллара пока нет.Чтобы брент и евро вернулись на позиции мая 2014 (годовой давности), приток ДБ США должен составить более +800 млрд к пред. году. Чтобы предполагать долгосрочный тренд падения доллара, сперва ДБ должна выйти хотя бы на +400 млрд г/г.ДБ публикуется только раз в неделю, порой с задержкой в 2-3 недели, поэтому по ней строить краткосрочные прогнозы никак невозможно. Среднесрок можно, т.к. ФРС объявляет о начале и сворачивании QE и худо-бедно публикует данные. Например, ЦБ РФ публикует только ежемесячную ДБ.Но есть не только QE - например, в любой четверг через бекдор могут протечь свопы на сотни млрд, чтобы прибить волатильность валютного рынка - тогда, прежде всего, упадёт корреляция между евро и брентом, которая в период янв.2014 - апр.2015 аж =0,93.Через месяц после сего предположения, 11 июня, таки появились свопы доллар-евро. См. Там нет никаких валютных войн - 3: коридор для евро в 2015-2016? Миллиарды не потребовались - хватило сотен млн, чтобы медведей проняло, несмотря на Греческую драму, - играть против связки ФРС-ЕЦБ нет смысла.Из диалога в день Греческой драмы/референдума, 2015-07-05 с siluetov:- Интересно евро скоро КАК откроется - сразу на 1,09 или ниже?- Может и свозят вниз, но к четвергу связка ФРС-ЕЦБ вынесет всех медведей, имхо.- Согласен. Шапито - это шапито, связка - это связка.Корреляция брент-евро не то что упала, а даже перевернулась на обратную - см. график. Причина смены корреляции с прямой на обратную заключена в поддержке евро долларом мимо валютного рынка - через бекдор валютных свопов ФРС-ЕЦБ.Японская иена получила ту же своп-поддержку долларом с первых дней 2015 года - низ коридора обозначился на 122, затем в конце мая свопы отключили - низ коридора опустился до 125,5 - затем тут же включили свопы - теперь третий месяц иена бьётся об 125 - в этом можно убедиться, сопоставив стабилизацию (коридор) иена-доллар с явлением и отключением одноимённых свопов. Во избежание ошибок важно знать: ФРС публикует таблицу всех свопов лишь неделю спустя. А ЕЦБ напротив - оперативно публикует сумму свопов в среду вечером - накануне выдачи, то есть накануне поступления долларов в открытый рынок.О настоящем и обозримом будущем корреляции ДБ, нефти и евро.1. До смены политики ФРС и при наличии свопа доллар-евро, корреляции пар ДБ-евро и брент-евро будут снижаться. Если свопы вдруг отключатся - прямая корреляция повысится опять до уровня R=0,9.2. Корреляция ДБ-брент будет продолжаться до объявления новой политики ФРС, как то:- навроде QE4;- повышение учётной ставки;- отмена процентов комбанкам от ФРС за избыточные резервы. По-прежнему уверен, проценты отменят прежде нового QE и/или повышения ставки. Подробнее см. Что нужно знать из заявления ФРС? Вероятнейший сигнал.3. При смене политики ФРС корреляция краткосрочно (месяц-два) разрушится, затем восстановится.4. Денежная база - это истинное количество подлинных денег в системе, а не долгов. В отличие от долгов, сие абсолютно управляемая вручную величина. Тем не менее, в уровне ДБ ФРС ориентируется не только на уровень безработицы и инфляции, но и на риски изменения оных - см. The Fed’s ‘Risk-Management’. А уровень инфляции-дефляции напрямую зависит от уровня цены энергоносителей.5. Нефть следует за ДБ с лагом в месяц-полтора. Снижение эмиссии г/г до нуля в дек 2014 отразилась снижением нефти в янв-2015 до 45 долл/барр. Затем, во второй половине дек-2014 ФРС резко переключилась на эмиссию +300 млрд г/г до начала февр-2015 - нефть следом выросла до 65. В начале марта-2015 ФРС провела первую рекордную за всю историю ремиссию ДБ - см. Рекордное сокращение денежной базы США - предполагалось, в марте-апреле вновь падение нефти до 45, но цена ограничилась снизу 52,5$ и так далее... 6. Исходя из п.п.4 и 5, исходя из предыдущего резкого включения эмиссии при цене Брент = 45$ (соответственно WTI за минусом спреда), можно предполагать, что Брент = 45$ является неким целевым уровнем для ФРС, при подходе к которому она будет вынуждена вновь переключиться на эмиссию с соответствующим ростом нефти и евро.7. Прямая корреляция ДБ и Брент может распасться и даже смениться на обратную в случае крупных военных действий в районах добычи и/или транзита нефти-газа. Но пока что спред Brent-WTI не превышает 10% от цены WTI... По предыдущим событиям периода 2010-2015, спред выше 20% однозначно указывает на вероятность войны и/или гос.переворотов. Подробнее см. Нефтяной спред - иллюстрация войн и переворотов.8. Долгосрочная корреляция ДБ-нефть должна прекратиться при возобновлении долгового производства в долларах внутри США, так и в мире в целом. Тогда агрегат М2 начнёт резкий рост - его индекс должен на сотни процентов обойти индекс ДБ. Пока что наоборот:Когда и как может возобновиться долговое производство в США?Этого никто не знает. Лучше, чтобы оно возобновилось в эволюционном порядке - при управляемой инфляции, стимулирующей инвестирование и кредитование. В противном случае - деволюция с дефляцией, тотальными дефолтами, налоговым террором и с последующей перспективой гиперинфляции. Всё на фоне череды войн и гос.переворотов. Отличие эволюции от деволюции заключается прежде всего в том, что для первого надо пахать и договариваться, а второй процесс можно запустить вручную в любой момент - чтобы хотя бы сами управляющие могли знать день катастрофы. И тогда лучше возле теперешних резервных валют рядом не стоять. А пока...9. Обновлён исторический рекорд по сокращению Денежной базы: с 29 июля две недели идёт минус 100 млрд долл год к году. Народы обязаны поклоняться доллару и остальным валютам картеля ЦБ-6.P.S. В материале намерено не уделено внимание уровням добычи нефти-газа и запасов. Это второстепенные факторы, зависимые прежде всего от уровня ДБ. Потому что даже полное включение Ирана в мировой рынок прибавит в годовой перспективе лишь 2%. А уровень "добычи" долларов в шахте ФРС изменяется в объёме десятков-сотен процентов год к году.
Годовые изменения за период с января 2014 по апрель 2015:- Денежная база США- нефть Брент- Европоказали рекордную корреляцию:MB&Brent R=0,86Brent&Euro R=0,93MB&Euro R=0,89Верите ещё в сказку про ценовую войну вассала против сюзерена? Всё дело состояло в необходимости свернуть эмиссию из-за возросших рисков гиперинфляции. А поскольку нет понятия о Добавленном долге, то и нет формулы расчёта нужного уровня ни эмиссии, ни ремиссии... Единственной альтернативой для ФРС является нырок в дефляцию - что и было спрогнозировано в марте 2014.Ссылки: Интерактивный график на сайте ФРС. Санкции? А дефляция? А низкая нефть? - март 2014 Нефтедоллар? Нет, не слышал. - дек 2014 Корреляция денежной базы США и нефти. Как топить нефтедоллар? - февр 2015 Корреляция денежной базы США и евро. - март 2015 Рекордное сокращение денежной базы США. - март 2015 Идеологема для БРИКС.
Что будет, если Греция откажется исполнять обязательства, которые требует от нее тройка международных кредиторов? Без сомнения, евродолжник станет изгоем: с ним никто не станет иметь дел. Никто в Евросоюзе, но не за его пределами. =======================================