Authored by Constantin Gurdgiev via CaymanFinancialReview.com, Last month, the Japanese government auctioned off some US$4 billion worth of new two-year bonds at a new record low yield of negative 0.149 percent. The country’s five-year debt is currently yielding minus 0.135 percent per annum, and its 10-year bonds are trading at -0.001 percent. Strange as it may sound, the safe haven status of Japanese bonds means that there is an ample demand among private investors, especially foreign buyers, for giving away free money to the Japanese government: the bid-to-cover ratio in the latest auction was at a hefty US$19.9 billion or 4.97 times the targeted volume. The average bid-to-cover ratio in the past 12 auctions was similar at 4.75 times. Japan’s status as the world’s most indebted advanced economy is not a deterrent to the foreign investors, banking primarily on the expectation that continued strengthening of the yen against the U.S. dollar, the U.K. pound sterling and, to a lesser extent, the euro, will stay on track into the foreseeable future. See chart 1 In a way, the bet on Japanese bonds is the bet that the massive tsunami of monetary easing that hit the global economy since 2008 is not going to recede anytime soon, no matter what the central bankers say in their dovishly-hawkish or hawkishly-dovish public statements. And this expectation is not only contributing to the continued inflation of a massive asset bubble, but also widens the financial sustainability gap within the insurance and pensions sectors. The stage has been set, cleaned and lit for the next global financial crisis. Worldwide, current stock of government debt trading at negative yields is at or above the US$9 trillion mark, with more than two-thirds of this the debt of the highly leveraged advanced economies. Just under 85 percent of all government bonds outstanding and traded worldwide are carrying yields below the global inflation rate. In simple terms, fixed income investments can only stay in the positive real returns territory if speculative bets made by investors on the direction of the global exchange rates play out. We are in a multidimensional and fully internationalized carry trade game, folks, which means there is a very serious and tangible risk pool sitting just below the surface across world’s largest insurance companies, pensions funds and banks, the so-called “mandated” undertakings. This pool is the deep uncertainty about the quality of their investment allocations. Regulatory requirements mandate that these financial intermediaries hold a large proportion of their investments in “safe” or “high quality” instruments, a class of assets that draws heavily on higher rated sovereign debt, primarily that of the advanced economies. The first part of the problem is that with negative or ultra-low yields, this debt delivers poor income streams on the current portfolio. Earlier this year, Stanford’s Hoover Institution research showed that “in aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion.” This accounts for roughly 97 percent of all public pension funds in the U.S. Taking into the account the pension funds’ penchant for manipulating (in their favor) the discount rates, the unfunded public sector pensions liabilities rise to $4.738 trillion. Key culprit: the U.S. pension funds require 7.5-8 percent average annual returns on their assets to break even on their future expected liabilities. In 2013-2016 they achieved an average return of below 3 percent. This year, things are looking even worse. Last year, Milliman research showed that on average, over 2012-2016, U.S. pension funds held 27-30 percent of their assets in cash (3-4 percent) and bonds (23-27 percent), generating total median returns over the same period of around 1.31 percent per annum. Not surprisingly, over the recent years, traditionally conservative investment portfolios of the insurance companies and pensions funds have shifted dramatically toward higher risk and more exotic (or in simple parlance, more complex) assets. BlackRock Inc recently looked at the portfolio allocations, as disclosed in regulatory filings, of more than 500 insurance companies. The analysts found that their asset books – investments that sustain insurance companies’ solvency – can be expected to suffer an 11 percent drop in values, on average, in the case of another financial crisis. In other words, half of all the large insurance companies trading in the U.S. markets are currently carrying greater risks on their balance sheets than prior to 2007. Milliman 2016 report showed that among pension funds, share of assets allocated to private equity and real estate rose from 19 percent in 2012 to 24 percent in 2016. The reason for this is that the insurance companies, just as the pension funds, re-insurers and other longer-term “mandated” investment vehicles have spent the last eight years loading up on highly risky assets, such as illiquid private equity, hedge funds and real estate. All in the name of chasing the yield: while mainstream low-risk assets-generated income (as opposed to capital gains) returned around zero percent per annum, higher risk assets were turning up double-digit yields through 2014 and high single digits since then. At the end of 2Q 2017, U.S. insurance companies’ holdings of private equity stood at the highest levels in history, and their exposures to direct real estate assets were almost at the levels comparable to 2007. Ditto for the pension funds. And, appetite for both of these high risk asset classes is still there. The second reason to worry about the current assets mix in insurance and pension funds portfolios relates to monetary policy cycle timing. The prospect of serious monetary tightening is looming on the horizon in the U.S., U.K., Australia, Canada and the eurozone; meanwhile, the risk of the slower rate of bonds monetization in Japan is also quite real. This means that the capital values of the low-risk assets are unlikely to post significant capital gains going forward, which spells trouble for capital buffers and trading income for the mandated intermediaries. Thirdly, the Central Banks continue to hold large volumes of top-rated debt. As of Aug. 1, 2017, the Fed, Bank of Japan and the ECB held combined US$13.8 trillion worth of assets, with both Bank of Japan (US$4.55 trillion) and the ECB (US$5.1 trillion) now exceeding the Fed holdings (US$4.3 trillion) for the third month in a row. Debt maturity profiles are exacerbating the risks of contagion from the monetary policy tightening to insurance and pension funds balance sheets. In the case of the U.S., based on data from Pimco, the maturity cliff for the Federal Reserve holdings of the Treasury bonds, Agency debt and TIPS, as well as MBS is falling on 1Q 2018 – 3Q 2020. Per Bloomberg data, the maturity cliff for the U.S. insurers and pensions funds debt assets is closer to 2020-2022. If the Fed simply stops replacing maturing debt – the most likely scenario for unwinding its QE legacy – there will be little market support for prices of assets that dominate capital base of large financial institutions. Prices will fall, values of assets will decline, marking these to markets will trigger the need for new capital. The picture is similar in the U.K. and Canada, but the risks are even more pronounced in the euro area, where the QE started later (2Q 2015 as opposed to the U.S. 1Q 2013) and, as of today, involves more significant interventions in the sovereign bonds markets than at the peak of the Fed interventions. How distorted the EU markets for sovereign debt have become? At the end of August, Cyprus – a country that suffered a structural banking crisis, requiring bail-in of depositors and complete restructuring of the banking sector in March 2013 – has joined the club of euro area sovereigns with negative yields on two-year government debt. All in, 18 EU member states have negative yields on their two-year paper. All, save Greece, have negative real yields. The problem is monetary in nature. Just as the entire set of quantitative easing (QE) policies aimed to do, the long period of extremely low interest rates and aggressive asset purchasing programs have created an indirect tax on savers, including the net savings institutions, such as pensions funds and insurers. However, contrary to the QE architects’ other objectives, the policies failed to drive up general inflation, pushing costs (and values) of only financial assets and real estate. This delayed and extended the QE beyond anyone’s expectations and drove unprecedented bubbles in financial capital. Even after the immediate crisis rescinded, growth returned, unemployment fell and the household debt dramatically ticked up, the world’s largest Central Banks continue buying some US$200 billion worth of sovereign and corporate debt per month. Much of this debt buying produced no meaningfully productive investment in infrastructure or public services, having gone primarily to cover systemic inefficiencies already evident in the state programs. The result, in addition to unprecedented bubbles in property and financial markets, is low productivity growth and anemic private investment. (See chart 2.) As recently warned by the Bank for International Settlements, the global debt pile has reached 325 percent of the world’s GDP, just as the labor and total factor productivity growth measures collapsed. The only two ways in which these financial and monetary excesses can be unwound involves pain. The first path – currently favored by the status quo policy elites – is through another transfer of funds from the general population to the financial institutions that are holding the assets caught in the QE net. These transfers will likely start with tax increases, but will inevitably morph into another financial crisis and internal devaluation (inflation and currencies devaluations, coupled with a deep recession). The alternative is also painful, but offers at least a ray of hope in the end: put a stop to debt accumulation through fiscal and tax reforms, reducing both government spending across the board (and, yes, in the U.S. case this involves cutting back on the coercive institutions and military, among other things) and flattening out personal income tax rates (to achieve tax savings in middle and upper-middle class cohorts, and to increase effective tax rates – via closure of loopholes – for highest earners). As a part of spending reforms, public investment and state pensions provisions should be shifted to private sector providers, while existent public sector pension funds should be forced to raise their members contributions to solvency-consistent levels. Beyond this, we need serious rethink of the monetary policy institutions going forward. Historically, taxpayers and middle class and professionals have paid for both, the bailouts of the insolvent financial institutions and for the creation of conditions that lead to this insolvency. In other words, the real economy has consistently been charged with paying for utopian, unrealistic and state-subsidizing pricing of risks by the Central Banks. In the future, this pattern of the rounds upon rounds of financial repression policies must be broken. Whether we like it or not, since the beginning of the Clinton economic bubble in the mid-1990s, the West has lived in a series of carry trade games that transferred real economic resources from the economy to the state. Today, we are broke. If we do not change our course, the next financial crisis will take out our insurers and pensions providers, and with them, the last remaining lifeline to future financial security.
Just over a month ago, Kyle Bass discussed why he was long effectively "long Greece." Bass penned a Bloomberg editorial in which the hedge fund founder and CIO called on the IMF to stop bullying Greece - publicizing the fact that he is now effectively long Greece. Greek government bonds have performed reasonably well so far this year: They’re up about 16%, and if Bass is right, they could have another 20% to 30% over the next 18 months if the IMF abandons its insistence on austerity and acknowledges that debt relief will need to be part of the long-term alleviation of debt. Bass added that, in the near future, voters will elect a more business-friendly government that will help reestablish the country’s creditworthiness, much like the government of Mauricio Macri did for Argentina. I think you also have an interesting political situation in Greece where I think there's going to be a handoff from the current Syriza government to kind of a more slightly-center-right but very economically independent new leadership in the next, call it, 18 months. And so, I think you asked why now? And I think you're starting to see green shoots. You're starting to see the banks do the right things finally in Greece and you are about to have new leadership. So, I think that you're going to see - and if you remember Argentina as Kirschner was going to hand-off – hand the reins over to someone that was much more let's say focused on business and economics than being a kleptocrat, I think you're going to see something again slightly similar in Greece where you have leadership today that might not be the right leadership and the government-in-waiting, I believe, and I think you know Mr. (Mitsutakous) - I think you're going to see something great happen to Greece in the and next, kind of, two years. Then, just yesterday, the founder and chief investment officer of Hayman Capital Management, which manages an estimated $815 million in assets under management, told CNBC that he's been invested in Greek bank stocks that are trading at a quarter of book value. According to Bass, foreign investors are waiting on the sidelines for a tectonic political shift to take place in 2018. The country is now preparing to end its international bailout program next year, with more than €320 billion (US$372 billion) in national debt. On Monday, Greece announced it will distribute 1.4 billion euros ($1.63 billion) as a social dividend to pensioners and others hit hard by the country's austerity program. "My best guess is a snap election for prime minister will be called between April and September of next year and Prime Minister Alexis Tsipras will lose power. "When that happens, there will be a massive move into the Greek stock market. Big money will flow in as investors feel more confident with a more moderate administration. "It's going to take Kyriakos Mitsotakis, president of New Democracy, the Greek conservative party, to be voted in as prime minister to reform the culture and rekindle investor confidence," said Bass. "I have no doubt €15 billion in bank deposits will come back to Greek banks if he's elected. The stock and bond markets will also jump following the election." All of which brings us to today. Greek bank stocks crashed over 8% today - plunging to the lowest since July 2016... And in context, that's not good... However, Bass is not pertrubed. As he explains, economic activity will get reenergized with the right leadership. The sectors global investors are eyeing right now are real estate, energy and tourism. "There is so much potential," he said. "Pimco, Lonestar, KKR are all looking to buy commercial properties in Greece." He also noted that the country will have marquee privatizations over the next two years. "From my perspective, we have to fix two things in Greece for the market to take off," Bass said. "First, Greeks have to stop evading taxes. Second, they have to start repaying their loans." Well if you believe him - you just got an 8% discount on your entry.
Mutual funds that are capable of offering favorable returns and bear a lower level of risk might be prudent investment options.
Authored by Matt Barrie via Medium.com, Co-authored with Craig Tindale. I recently watched the federal treasurer, Scott Morrison, proudly proclaim that Australia was in “surprisingly good shape”. Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970. Australian GDP growth has been trending down for over forty yearsSource: Trading Economics, ABS I was pretty shocked at the complacency, because after twenty six years of economic expansion, the country has very little to show for it. For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour. That neighbour is China. Out of all OECD nations, Australia is the most dependent on China by a huge margin, according to the IMF. Over one third of all merchandise exports from this country go to China- where ‘merchandise exports’ includes all physical products, including the things we dig out of the ground. Source: Austrade, IMF Director of Trade Statistics Outside of the OECD, Australia ranks just after the Democratic Republic of the Congo, Gambia and the Lao People’s Democratic Republic and just before the Central African Republic, Iran and Liberia. Does anything sound a bit funny about that? Source: Austrade, IMF Director of Trade Statistics As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble. Unfortunately for Australia, that “lucky” free ride is just about to end. Societe Generale’s China economist Wei Yao said recently, “Chinese banks are looking down the barrel of a staggering $1.7 trillion?—?worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400% of the U.S. banking losses incurred during the subprime crisis”. A hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur. Delusions which are all unfolding right now as this quadruple leveraged bubble unwinds. What makes this especially dangerous is that it is unwinding in what increasingly looks like a global recession- perhaps even depression, in an environment where the U.S. Federal Reserve (1.25%), Bank of Canada (1.0%) and Bank of England (0.25%) interest rates are pretty much zero, and the European Central Bank (0.0%), Bank of Japan (-0.10%), and Central Banks of Sweden (-0.50%) and Switzerland (-0.75%) are at zero or negative interest rates. Summary of Current Interest Rates from Central Banks (16th October 2017). Source: Global-rates.com As a quick refresher of how we got here, after the Global Financial Crisis, and consequent recession hit in 2007 thanks to delinquencies on subprime mortgages, the U.S. Federal Reserve began cutting the short-term interest rate, known as the ‘Federal Funds Rate’ (or the rate at which depository institutions trade balances held at Federal Reserve Banks with each other overnight), from 5.25% to 0%, the lowest rate in history. When that didn’t work to curb rising unemployment and stop growth stagnating, central banks across the globe started printing money which they used to buy up financial securities in an effort to drive up prices. This process was called “quantitative easing” (“QE”), to confuse the average person in the street into thinking it wasn’t anything more than conjuring trillions of dollars out of thin air and using that money to buy things in an effort to drive their prices up. Systematic buying of treasuries and mortgage bonds by central banks caused the face value of on those bonds to increase, and since bond yields fall as their prices rise, this buying had the effect of also driving long-term interest rates down to near zero. Both short and long term rates were driven to near zero by interest rate policy and QE. Source: Bloomberg, CME Group In theory making money cheap to borrow stimulates investment in the economy; it encourages households and companies to borrow, employ more people and spend more money. An alternative theory for QE is that it encourages buying hard assets by making people freak out that the value of the currency they are holding is being counterfeited into oblivion. In reality, the ability to borrow cheap money was mainly used by companies to buy back their own shares, and combined with QE being used to buy stock index funds (otherwise known as exchange traded funds or “ETFs”), this propelled stock markets to hit record high after record high even though this wasn’t justified the underlying corporate performance. Almost all flows into the equity market have been in the form of buybacks. Source: BofA Merrill Lynch Global Investment Strategy, S&P Global, EPFR Global, Convexity Maven In literally a “WTF Chart of the Day” on September 11, 2017, it was reported that the central bank of Japan now holds 75% of all ETFs. No, not ‘owns units in three out of four ETFs’?—?the Bank of Japan now owns three quarters of all assets by market value in all Japanese exchange traded funds. In today’s world Hugo Chavez wouldn’t need to nationalise assets, he could have just printed money and bought them on the open market. Bank of Japan now owns 75% of all Japanese ETFs. Source: Zerohedge Europe and Asia were dragged into the crisis, as major European and Asian banks were found holding billions in toxic debt linked to U.S. subprime mortgages (more than 1 million U.S. homeowners faced foreclosure). One by one, nations began entering recession and repeated attempts to slash interest rates by central banks, along with bailouts of the banks and various stimulus packages could not stymie the unfolding crisis. After several failed attempts at instituting austerity measures across a number of European nations with mounting public debt, the European Central Bank began its own QE program that continues today and should remain in place well into 2018. In China, QE was used to buy government bonds which were used to finance infrastructure projects such as overpriced apartment blocks, the construction of which has underpinned China’s “miracle” economy. Since nobody in China could actually afford these apartments, QE was lent to local government agencies to buy these empty flats. Of course this then led to a tsunami of Chinese hot money fleeing the country and blowing real estate bubbles from Vancouver to Auckland as it sought more affordable property in cities whose air, food and water didn’t kill you. QE was only intended as a temporary emergency measure, but now a decade into printing and the central banks of the United States, Europe, Japan and China have now collectively purchased over US$19 trillion of assets. Despite the lowest interest rates in 5,000 years, the global economic growth in response to this money printing has continued to be anaemic. Instead, this stimulus has served to blow asset bubbles everywhere. Total assets held by major central banks. Source: Haver Analytics, Yardeni Research This money printing has lasted so long that the US economic cycle is imminently due for another downturn- the average length of each economic cycle in the U.S. is roughly 6 years. By the time the next crisis hits, there will be very few levers left for central banks to pull without getting into some really funny business. It wasn’t until September 2017 that the U.S. Federal Reserve finally announced an end to the current program, with a plan to begin selling-off and reducing its own US$4.5 trillion portfolio beginning in October 2017. How these central banks plan to sell these US$19 trillion in assets someday without completely blowing up the world economy is anyone’s guess. That’s about the same in value as trying to sell every single share in every single company listed on the stock markets of Australia, London, Shanghai, New Zealand, Hong Kong, Germany, Japan and Singapore. I would think a primary school student would be able to tell you that this is all going to end up going horribly wrong. To put into perspective how perverted things are right now, in September 2017, Austria issued a 100 year euro denominated bond which yields a pathetic 2.1% per annum. That’s for one hundred years. The buyers of these bonds, who, on the balance of probability, were most likely in high school or university during the global financial crisis, think that earning a miniscule 2.1% per annum every year over 100 years is a better investment than well anything else that they could invest in- stocks, real estate, you name it, for one hundred years. They are also betting that inflation won’t be higher than 2.1% on average for one hundred years, because otherwise they would lose money. This is even though in 20 years time they’ll be holding a bond with 80 years left to go to be paid out in a currency that may no longer exist. The only way the value of these bonds will go up is if the world continues to fall apart, causing the European Central Bank to cut its interest rate further and keep it lower for 100 years. Since the ECB refinancing rate is currently zero percent, that would mean that if you wanted to borrow money from the European Central Bank, it would literally have to pay you for the pleasure of borrowing money from it. The other important thing to remember is that on maturity, everyone that bought that bond in September will be dead. So if one naively were looking at markets, particularly the commodity and resource driven markets that traditionally drive the Australian economy, you might well have been tricked into thinking that the world was back in good times again as many have rallied over the last year or so. The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets. This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg in a report entitled “The World’s Most Extreme Speculative Mania Unravels in China”. Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016?—?exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion. While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps. Average futures contract holding times for various commodities. Source: Bloomberg In April 2016, the average holding period for steel rebar and iron ore contracts was less than 3 hours. The Chief Executive of the London Metal Exchange, said “Why should steel rebar be one of the world’s most actively-traded futures contracts? I don’t think most people who trade it know what it is”. Steel, of course, is made from iron ore, Australia’s biggest export, and frequently the country’s main driver of a trade surplus and GDP growth. Australia is the largest exporter of iron ore in the world, with a 29% global share in 2015–16 and 786Mt exported, and at $48 billion we’re responsible for over half of all global iron ore exports by value. Around 81% of our iron ore exports go to China. Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50% of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens. In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Last January, China pledged “supply-side reforms” for its steel and coal sectors to reduce excessive production capacity. In 2016, capacity was cut by 6 percent for steel and and 8 percent for coal. In the first half of 2017 alone, a further 120 million tonnes of low-grade steel capacity was ordered to close because of pollution. This represents 11 percent of the country’s steel capacity and 15 percent of annual output. While this will more heavily impact Chinese-mined ore than generally higher-grade Australian ore, Chinese demand for iron ore is nevertheless waning. Over the last six years, the price of iron ore has fallen 60%. Iron ore fines 62% Fe CFR Futures. Source: Investing.com While the price of iron ore briefly rallied after the U.S. election in anticipation of increasingly less likely Trumponomics, DBS Bank expects that global demand for steel will remain stagnant for at least the next 10–15 years. The bank forecasts that prices are likely to be rangebound based on estimates that Chinese steel demand and production have peaked and are declining, that there are no economies to buffer this slowdown in China, and that major steel consuming industries are also facing overcapacity issues or are expected to see lower growth. Australia’s second biggest export is coal, being the largest exporter in the world supplying about 38% of the world’s demand. Production has been on a tear, with exports increasing from 261Mt in 2008 to 388Mt in 2016. Australian Coal Exports by Type 1990–2035 (IEA Core Scenario). Source: International Energy Agency, Minerals Council of Australia While exports increased by 49% over that time period, the value of those exports has collapsed 38%, from $54.7 billion to $34 billion. The only bright side for Australian coal in 2017 was that, unexpectedly, Cyclone Debbie wiped out several railroads and forced the closure of ports and mining operations, which has caused a temporary spike in coal prices. Australian Thermal Coal Prices. (12,000- btu/pound,
The euphoria of the past month has ended with a thud and BTFDers are strangely missing as the commodity chill out of China (which overnight became full blown carnage), has unleashed a global risk-off phase ahead of today's critical CPI data, resulting in broad and sharp selling across global markets, as European stocks followed declines in Asia while bonds and gold advanced. The equity retreat, which spread to U.S. stock futures, started with last night's sharp puke in Chinese commodities. As a result, S&P 500 futures dropped 0.5% after U.S. stocks fell for a third time in four days, while Japan’s recent euphoria - which attracted a record influx of foreign investors - is now a distant memory with the Topix falling for the fifth day, its longest losing streak this year, as it declined 2%, while European stocks tumbled for a seventh consecutive day, the worst losing streak since November 2016, to a two month low with the Stoxx 600 down 1%. “The decline by U.S. equities led by energy shares is having a knock-on effect, dampening sentiment in sectors related to energy and industry,” said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management in Tokyo. “Broadly speaking equities had enjoyed an almost uninterrupted run for the past few months, so we are seeing a bit of a correction finally emerging.” "So far we don’t see that much disruption in sentiment, so I think we are just taking a bit of froth off the top of the market at the moment,” Michael Metcalfe, global head of macro strategy at State Street Global Markets, said on Bloomberg TV. “It would be dangerous to say this is the unwinding of a bubble - the fact that it’s being led by Japan actually tells you that, because there isn’t a valuation case to sell Japanese stocks.” The cautious tone has settled into markets in recent days as new obstacles emerged to the U.S. overhauling taxes and after many stock gauges approached record highs. Attention now turns to data coming on U.S. consumer prices and retail sales for further clues on US economic strength after the flattest American yield curve in a decade raised concern that growth will slow. Amusingoy, amid the equity pullback, Morgan Stanley advised staying overweight stocks and avoiding the temptation to sell even as valuations appear stretched. Current indicators used by the New York-based bank’s cross-asset strategy team are showing strong macro-economic data favoring a tilt to shares, with low allocation to high-yield credit. Asian equities fell, with the regional benchmark poised for its steepest four-day decline this year, as a slump in commodity prices weighed on materials and energy producers shares. The MSCI Asia Pacific Index dropped 1% percent to 167.97 with material and energy sub-gauges each down at least 1.7 percent. Japan’s Topix capped its longest declining streak since September 2016, while Hong Kong’s Hang Seng Index lost 1 percent. Moderation in China’s growth and rising odds of U.S. rate hikes are putting the brakes on Asia’s world-leading rally this year. A Bloomberg gauge of commodity prices extended Tuesday’s steepest slump in six months after Chinese data pointed to slowing industrial output, fixed-asset investment and retail sales. The MSCI Emerging Market Index fell 0.4%, hitting the lowest in almost three weeks with its fifth consecutive decline. "Commodity prices are sinking on rate-hike expectations as well as China data that missed some analyst forecasts," said Hao Hong, Hong Kong-based chief strategist at Bocom International Holdings Co. "Investors are taking profits after rallies." Mitsubishi Gas Chemical Co. slumped 4.3 percent in Tokyo for its biggest drop in more than seven months, while PetroChina Co. lost 3.1 percent in Hong Kong. European stocks followed in Asia's example, falling in brisk volumes, with basic resources and energy stocks falling the most on the back of weaker commodity prices, as investors assess the global equity pull-back. The Stoxx Europe 600 Index retreated 0.6% to a near two-month low, breaking below its 200-day moving average for the first time since early September. All but one sector are in the red, with banks among the worst performers as bond yields weaken. The Stoxx 600 is heading for its longest losing streak since November 2016. The U.K.’s FTSE 100 Index decreased 0.6% , hitting the lowest in almost seven weeks with its fifth consecutive decline. Germany’s DAX Index dipped 1.3%, reaching the lowest in almost seven weeks on its fifth consecutive decline. European stocks fall in brisk volumes, with basic resources and energy stocks falling the most on the back of weaker commodity prices, as investors assess the global equity pull-back. The Stoxx Europe 600 Index retreats 0.6% to a near two-month low, breaking below its 200-day moving average for the first time since early September. All but one sector are in the red, with banks among the worst performers as bond yields weaken. The Stoxx 600 is heading for its longest losing streak since November 2016. Mining and oil-related stocks set the tone, as the Bloomberg Commodities Index continued its longest slide since June. Benchmark WTI crude fell through $55 a barrel after industry data showed U.S. stockpiles unexpectedly rose last week and as Russia was said to waver on extending output cuts. The dollar traded near a three-week low and Treasuries led bond gains. S&P 500 futures dropped 0.6 percent. The euro climbed to its highest level in more than three weeks, the EURUSD rising above 1.1800 as increased confidence in the currency bloc was underpinned with concerns that U.S. inflation data due Wednesday may further pressure the dollar. The common currency rose a sixth day, set for its longest winning run since May 2016, as demand for upside exposure intensified in both spot and options markets. Real-money names returned from the sidelines and added fresh longs, while macro accounts also bid the euro, traders in Europe and London told Bloomberg. Pressured by the euro’s surge, the dollar index against a basket of six major currencies lost about 0.7 percent overnight. It last stood flat at 93.870. The greenback was 0.2 percent lower at 113.230 yen after pulling back from a high of 113.910 the previous day. The yen as well as Japan’s equity and bond markets showed little reaction to Wednesday’s GDP data. Japan’s economy grew for the seventh straight quarter during the July-September period, although this was tempered somewhat as private consumption declined for the first time since the last quarter of 2015. The immediate focus for the dollar, and a potential catalyst, was data on U.S. consumer prices due later in the global day. Ahead of today's closely watched CPI update out of the US, overnight the Fed's Evans said that the Fed should acknowledge a much greater chance of 2.5% inflation, further stating that he sees solid US economic growth in 2018 and sees a big risk in not getting inflation to 2% before the next recession hits. Elsewhere, the US Senate Finance Committee Chair Hatch unveiled the modified Chairman’s mark of Senate’s tax overhaul plan, which: Repeals Affordable Care Act’s individual mandate tax, according to release from committee Increases child tax credit from the current $1,000 to $2,000 Reduces middle income tax rates from 22.5% to 22%; 25% to 24%; and 32.5% to 32% The White House is said to strongly support the House tax bill. Crude oil prices stretched losses, weighed by forecasts for rising U.S. crude output and a gloomier outlook for global demand growth in a report from the International Energy Agency. U.S. crude futures were down 1.1 percent at $55.07 per barrel and on track for their fourth day of losses. Brent lost 1.3 percent to $61.42 per barrel. With oil prices having slid steadily from 28-month highs scaled last week, commodity currencies came under pressure. On today's calendar, investors will be looking for consumer prices, retail sales, MBA mortgage applications, Empire State manufacturing, business inventories, and Treasury net capital flows. Tax overhaul update: revisions bring the plan in line with Senate’s tight fiscal constraints, but may create complications for President Donald Trump who have pitched the plan as benefiting the middle class. Several ECB officials speak with Executive Board member Peter Praet chairing the closing policy panel at an ECB conference in Frankfurt. Market Snapshot S&P 500 futures down 0.5% to 2,566.25 STOXX Europe 600 down 1.0% to 380.00 MSCI Asia down 0.9% to 168.14 MSCI Asia ex Japan down 0.6% to 552.69 Nikkei down 1.6% to 22,028.32 Topix down 2% to 1,744.01 Hang Seng Index down 1% to 28,851.69 Shanghai Composite down 0.8% to 3,402.52 Sensex down 0.6% to 32,750.40 Australia S&P/ASX 200 down 0.6% to 5,934.24 Kospi down 0.3% to 2,518.25 German 10Y yield fell 2.8 bps to 0.369% Euro up 0.4% to $1.1845 Italian 10Y yield fell 0.5 bps to 1.563% Spanish 10Y yield fell 0.9 bps to 1.525% Brent Futures down 1.1% to $61.51/bbl Gold spot up 0.4% to $1,285.26 U.S. Dollar Index down 0.4% to 93.47 Top Overnight News Chicago Fed President Charles Evans says policy makers should take a more aggressive public stance toward boosting price gains; "harder for me to feel comfortable with the idea that weak inflation is simply transitory"; concerned something more persistent is holding down inflation today While U.K. unemployment rate stayed near a 42-year low, there were signs that the labor market may be slowing as the number of people in work fell for the first time in almost a year Britain’s PM May is heading for a showdown with her own Tory party over what one member of Parliament called her “mad” plan to write the date of Brexit into British law The armed forces seized power in Zimbabwe after a week of confrontation with President Robert Mugabe’s government and said the action was needed to stave off violent conflict in the southern African nation that he’s ruled since 1980 U.K. Sept. Average Weekly Earnings: 2.2% vs 2.1% est; Unemployment Rate 4.3% vs 4.3% est. ECB’s Hansson: we feel more and more confident that inflation will eventually reach the levels consistent with our aim; short-term economic risks are to the upside Australia 3Q wage prices 0.5% vs 0.7% est; y/y 2.0% vs 2.2% est API inventories according to people familiar w/data: Crude +6.5m; Cushing -1.8m; Gasoline +2.4m; Distillates -2.5m North American Free Trade Agreement (Nafta) negotiators from the U.S., Canada, and Mexico meet in Mexico City for round five of discussions through Nov. 21. The armed forces seized power in Zimbabwe after a week of confrontation with President Robert Mugabe’s government House leaders cleared the way for a Thursday vote on their tax-overhaul bill as Senate tax writers released a late-night draft that would make many individual breaks temporary and repeal a key part of the Obamacare law Airbus SE announced the biggest commercial-plane transaction in its history, securing an order for single-aisle aircraft valued at nearly $50 billion at the Dubai Air Show, outdoing Boeing Co.’s own $20 billion mega-deal Amid the worst sell-off in months for junk-rated corporate bonds, money manager Loomis Sayles & Co. has been selectively buying the debt Warren Buffett continued to trim a once-major investment in International Business Machines Corp. while adding to newer holding Apple Inc. in the third quarter OPEC has yet to convince Russia that it’s necessary to reach an agreement to extend oil-output cuts at a meeting in Vienna later this month, as officials and oil bosses in Moscow still haven’t decided how long the production deal should last Deutsche Bank AG has attracted a new top investor whose identity will probably be revealed within days SandRidge Energy is nearing agreement to buy Bonanza Creek Energy for about $750 million in cash-and-stock deal, Wall Street Journal reports citing unidentified people familiar Asian stocks slumped sharply, following the lead of their US counterparts, as negative risk sentiment and the stronger domestic currency weighed on Japan’s Nikkei 225 which finished 1.6% lower, although this was off of worst levels. In Australia, the ASX 200 fell 0.6%, with energy stocks and resource names leading the way on the back of softer oil prices and yesterday’s Chinese data respectively. Chinese and Hong Kong markets also fell afoul of risk off sentiment (Shanghai Comp -0.6%, Hang Seng -0.7%), with the tumble in Shanghai metals heaping further weight on industrial names. Bonds edged higher in the US, Japan & Australia, with Australian 3-year bond futures experiencing notable buy side flow in the wake of the soft wage data. Japanese GDP QQ (Q3) 0.3% vs. Exp. 0.3% (Prev. 0.6%); Australian Wage Price Index QQ (Q3) 0.5% vs. Exp. 0.7% (Prev. 0.5%); New Zealand Finance Minister Robertson reiterates that it is the government's intention to reduce net debt to 20% of GDP within 5 years. The RBNZ has increased the capital requirements for Westpac's NZ division as the firm did not comply with regulations. Top Asian News China Throws Lifeline to Builders Facing Record Wall of Debt China Seen Supporting Bonds as PBOC Steps Up Liquidity Injection Tencent Delivers a Blowout Quarter as Honour of Kings Shines India Advances BS-VI Fuel Norm in Delhi to Combat Pollution Korea Factories Operating Normally After Big Quake China Is Said to Allow Panda Bond Issuers to Use U.S. GAAP Rules Investors Lose Faith in Asia’s Top Stock as Downgrades Mount Freeport Indonesia Shuts Main Road to Grasberg After Shooting Aluminum Supply Cuts in China Set to Disappoint This Winter European indices lower this morning, with almost every sector in negative territory. A typical risk-off session thus far, with financials and commodity-related names taking the most points off EU bourses. Not all doom and gloom however, as Airbus shares have been flying high after they confirm the largest aircraft deal in its history, valued at over USD 40bln. Gilts initially firmer in wake of the latest jobs and wages update, and indeed inched a bit closer to 125.00 before easing back again, while the Short Sterling strip has held relatively modest gains of 1-2 ticks. The inference is that unemployment and pay did not top estimates by enough to prompt a reaction or change the near term outlook for the BoE, albeit encouraging. Moreover, Bunds and USTs are inching further ahead (former just up to a fresh 162.86 Eurex high) amidst a broader safety flight, which has now seen the 10 year UK benchmark break through 125.00 to 125.09. Germany supply up next, but in the context of risk aversion this should cause any major digestion issues. Top European News EU Is Said to Be Looking to 2018 Summits for Brexit Breakthrough Weimer Is Said to Be Lead Candidate for Deutsche Boerse CEO Post U.K. Labor Market Shows Signs of Slowing as Employment Falls VW Raided by German Prosecutors Over Labor Chief’s Pay TalkTalk Plunges as Earnings Outlook Dims on Customer Costs Atlantia CEO Says Room to Make Abertis Offer Competitive: FT AstraZeneca’s Fasenra Gets FDA OK for Severe Eosinophilic Asthma Israel Plans to Issue Tax Bills to Google, Facebook: Haaretz In FX, cable Retreated from session highs, consolidating back inside the day’s range. In DXY trading, d Dovish comments from Fed’s Evans hardly helped to ease the Greenback’s pain as he bemoans the fact that US inflation remains below target and warns that it may not hit mandate before the next recession. The Index has duly declined further from the 94.000 level and is threatening 93.500 on the downside. It's onwards and upwards for the Euro with 1.1800 now surpassed and techs turning outright bullish given the break of a negative channel. The early morning upside target of 1.1837 has been breached with the October peak of 1.1880 in sight. EURGBP making a firm breach of 0.90 has weighed on GBP. GBP briefly above 1.32 above post UK jobs data, however wages still continue to lag inflation, while some investors may be looking at the retail sales release tomorrow which has some growing pessimism given how weak the retail sector has been over the recent months. In JPY moves, benefiting from its flight to quality status (along with the Chf) and breaking below the recent 113.00-114.00 range vs the Greenback to around 112.80 and closer to downside option expiries at 112.50 (460 mn). The AUD was a marked and sole underperformer vs the US Dollar among majors, largely due to weaker than forecast Australian wage data, hot on the heels of comments alluding to that fact from RBA deputy Governor Debelle. Aud/Usd has now slipped through 0.7600 where macro offers were evidently seen, and bears are looking at 0.7571 chart support next. Note, a 0.7650 option expiry today (470 mn). In commodities, oil prices off around 1% following last night’s API report which showed a rather large build of 6.5mln in US crude inventories, while analysts had expected a drawdown of 2.2mln. Looking at the day ahead, the big focus will be the October CPI print while October retail sales, November empire manufacturing and September business inventories are also due. There is plenty more central bank speak scheduled with the ECB’s Lane, Praet and Hanson all due along with the Fed’s Evans and the BoE’s Haldane. NAFTA negotiators from the US, Canada and Mexico are also scheduled to meet for round 5 of discussions. US Event Calendar 7am: MBA Mortgage Applications, prior 0.0% 8:30am: US CPI MoM, est. 0.1%, prior 0.5%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1% US CPI YoY, est. 2.0%, prior 2.2%; Ex Food and Energy YoY, est. 1.7%, prior 1.7% Real Avg Weekly Earnings YoY, prior 0.63%; Real Avg Hourly Earning YoY, prior 0.7% 8:30am: Empire Manufacturing, est. 25.1, prior 30.2 8:30am: Retail Sales Advance MoM, est. 0.0%, prior 1.6%; Retail Sales Ex Auto MoM, est. 0.2%, prior 1.0% Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.5%; Retail Sales Control Group, est. 0.3%, prior 0.4% 10am: Business Inventories, est. 0.0%, prior 0.7% 4pm: Total Net TIC Flows, prior $125.0b; Net Long-term TIC Flows, prior $67.2b DB's Jim Reid concludes the overnight wrap So will today’s US inflation numbers give markets an early Xmas present after a ‘bah humbug’ last four trading days which has carried on overnight in the Asian session. At the moment US CPI is probably the most important data release of the month so the stakes are high. The central bank put can continue to be withdrawn slowly and possibly be put back in place if needed whilst inflation remains well behaved. By well behaved the sweet spot for risk markets is a bias for slightly missing expectations more often than it beats but without ever threatening deflation. This describes 2017 perfectly so far. US CPI has missed expectations for 6 out of the last 7 months, with the other month being in-line. Today we expect Core CPI (+0.2% mom vs. +0.1% previous) to firm in line with consensus but the year-over-year growth rate should remain at 1.7%, down from 2.3% at the beginning of the year (headline 2.0% yoy expected). While our economists anticipate core inflation to remain tame near-term, there are signs that we are reaching an inflection point though. Over the last 20 years US inflation has lagged GDP by around five to six quarters, so we think that a lot of the misses this year can be attributed to the weak growth seen at the back end of 2015/ early 2016. The stronger growth seen in the US and globally post H2 2016 should start to impact inflation soon. Today’s print might be too early and our strategists’ models point to a weak 0.2% core reading (0.16% unrounded) so the risks might be on the downside near term but we think to the upside in 2018. Ahead of this, the US PPI was strong but European inflation data weak. In the US, the headline October PPI was 2.8% yoy – the highest since February 2012. Core PPI was also above expectations at 0.4% mom (vs. 0.2%) and 2.4% yoy (vs. 2.2% expected). In the details, the healthcare services component of the PPI (a direct input into the core PCE deflator) was up 0.18% mom on a seasonally adjusted basis. Across Europe, the UK’s October CPI was slightly below expectations at 0.1% mom (vs. 0.2%), while core annual inflation was steady for the third consecutive month at 2.7% yoy (vs. 2.8% expected). Elsewhere, the final readings on inflation for Germany (1.5% yoy), Spain (1.7% yoy) and Italy (1.1% yoy) were unrevised. This morning in Asia, markets have followed the negative lead from yesterday and are trading lower again. The Nikkei (-1.51%), Kospi (-0.29%), Hang Seng (-0.79%) and ASX 200 (-0.42%) are all down with losses led by energy and mining stocks. In Japan, 3Q GDP was a tad softer than expected (0.3% qoq vs. 0.4% expected), but is still an expansion for the 7th consecutive quarter – longest since 2001, and adjusting for prior data revisions, the annual growth was more in line at 1.4% yoy. Prior to this it was another weak day yesterday for markets. US bourses all weakened, with the S&P 500 (-0.23%), Dow (-0.13%) and Nasdaq (-0.29%) all down modestly. Within the S&P, only the utilities and consumer sectors were in the green, while losses were led by energy (-1.53%) and telco stocks. GE dropped a further 5.9% (-12.6% in two days) after announcing its turnaround plans. European markets were all lower, with the Stoxx 600 down for the 6th consecutive day (-0.59%, cumulative loss of -3.2%) - the longest losing streak since October 2016, with losses led by energy and mining stocks, partly in response to lower oil price and softer than expected Chinese macro data on IP and property sales. Across the region, the FTSE was the relative outperformer (-0.01%) following weaker inflation data, while the DAX (-0.31%), CAC (-0.49%) and FTSE MIB (-0.63%) all fell modestly. Bond markets were slightly firmer, with core 10y bond yields 1-3bp lower (UST: -3.3bp; Bunds -1.9bp; Gilts -0.8bp) while peripheral yields marginally underperformed, ranging from flat to 1bp lower. Turning to currencies, the US dollar index fell 0.70% - the biggest fall since late June, while Sterling and the Euro gained 0.37% and 1.12% respectively, with the latter likely supported by a solid beat in Germany’s 3Q GDP (0.8% qoq vs. 0.6% expected). In commodities, WTI oil dropped 1.87% - the biggest fall since early October, following the IEA lowering its 2018 demand outlook and cautioning that the global market is likely to remain over supplied in 2Q. This morning, it’s fallen c1% more, after API data showed an unexpected rise in US crude inventory. Elsewhere, precious metal were little changed (Gold +0.15%; Silver -0.20%) but other base metals all weakened following softer Chinese macro data (Copper -1.74%; Zinc -2.25%; Aluminium -0.90%). As a reminder, in China yesterday, both the October IP (6.2% yoy vs. 6.3% expected) and retail sales (10% yoy vs. 10.5% expected) were lower than consensus and monthly property sales turned negative for the first time since March 2015, dropping to -1.7% yoy from 1.6%. Moving onto Brexit, yesterday we noted that Bloomberg reported that Brexit Secretary Davis told a group of business leaders that the chance for a breakthrough for Brexit talks by December was “a 50/50 chance”. Later on, a spokesman on behalf of Davis said “this is categorically untrue. Davis did not say this”. Elsewhere, Davis noted that he wanted banking employees to retain their ability to transfer between offices in the UK and EU after Brexit and he predicted he will achieve an agreement on a post 2019 transition period “very early next year”. Finally, the House of Commons has voted 318 to 68 to agree to Clause 1 of the EU withdrawal bill which will repeal the 1972 law that is the basis of UK’s EU membership. Notably, the vote is the second in a series of upcoming votes on PM May’s Brexit bill. As we get closer to 2018 the outlooks will start to come thick and fast. Hot off the presses this morning our European equity strategy team led by Sebastian Raedler have published their 2018 outlook. They expect the Stoxx 600 to end 2018 at 395, 3% above current levels, based on projected 2018 EPS growth of 2% and an end-2018 12-month forward P/E of 15.1x (slightly above the current 14.8x). They remain tactically neutral near-term, but expect a pull-back for the Stoxx 600 to 375 in Q1 as Euro area macro momentum softens from its current elevated levels. They are underweight European cyclicals versus defensives – and expect European equities to continue underperforming US equities over the coming months. Email Sebastian.Raedler@db.com for a copy. Now wrapping up with a busy day of central bank speak before we recap yesterday’s data and preview today’s. Firstly the Fed’s Bullard reiterated his dovish view, noting the current interest rate “is likely to remain appropriate over the near term” and that even if US unemployment rate declines substantially further, “the effect on inflation are likely to be small”. Further, if the Fed is going to hit its inflation target, “it will likely to occur in 2018 or 19”. Conversely, the Fed’s Kaplan said he is “actively considering appropriate next steps” in terms of a potential December rate hike. Further, he is watching core inflation closely and noted there is a mounting case for moving ahead of signs of price increases. Following on, the Fed’s Bostic noted that based on anecdotal feedback and monitored indicators, they convince him that the foreseeable future is “more of the same”, with GDP growth at a bit above 2%, unemployment rate in low 4% and modest increase in real wage growth. Hence he believes “it will be appropriate for interest rates to rise gradually over the next couple of years”. Elsewhere, he seemed to attribute the current yield curve flattening in the US to the flow associated with the demand for US securities, rather than as a sign of the economy’s softness. After the PPI data, softer markets and central bankers speak, the odds of a December rate hike fell 5ppt to a still high level of 92% (per Bloomberg). Staying with the Fed, the WSJ has reported that former Pimco CEO Mohamed El-Erian is among several candidates that are currently being considered for the role of Fed Vice Chairman. Moving onto US tax plans, Senator John Thune noted that Senate Majority Whip Mr Cornyn is confident the chamber can get the votes to pass the bill, “we wouldn’t have proceeded if Cornyn wasn’t confident he could get to 50”. Back to central bankers and the ‘Fab Four’ panel discussion at the ECB’s conference yesterday. Overall, there was minimal material information for markets. In the details, Mrs Yellen sounded a bit critical of some FOMC members who gave the impression of having made their policy decisions ahead of hearing the views of fellow colleagues. Elsewhere, she noted “all (rates) guidance should be conditional on the outlook for the economy” and the appropriate policy path depends “on expectations about where the medium term outlook is”. Finally, one of the lessons for the Fed from the taper-tantrum was to lay the ground work in a long set of communications to enable the taper process to be orderly, gradual and avoid market disruption. The BOE’s Carney reiterated his caution on Brexit, noting that the UK is in “exceptional circumstances”, in part as Brexit will “very much depend on the final arrangements with the EU-27 and what the transition path is from here”. However, he noted the potential impact on rates may be evolving. On the one hand, it could be inflationary as there are not much spare capacity in the economy, on the other, there could be an expansive relationship with Europe, a reasonable transition period and demand holds up. For now, “you could paint either picture”. The ECB’s Draghi expressed some disappointment in the continued media criticism of his Bank’s policies that was evident in some countries and noted that “forward guidance has now become a full-fledged monetary policy instrument”. Elsewhere, the BOE’s deputy governor Cunliffe was one of the two policy makers who oppose the recent rate hike in the UK. He reiterated his dovish view, noting “the low level of domestic pressure on inflation now, the absence of second round effects from the depreciation of sterling…..make it possible to wait before tightening policy until there is clear evidence that pay growth is responding to the level of unemployment”. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the NFIB small business optimism index was broadly in line at 103.8 (vs. 104 expected). In Germany, 3Q GDP beat expectations at 0.8% qoq (vs. 0.6% expected) and 2.8% yoy (vs. 2.3% expected) – the highest in 6 years, mainly due to positive contributions from net exports and capital investment. The November ZEW survey on current situations for November slightly beat at 88.8 (vs. 88 expected). In the Eurozone, the second reading of the 3Q GDP was unrevised at 0.6% qoq and 2.5% yoy along with the September IP at -0.6% mom and 3.3% yoy. The November ZEW survey on expectations was higher than last month’s reading at 30.9 (vs. 26.7 previous). Over in Italy, 3Q GDP was in line at 0.5% qoq and 1.8% yoy – the most since 1Q 2011. Looking at the day ahead, in Europe we’ll receive the final October CPI report in France and the September/October employment stats in the UK. In the US the big focus will be the October CPI print while October retail sales, November empire manufacturing and September business inventories are also due. There is plenty more central bank speak scheduled with the ECB’s Lane, Praet and Hanson all due along with the Fed’s Evans and the BoE’s Haldane. NAFTA negotiators from the US, Canada and Mexico are also scheduled to meet for round 5 of discussions.
Главные новости- Представитель ФРС Бостик (нейтрал без права голоса) заявил, что постепенные повышения ставки будут подходящими в ближайшие пару лет. Заявил, что высокий спрос значительно выполаживает кривую доходностей Treasuries в значительной степени. Также он не предполагает резких изменений курса ФРС в связи со сменой состава. - Белый Дом обдумывает кандидатуру Мохамеда Эль-Эриана, со-основателя PIMCO, ведущего экономического консультанта международной финансовой корпорации Allianz на должность вице-президента ФРС, среди других кандидатов, сообщает агентство Dow Jones. - Мнучин заявил, что рост в США на уровне 2% не является новой нормальностью и налоговая реформа поможет достичь цели ускорения годового роста как минимум до 3%. - Опрос от Quinnipiac University показывает, что рейтинг доверия Трампа упал до нового минимума в 40%. - Во Франции группа “100 демократов”, членов партии Макрона “Вперед, Республика”, собирается выйти из партии до субботнего конвента партии, заявляя о дефиците демократии в партии. Среди этих 100 есть избранные представители власти и главы регионов Франции. - Министерство финансов Греции произвело дальнейшее ослабление контроля над капиталом. - Чиновники ЕС готовят встречи на высшем уровне по Брекзиту на начало следующего года, где они могли бы искать прорыва, так как сторона ЕС готовится к тому, что декабрьский саммит закончится провалом. - Представитель Банка Англии Канлифф (голосовал против повышения ставки) заявил, что национальная инфляция недостаточно сильна, чтобы гарантировать дальнейшие повышения ставки. - Рост ВВП Японии в 3 кв. показал рост 0.3% кв/кв против прогноза 0.4% кв/кв, в годовом выражении упал с 2.5% г/г до 1.4% г/г (прогноз 1.5% г/г).Источник: FxTeam
NEW YORK (Reuters) - A top economist at Pacific Investment Management Co on Tuesday said global markets are stuck in a low interest rate environment that has siphoned fear from investors who may be...
In what will come as a big surprise to many Fed watchers, moments ago the WSJ reported that among other candidates, Mohamed El-Erian, former deputy director of the IMF, former head of the Harvard Management Company, Bill Gross' former partner at Pimco until the duo's infamous falling out, and one of the few people who - together with John Taylor - actually deserve the nomination, is being considered for the Fed Vice Chairman role. DJ also added that Kansas banking regulator Michelle Bowman is also being considered. From the WSJ: The White House is considering economist Mohamed El-Erian as one of several candidates to potentially serve as the Federal Reserve’s vice chairman, according to a person familiar with the matter. The process of selecting the Fed’s No. 2 official began this month after President Donald Trump nominated Fed governor Jerome Powell to succeed Fed Chairwoman Janet Yellen when her term expires next February. The WSJ adds that there is a broad range of candidates under consideration for post, and that the White House will focus on monetary policy experience for post. Reportedly, the White House is also considering the nomination of a Kansas banking regulator for a seat on the Fed’s board of governors, according to two people familiar with the matter. Michelle Bowman was confirmed as the Kansas bank commissioner in January and would be nominated to a spot reserved for a community banker or regulator of community banks. In 2014, Congress reserved one of seven seats on the Fed’s board for a community banker and the position has never been filled. For those unfamilair, here are some recent perspectives on El-Erian's recent thoughts: El-Erian likes Bitcoin/Blockchain Fears a China Minsky Moment Is aware of equity market disconnect from reality Thinks The Fed Put is gone Is not surprised by low inflation And some recent notable quotables: "The Fed's embarked on this beautiful normalization: It has stopped [quantitative easing], it has raised rates, it has declared a path to reduce its balance sheet without disrupting markets and without derailing the global recovery. And I don't think anybody will want to mess with this beautiful normalization” “We don’t understand very well why inflation is low. And therefore, should inflation be an over-determining factor in monetary policy? On the other hand, how concerned is the Fed about elevated asset prices?” “I suspect the market is too sanguine when it comes to how much central bankers are thinking about the risk of financial instability down the road."
Москва, 13 ноября - "Вести.Экономика". В сотый раз за последнее десятилетие на рынке государственных облигаций провозглашается великий разворот. Доходность облигаций поднялась по всему миру, включая Китай, где доходность десятилетних бондов впервые с 2014 г. приблизилась к 4%.
В сотый раз за последнее десятилетие на рынке государственных облигаций провозглашается великий разворот. Доходность облигаций поднялась по всему миру, включая Китай, где доходность десятилетних бондов впервые с 2014 г. приблизилась к 4%.
В сотый раз за последнее десятилетие на рынке государственных облигаций провозглашается великий разворот. Доходность облигаций поднялась по всему миру, включая Китай, где доходность десятилетних бондов впервые с 2014 г. приблизилась к 4%.
The following article by David Haggith was published on The Great Recession Blog: The Trump Rally pushed ahead relentlessly through a summer full of high omens and great disasters, all which it swatted off like flies. Even so, all was not perfect in the market as nerves began to jitter midsummer beneath the surface even among the most longtime bulls. Wall Street’s fear gauge (the CBOE Volatility Index) lifted its needle off its lower post to a nine-month high after President Trump’s comments about “fire and fury” if North Korea didn’t toe the line. (Mind you, the high wasn’t very far off the post because of how placid the previous nine months had been.) As volatility stirred languidly over the threat of nuclear war, stock prices took a little spill with all major stock indices seeing their biggest one-day drop since May. The SPX fall amounted to a 1.4% drop in a day — nothing damaging. The Dow dropped about 1% in a day. But beneath the surface, the market is looking different and shakier. For example, trading narrowed to fewer players as more stocks in the Nasdaq 100 finally moved below their fifty-two week lows than moved above them. Likewise in the S&P. This phenomenon is known as the “Hindenburg omen,” and tends to precede major crashes. It’s a serious signal that highlights times of decoupling within an index or an exchange. The S&P hasn’t suffered five signals so tightly clustered since 2007 and 2000…. This year the pattern has been popping up more often in all four indexes … 74 omens so far in 2017, second only to 78 recorded in November 2007…. That they are manifesting in several indexes and forming so frequently are good reasons to brace for weakness. (MarketWatch) Long credit cycles like the current one always end with a crash. But first they deteriorate. The headline numbers remain positive while under the surface a growing list of sectors start to falter. It’s only when the latter reach a critical mass that market psychology turns dark. How far along is this process today? Pretty far, it seems, as some high-profile industries roll over: ‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone…. Used Car Prices Crash To Lowest Level Since 2009 Amid Glut Of Off-Lease Supply…. Junk Bonds Slump…. The worst is yet to come for retail stocks, says former department store executive Jan Kniffen…. U.S. Stock Buybacks Are Plunging…. “Perhaps over-leveraged U.S. companies have finally reached a limit on being able to borrow simply to support their own shares.” (–John Rubino, The Daily Coin) The fact is that the market is breaking down beneath the shrinking number of Big Cap stocks and levitating averages. This has all set-up a severe downside shock within the coming weeks. As to the market’s weakening internals, consider that there are 2,800 stocks on the New York Stock Exchange (NYSE). Back in early 2013 when the bull market was still being super-charged with massive QE purchases by the Federal Reserve, 85% or 2,380 of them were above their 200-DMA. By contrast, currently only 1,050 of them (37.5%) are above that level, meaning that the bull is getting very tired. (–David Stockman, The Daily Reckoning) Trading shifted this summer from the major players (often called the “smart money”) buying to smaller buyers trying to jump in, which is also the typical final scenario before a crash where the smart money escapes by finding chumps who fear missing some of the big rush that has been happening. And buybacks seem to be slumping as corporations hope for a new source of cash from Trump’s corporate tax breaks. In spite of those underlying signs of stress, the market easily relaxed back into its former stupor, with the fear gauge quickly recalibrating, from that point on, to absorb threats and disasters with scarcely a blip as the new norm. The market now yawns at nuclear war, hurricanes and wildfires, having established a whole new threshold of incredulity or apathy, so the fear gauge stirs no more. With the New York Stock Exchange eclipsed by the larger number of shares that now exchange hands inside “dark pools” — private stock markets housed inside some of Wall Street’s biggest casinos (banks) where the biggest players trade large blocks of stocks in secret during overnight hours — the average guy won’t see the next crash when it begins to happen. He’ll just awaken to find out it has happened … just like much of the nation woke one Monday to find out that northern California had gone up in flames over the weekend. Bulls starting to sound bearish While concern over these national catastrophes never came close to letting the bears out of their cages, it did change the dialogue at the top as if something was beginning to smell … well … a little dead under the covers. Perhaps these slight and temporary tremors in the market are all the warning we can expect in a market that is now almost entirely run by robots and inflated by central bank largesse. While the bearish voices quoted above can be counted on to sound bearish, many of the big and normally bullish investors and advisors became more bearish in tone as summer rolled into fall. For the first time in years, Pimco expressed worries about top-heavy asset valuations, particularly in stocks and junk bonds, advising its clients in August to trim risk from their portfolios. Pimco argued that that the new central bank move toward reversing QE could leave equities high and dry as the long high tide of liquidity slowly ebbs. Pimco’s former CEO said much the same: Bill Gross … perhaps the preimminent bond market analysts/ trader/ investor of the age… has gone on record as stating only just recently that the risks of equity ownership are as high as they were in ’08, and that at this point when buying weakness “instead of buying low and selling high, you’re buying high and crossing your fingers.” (Zero Hedge) Goldman Sachs even took the rare position that the stock market had a 99% chance that it would not continue to rise in the near future, and places the likelihood of a bear market by year’ send at 67%, prompting them to ask “”should we be worried now?” The last two times Goldman’s bear market indicator was this high were right before the dot-com crash and right before the Great Recession. In fact, there has only been one time since 1960 when it has been this high without a bear market following within 2-3 months. Of course, everything is different under central-bank rigging, but some central banks are promising to start pulling the rug out from under the market in synchronous fashion, starting last month. (Though, as of the Fed’s own latest balance sheet shows, they have failed to deliver on their promise, cutting only half as much by the close of October as they said they would.) Morgan Stanley’s former chief economist said at the start of fall that the combination of high valuations and rising interest rates is about to reck havoc in the market. He claimed the Fed’s commitment to normalization should have come much earlier, as the market now looks as frothy as it did just before the Great Recession. Citi now calculates the odds of a major market correction before the end of the year at 45% likelihood. Even Well’s Fargo now predicts a market drop of up to 8% by year’s end. Speaking of big banks, their stocks look particularly risky. Two years ago, Dick Bove was advising investors to buy major banks stocks aggressively. Now, he’s taken a strikingly bearish tone on the banks: A highly-respected banking stock guru warns that financial storm clouds loom for Wall Street’s bull rally. The Vertical Group’s Richard Bove “warns that the overall market is just as dangerous as the late 1990s, and he cites momentum — not fundamentals — as what’s driving bank stocks to all-time highs,” CNBC.com explains. “If we don’t get some event in the economy or in politics or in somewhere that is going to create more loan volume and better margins for the banks, then yes, they would come crashing down,” Bove told CNBC. “I think that the risk in these stocks is very high at the present time,” he said. (NewsMax) It’s a taxing wait for the market These are all major institutions and people who are normally quite bullish. Some of the tonal change is because of concern about the Fed’s Great Unwind of QE, while much is because enthusiasm over Trump’s promised tax cuts has become muted among investors deciding to wait and see, having been burned by a long and futile battle on Obamacare. In fact, the market showed more interest in Fed Chair Yellen’s suggestion of a December interest-rate hike than in Trump’s release of a tax plan. Retiring Republican Senator Bob Corker predicts the fighting over tax reform will make the attempt to rescind Obamacare look like a cakewalk, and he intends to lead the fight as one of the swing voters to make sure it is not a cakewalk now that he and Trump are political enemies. The Dow took a 1% drop in the summer when Bannon was terminated so that anti-establishment resellers felt they were losing the battle and when the Republican government seemed deadlocked on all tax-related issues, which it still may be. On the bright side, with Mitch McConnel’s Luther Strange losing his senate race and Bob Corker quitting, anti-establishment forces appear to be gaining a little power. That’s, at least, something. On the other hand, Trump has just chosen an establishment man to run the Fed, and Trump, who once ridiculed Janet Yellen for propping up Obama’s economy with low interest rates, said a few days ago, I also met with Janet Yellen, who I like a lot. I really like her a lot. President Trump’s new Federal Reserve chair, Jerome “Jay” Powell, “a low interest-rate kind of guy,” was obviously picked because he is Janet Yellen minus testicles, the grayest of gray go-along Fed go-fers, going about his life-long errand-boy duties in the thickets of financial lawyerdom like a bustling little rodent girdling the trunks of every living shrub on behalf of the asset-stripping business that is private equity…. Powell’s contribution to the discourse of finance was his famous utterance that the lack of inflation is “kind of a mystery….” Unless you consider that all the “money” pumped out of the Fed and the world’s other central banks flows through a hose to only two destinations: the bond and stock markets, where this hot-air-like “money” inflates zeppelin-sized bubbles that have no relation to on-the-ground economies where real people have to make things and trade things…. The “narrative” is firmest before it its falseness is proved by the turn of events, and there are an awful lot of events out there waiting to present, like debutantes dressing for a winter ball. The debt ceiling… North Korea… Mueller… Hillarygate….the state pension funds….That so many agree the USA has entered a permanent plateau of exquisite prosperity is a sure sign of its imminent implosion. What could go wrong? (–James Howard Kunstler) Powell doesn’t sound like a man who sees a need for change in the current Fed programming, but he is the very best Trump could think of for carrying out his desire to make America great again. Bulls still climbing to dizzying heights While some of the leading bulls have started sounding like bears of late, the bulls still lead the bears by more than 4:1, and investors remain in love with technology almost as much as they were before the dot-com crash. ”Still, as Sir John Templeton famously said, Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. We are clearly in the euphoric stage where the market just cannot stop itself from rising. It’s been a year-long euphoria now as the Trump Rally, which stalled for some time midyear, found a second wind. It is now on track to soon become the greatest rally in 85 years. You have to go back to FDR and the recovery from the Great Depression to find anything greater. No euphoria there, given that is all based on tax cuts that have as much likelihood of failing as the Obamacare repeal had. What is peculiarly interesting at present is the euphoria over volatility itself. Look at the following two graphs: (The first indicates what is happening in terms of market volatility. The second shows where people are betting volatility will go from here.) The CBOE Volatility Index dove 8% last Friday to close the week just a hair’s breadth above its lowest volatility record ever! So, at a time when volatility in the stock market is essentially as low as it has ever gone, bets that volatility will go lower have risen astronomically. Yeah, that makes sense. Essentially, hoards of investors are so certain that volatility is down for the count that they are betting it will practically cease to exist months from now. As Mauldin Economics has argued, we are now, among all our other bubbles, in a volatility bubble. Such low volatility when the market is priced to its peak means market investors see no risk even at such a high top and even in an environment that has been literally plagued for months by external risks from hurricanes to wildfires to endless threats of nuclear annihilation by a lunatic. That’s because all investors know the market will stay up for as long as the Federal Reserve chooses to keep propping it up. Investors must not be taking the Fed’s threat of subtracting that support seriously, or they are choosing to stay in to the last crest of the last wave and then all hoping to be the first ones out before the wave crashes. Is that rational or irrational euphoria? This market is not just notable for how long its low-volatility euphoria has gone on but also for how low the volume of trades have been. We are almost at a point of no volatility and no volume. That means nobody is selling stocks if they don’t get a higher price, but there aren’t many buying either. The few companies whose stocks are pushing the market up are trading less and less. That trend holds in both the US and Europe. European trading volume is its lowest in five years; and in the US, it is 22% below last year and still falling. That things are so calm in the middle of global nuclear threats, devastating hurricanes and wildfires and constant political chaos on the American scene and with such a do-nothing congress strikes me as surreal. The Wall Street Journal concludes, The collapse in trading volumes is closely tied to the recent fall in volatility, where measures of daily stock price movements have plumbed multiyear lows. When markets aren’t moving, there are typically fewer people scrambling to protect their portfolios against further losses or seizing an opportunity to buy things that look cheap.” (The Wall Street Journal) What does it mean; where do we go from here? Even the WSJ says it isn’t sure what this low-volatility/low-volume stasis means. I have to wonder if the market will reach such a lull in volatility that everyone just sits there, looking at each other, wondering who will be the first to move again. Is that finally the moment panic breaks in? Even the Journal wonders if the eery calm means investors have simply become so bullish they refuse to sell. Or is it that everyone is already in the market who wants in at current prices now that the Fed has stopped QE and is now even reversing it. Is the lull extreme narrowing happening because there is no longer excess new money in the market to invest but no one scared enough to drop their price and sell? Is there no money that wants in at current prices and under the current knowledge that money supply will now be deflating for the first time in years? Is this the way the unwind of QE starts to suck money back out of the market … by reducing the number of interested traders to a thin trickle while the fewer number of interested players who do have money to invest keep bidding up prices? If you’re already in this hyper-inflated market, where earnings only look good on a per-share basis because companies keep spending a fortune buying back shares, then you may see no reason to sell; but, if you’ve been sitting on the side with a pocketful of cash, it may look awfully late in the game to jump in. (Consider also that growth in earnings throughout the first half of 2017 was easy to show because it compared to the first half of 2016, where earnings were terrible. Now the climb in earnings has to steepen in order to show growth year on year.) So what if the tax reform that everything seems to be depending on flops? Charles Gaparino warns, If tax reform bellyflops the way ObamaCare repeal did, many smart analysts are coming to the conclusion that the market will turn sour. Without tax cuts, one Wall Street executive told me, “the markets will drop like a rock….” This is a significant change in investor attitudes…. As much as stock values represent economic and corporate fundamentals, they also represent raw emotion known as the “herd mentality.” And that mentality, according to the investors I speak to, has begun to shift in recent weeks…. The market mentality that once said anything is better for the markets than Hillary is now saying to the president and Congress: Deliver on those promised tax cuts or face the consequences. And they won’t be pretty.(The New York Post) Evidence of how reactive the market will be if tax cuts are less than expected came a couple of weeks ago when the Russel 2000 fell the most it has since August on news that the Republicans’ proposed corporate cuts would be phased in over a period of years. That demonstrated that the Trump Rally is mostly about the tax cuts; they are fully priced in; so, if the tax cuts fail or even get dragged out over years, the market fails. With savings way down, personal debt extremely high, corporate debt quite high, and central banks threatening to reduce liquidity, consumption will have no means of support if asset prices also fall; so, the whole broader consumer-based economy goes back down if the stock market fails. Of course, central banks will revert to more QE if that happens; but each round of QE has been less effective dollar-for-dollar. And where have we arrived under complete Republican leadership in the midst of all this? As the Committee for a Responsible Federal Budget stated, Republicans in Congress laid out two visions in two budgets for our fiscal future, and today, they choose the path of gimmicks, debt, and absolutely zero fiscal restraint over the one of responsibility and balance. While the original House budget balanced on paper and offered some real savings, the Senate’s version accepted today by the House fails to reach balance, enacts a pathetic $1 billion in spending cuts out of a possible $47 trillion, and allows for $1.5 trillion to be added to the national debt…. The GOP is now on-the-record as supporting trillions in new debt for the sake of tax cuts over tax reform…. “Tax cuts do not pay for themselves; they can create growth, but in the amount of tenths of percentage points, not whole percentage points. And they certainly cannot fill in trillions in lost revenue. Relying on growth projections that no independent forecaster says will happen isn’t the way to do tax reform. (TalkMarkets) This is progress? The Republicans are proving month after wearying month they are incapable of doing everything they have sworn for years they would do if they were in power. They could complain as an obstructionist body about the other sides, but they have no solutions they can agree on. The Republican answer in the budget and tax plan that have just come out guarantees mountains of additional debt as far as the eye can see … with the perennial promise that cuts will eventually be made in some distant future by a congress that will not in any way be beholden to the wishes and slated demands of the present congress. (Always tax cuts now, spending cuts promised to be made by other people far down the road.) If the program passes, however, it will shore up the stock market which has been banking entirely on that possibility; but at the cost of deeper economic structural problems to be solved (as always) by others later on. If it doesn’t pass, you do the math as to what that likely means for all the underlying weaknesses presented above when huge tax breaks are already baked into stock prices. If you want to see whether or not tax cuts have EVER created sustained economic growth, read the last article linked above, but here is a chart from that article for a quick representation of the truth:
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Libby Cantrill, executive vice president of public policy at Pimco, discusses whether the delayed tax reform bill can get passed.
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