Good evening Ladies and Gentlemen: (amended to include data on comex silver as they had a data failure yesterday night)
Here are the following closes for gold and silver today:
Gold: $1120.60 down $3.10 (comex closing time)
Silver $14.54 down 16 cents.
In the access market 5:15 pm
Today China is closed and this country is a major purchaser of gold. Thus without these players, it was easy for our bankers to manipulate gold and silver for the second day in a row. Monday will be interesting as China will be the first to trade. I may provide some coverage for you on Monday on Chinese trading. I expect fireworks on Tuesday trading.
First, here is an outline of what will be discussed tonight:
At the gold comex today we had a poor delivery day, registering 0 notices for 0 ounces Silver saw 53 notices for 265,000 oz.
Several months ago the comex had 303 tonnes of total gold. Today, the total inventory rests at 223.26 tonnes for a loss of 80 tonnes over that period.
In silver, the open interest fell by 1521 contracts despite the fact that silver was up in price by only 4 cents yesterday. Again, our banker friends used the opportunity to cover as many silver shorts as they could but failed. The total silver OI now rests at 156,620 contracts In ounces, the OI is still represented by .783 billion oz or 111% of annual global silver production (ex Russia ex China).
In silver we had 53 notices served upon for 265,000 oz.
In gold, the total comex gold OI surprisingly rose to 413,877 for a gain of 5,092 contracts. We had 0 notices filed for nil oz today.
We had no change in tonnage at the GLD today/ thus the inventory rests tonight at 682.59 tonnes. The appetite for gold coming from China is depleting not only gold from the LBMA and GLD but also the comex is bleeding gold. It sure looks like 670 tonnes will be the rock bottom inventory in GLD gold. It looks to me that China has taken the last amounts of physical gold from the GLD. I guess the only place left for China to receive physical gold will be the FRBNY and the comex. In silver, we had no changes in silver inventory at the SLV,/ Inventory rests at 324.923 million oz.
We have a few important stories to bring to your attention today…
1. Today, we had the open interest in silver fall by 1,521 contracts down to 156,620 despite the fact that silver was up by only 4 cents in price with respect to Thursday’s trading. The total OI for gold rose by 5092 contracts to 413,877 contracts, despite the fact that gold was down by $8.80 yesterday.
2.Gold trading overnight, Goldcore
3. The COT report
4. Overnight, the Japanese minister opens his mouth claiming that some nations will tighten shortly ending the USA/Yen rising, setting the stage for today’s bloodbath
5.Your big story of the day, the iMF confirming that central banks do not have enough of treasuries to monetize especially ECB and the Bank of Japan
6. Traders dumping Japanese stocks in the fastest pace in HISTORY
7. Foreign exchange traders worried about Brazil as this nation is teetering on the edge
8. Turkey sees its lira fall to 3. to 1 as this emerging market challenges Brazil to see who defaults first
9. Graham Summers/ of Phoenix Capital Research discusses the huge 9 trillion USA short position and its meaning:
(Graham Summers/Phoenix Research Capital)
10. Hugh Smith on why large amounts of capital are leaving China
( Charles Hugh Smith)
11. USA stories/Trading of equities NY
a) 2 stories today on NY trading
b) Six stories on the jobs report NFP
(zero hedge/BLS/Dave Kranzler/IRD)
c Jeffry Lacker (Fed Governor) warns of a strong case of a rate hike whether the jobs report was good or bad
d) Home prices falling in New York area due to lack of buyers as aggregate demand is playing havoc on the economy
e) Greg Hunter wraps up this week
12. Physical stories:
- Peter Cooper/Arabian Money/GATA on the EU investigation into price fixing of gold and silver
- Steve St Angelo on central bank selling of gold and silver over the past several years (Steve St Angelo/SRSRocco report)
- Bill Holter talks about premium on gold and silver coins
- Craig Hemke on the phoniness of deliveries at the gold/silver comex
and well as other commentaries…
Let us head over and see the comex results for today.
September contract month:
|Withdrawals from Dealers Inventory in oz||nil|
|Withdrawals from Customer Inventory in oz|| 43,305.709 oz
|Deposits to the Dealer Inventory in oz||nil|
|Deposits to the Customer Inventory, in oz||1,607.500oz (Manfra)
|No of oz served (contracts) today||0 contracts (nil oz)|
|No of oz to be served (notices)||179 contracts (179,000 oz)|
|Total monthly oz gold served (contracts) so far this month||12 contracts(1,200 oz)|
|Total accumulative withdrawals of gold from the Dealers inventory this month||nil|
|Total accumulative withdrawal of gold from the Customer inventory this month||48,586.2 oz|
Total customer deposit: nil oz
JPMorgan has 4.41 tonnes left in its registered or dealer inventory. (141,842.843) and only 830,984.990 oz in its customer (eligible) account or 25.84 tonnes
September silver initial standings
September 4 2015:
|Withdrawals from Dealers Inventory||nil|
|Withdrawals from Customer Inventory|| 346,453.68 oz
|Deposits to the Dealer Inventory||nil|
|Deposits to the Customer Inventory||nil|
|No of oz served (contracts)||53 contracts (265,000 oz)|
|No of oz to be served (notices)||849 contracts (4,245,000 oz)|
|Total monthly oz silver served (contracts)||664 contracts (3,320,000 oz)|
|Total accumulative withdrawal of silver from the Dealers inventory this month||nil|
|Total accumulative withdrawal of silver from the Customer inventory this month||4,739,436.4 oz|
DATA FAILURE from COMEX with respect to silver inventory movements has now been corrected and I have amended the Sept 4 commentary.
Today, we had 0 deposits into the dealer account:
total dealer deposit; 0 oz
total customer deposits: 0 oz
total withdrawals from customer: 346,453.66 oz
And now SLV:
Sept 4.2015:no changes in inventory at the SLV/rests tonight at 324.923 million oz
sept 3/we had a small withdrawal of 140,000 oz of silver from the SLV/Inventory rests at 324.923 million oz
Sept 2: we had a small withdrawal of 859,000 oz of silver from the SLV vaults/inventory rests tonight at 325.063 million oz
September 1/no change in inventory over at the SLV/Inventory rests tonight at 325.922 million oz
August 31.a huge addition of 954,000 oz were added to inventory today at the SLV/Inventory rests at 325.922 million oz
August 28.2015: no change in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 27.no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 26.2015/no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 25.2015:no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 24./no change in inventory at the SLV/Inventory rests at 324.698 million oz
August 21.2015/ no change in inventory at the SLV/Inventory rests at
324.698 million oz
August 20.2015:/no changes in inventory at the SLV/Inventory rests tonight at 324.698 million oz
August 19/no changes in inventory at the SLV/Inventory rests tonight at 324.698 million oz
Sprott formally launches its offer for Central Trust gold and Silver Bullion trust:
SII.CN Sprott formally launches previously announced offers to CentralGoldTrust (GTU.UT.CN) and Silver Bullion Trust (SBT.UT.CN) unitholders (C$2.64) Sprott Asset Management has formally commenced its offers to acquire all of the outstanding units of Central GoldTrust and Silver Bullion Trust, respectively, on a NAV to NAV exchange basis. Note company announced its intent to make the offer on 23-Apr-15 Based on the NAV per unit of Sprott Physical Gold Trust $9.98 and Central GoldTrust $44.36 on 22-May, a unitholder would receive 4.45 Sprott Physical Gold Trust units for each Central GoldTrust unit tendered in the Offer. Based on the NAV per unit of Sprott Physical Silver Trust $6.66 and Silver Bullion Trust $10.00 on 22-May, a unitholder would receive 1.50 Sprott Physical Silver Trust units for each Silver Bullion Trust unit tendered in the Offer. * * * * *
|Gold COT Report – Futures|
|Change from Prior Reporting Period|
|non reportable positions||Change from the previous reporting period|
|COT Gold Report – Positions as of||Tuesday, September 01, 2015|
|Silver COT Report: Futures|
|Small Speculators||Open Interest||Total|
|non reportable positions||Positions as of:||143||119|
|Tuesday, September 01, 2015|
Our small specs;
Those small specs that have been long in silver pitched 1442 contracts from their long side.
Will Uncle Sam Confiscate Gold Again?
Today’s Gold Prices: USD1125.00, EUR 1009.87 and GBP 737.95 per ounce.
Yesterday’s Gold Prices: USD1130.05, EUR 1005.88 and GBP 739.63 per ounce.
Gold was 0.8% lower yesterday and closed at $1125.40 per ounce, down $8.20 to go 0.6% lower for the week. Silver was flat and again closed at $14.69 per ounce but is nearly 1% higher for the week.
Will Uncle Sam Confiscate Gold Again?
Investors suffered financial losses in recent weeks as stocks globally came under pressure in August and had their worst month in the last three years.
In one of the most volatile trading periods since the global financial crisis, August saw a massive $5.7 trillion erased from the value of stocks worldwide. No major stock market was left unscathed and the risk of financial and economic contagion became evident again.
There are growing concerns internationally that in the event of another Wall Street or global stock market crash and a new systemic crisis – a Eurozone debt crisis or another Lehman Brothers collapse – there could be enforced bank closures or extended bank holidays in the EU and U.S. as seen in Greece recently.
In this scenario, deposit boxes and vaults in U.S. banks and financial institutions could be sealed and gold confiscated again.
There is a legal precedent for this. April 5th, 1933 – at the height of the Great Depression – was the day when U.S. President Franklin Delano Roosevelt instructed all American citizens to hand over all their gold coins and bars to the Federal Government.
Every coin, bar and certificate had to be handed in to Roosevelt’s government or else one would face a very large fine of $10,000 or 10 years in jail. That is whopping fine of $180,000 fine in today’s money.
Gold was money at the time as dollars were backed by gold so in effect Roosevelt was confiscating the safest and most valuable form of money that people owned for the benefit of the state. Under the Gold Confiscation Act of 1933 Roosevelt ordered all gold be handed to the authorities. At the time, gold was valued at $20 per ounce. Once the gold was confiscated from the citizens and in the government coffers they revalued gold and devalued the dollar to $35 per ounce.
All privately held gold holdings were confiscated, capital controls were brought in and all gold exports were banned and the dollar depreciated massively against gold.
In the minds of the public, gold and silver are being associated with terrorists today. Bizarrely ISIS recently claimed it had launched gold and silver dinar and dirham coins as part of the group’s outlandish plan for “world domination.” As with all things ISIS it is difficult to establish fact from fiction amid all the disinformation and propaganda of today.
However, it seems possible and it would not be a large step from rightfully denouncing the brutal ISIS to demonising gold owners or the pejorative ‘goldbugs’ as anti-social and anti American ‘hoarders’ and using this is a justification for confiscation of legitimately owned gold bullion.
Guilt by association could be used as a tool to persuade and justify to the public why gold is a “barbaric relic” used by terrorists and should be banned in our ‘brave new’ cashless, moneyless and ‘goldless’ western world.
Alternatively, being forced to hand in gold bullion may be spun as doing your patriotic duty to help rebuild America after a financial, economic and monetary crash – as happened in 1933.
Given the conditions of today and the clear historical precedent, it is a bit naive to completely discount the risk of confiscation of bullion today.
The bail-ins and confiscation of individuals and companies savings by the Troika (EU, ECB and IMF) in Cyprus shows how there is a risk of confiscation of all assets – from deposits to pensions funds to stored gold.
Download the Essential Guide to Storing Gold Offshore here
It is now the case that in the event of bank failure, both your deposits and your gold could be confiscated. Let’s be crystal clear: the EU, UK, the U.S., Canada, Australia and New Zealand all have plans for bail-ins in the event of banks and other large financial institutions getting into difficulty.
The U.S. is one of the most indebted nations in the world today and one of the most indebted nations the world has ever seen. The national debt is now over $18.3 trillion and rising rapidly – see here. Importantly, there are unfunded liabilities of between $100 and $200 trillion.
There is a real risk that Uncle Sam will again confiscate citizen’s gold.
For many years, we have warned that if a confiscation takes place again, it will likely be of large stores of pooled gold, ETF custodial and unallocated gold in the banking system and large holdings of gold stored with companies and in countries that are massively indebted such as the UK, many Eurozone countries, Japan and indeed the U.S.
This shows the vital importance of owning gold in wealthier creditor nations that have a tradition of respect for property rights and in private depositories in safer countries such as Switzerland, Singapore and or Hong Kong.
It also shows the importance of owning and taking personal possession of some gold coins and bars.
Anecdotally, it is known that some people did not turn in their gold in 1933. Today, it would be even more problematic and governments would be unlikely to send police squads door to door to confiscate the tiny amounts of gold coins and bars held by citizens.
It is likely that in the event of such of another economic crisis – large pools of gold in indebted nations will be vulnerable. Pool accounts, digital gold bullion vaulting providers and depositories in the UK and the US might have their companies and assets nationalized and have their clients gold and silver bullion confiscated.
In the light of these risks, one should take possession of some of your bullion. But for security reasons, generally larger amounts would be safer stored in the safest vaults in the world and in the safest jurisdictions in the world.
**Note** Delays in delivery of silver coin and bar products continue and have deepened. Some 1 oz and 10 oz coin and bars formats are not available until November now. Various sovereign mint coins and private mint coin and bar production are still suspended. Premiums have risen and will likely continue to do so.
Platinum and palladium are all a touch weaker this morning. On a weekly basis, palladium’s the biggest loser – down 2.2%, followed by platinum which is down 1.7%.
On the wider markets today, investors cut holdings in riskier assets, seeking shelter before U.S. payrolls data that may again show the U.S. economy is weaker than thought and weakening. Stocks fell for the first time in three days in Europe and shares in Asia extended a seventh weekly decline as equities in Japan and Hong Kong resumed losses.
Most European share indices are down nearly 2%. Markets are focused on a U.S. jobs report for hints about the timing of an expected interest rate rise in the United States. The dollar fell as stocks weakened, with traders increasingly certain that a key U.S. jobs report due later is unlikely to push the Federal Reserve to raise rates.
The euro rose 0.25%, while euro zone bond yields fell further following a strong signal from the European Central Bank that it is willing to undertake further QE in an attempt to revive the struggling single currency bloc’s economy.
The ECB downgraded its growth forecasts for the euro area yesterday, with President Mario Draghi citing a slowdown in emerging-market economies and signaling policy makers may expand ‘stimulus’, engage in further QE and further debase the euro.
Gold retains 2-day decline ahead of U.S. jobs data – Reuters
Perth Mint’s gold, silver sales drop in August but robust – The Economic Times
UPDATE 1-Supervisors should not tell whole truth about bank health -BuBa economist – Reuters
Best Ever August for Bullion Silver Eagles – silvercoinstoday.com
Gold fever hits Poland with possible discovery of Nazi train – Yahoo News
These Are a Few of the Stock Charts That Spook Louise Yamada – Bloomberg TV
Why Are Foreign Countries Repatriating Gold From US Federal Reserve? – Sputnik
Death Crosses Everywhere; Time to Buy Gold Yet? – Barron’s
Your savings are at risk – Tim Price – MoneyWeek.com
Peter Cooper: Don’t dismiss the EU investigation into alleged gold and silver price fixing
Submitted by cpowell on Fri, 2015-09-04 01:09. Section: Daily Dispatches
By Peter Cooper
Arabian Money, Dubai, United Arab Emirates
Thursday, September 3, 2015
Gold bugs are bemused by reports that the European Union competition watchdog is investigating alleged “anti-competitive behavior” by participants in the precious metals market.
But anybody who remembers how the EU broke up the cement cartel a couple of decades ago will know that this is a watchdog that has very powerful teeth. Its fines can bankrupt even very large companies or banks.
True the gold bugs have watched and waited in the past when various investigations into alleged precious metal price fixing have been launched in the US, UK and Germany. These investigations have quietly concluded that nothing was wrong, despite some very convincing evidence from market watchers and industry experts.
The general view in the gold community is that the central banks themselves manipulate the gold price to help dampen inflation expectations. And the central banks are above the law in such matters.
However, they may have met their match in the EU competition watchdog. According to the Treaty of Rome and its later additions, EU law is the supreme authority, and even central banks are subservient to its law. …
… For the remainder of the commentary:
Supervisors should not tell whole truth about bank health, Bundesbank economist warns
Submitted by cpowell on Fri, 2015-09-04 03:59. Section: Daily Dispatches
By Francesco Canepa
Tuesday, September 1, 2015
Banking supervisors should withhold some information when they publish stress test results to prevent both bank runs and excessive risk taking by lenders, according to a paper co-authored by a Bundesbank economist.
European banking authorities are due to carry out a fresh round of stress tests next year as they try to restore investor and depositor confidence in the continent’s banks after the financial crisis.
The paper, presented at a conference in Mannheim last week but yet to be published in its current form, says stress tests should be used to influence depositor behavior and warns against giving too much away.
If depositors know from the watchdog that banks are in trouble, they will withdraw their cash, threatening lenders’ survival and causing the panic the supervisor is trying to avoid, the paper said.
For this reason, the authors say, the amount of information disclosed by supervisors should decrease the more vulnerable the banking sector is expected to be. …
… For the remainder of the report:
TF Metals Report: The Comex delivery charade
Submitted by cpowell on Fri, 2015-09-04 14:06. Section: Daily Dispatches
10:05a ET Friday, September 4, 2015
Dear Friend of GATA and Gold:
The TF Metals Report’s Turd Ferguson today examines Comex gold contract delivery data for August and concludes that “there is no actual gold being delivered.” Rather, he writes, bullion banks JPMorganChase and HSBC are just shuffling warehouse receipts. His commentary is headlined “The Comex Delivery Charade” and it’s posted at the TF Metals Reort here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
THE END GAME: Central Bank Precious Metals Supply Evaporates
by SRSrocco on September 4, 2015 •
The Central Bank policy of dumping precious metals onto the market to rig prices has come to an end. Soon, Central Banks will no longer have the ability to control the paper price of gold and silver as true market fundamentals will finally kick in. Unfortunately, when the decades long marketing rigging of the precious metals finally ends, most investors will not be prepared.
When we talk about Central Bank precious metal sales, most investors think of gold. However, Central Banks supplied a great deal of silver into the market over the past 50+ years. The United States was the world’s “Silver Sugar Daddy” during the 1960’s. I am putting together THE SILVER MARKET REPORT explaining this in detail.
As the U.S. Government depleted the last of its stocks of silver in the 1990’s, China, India and Russia supplemented the market over the past decade. This chart below, is from my THE SILVER CHART REPORT showing the Net Government Silver Sales since 2003:
From 2003 to 2013, these three governments (mostly China) sold a total of 454.2 million oz (Moz) of silver into the market. As we can see, net government silver sales were the highest from 2003 to 2006, continued to decline until 2013, and then dropped to zero by 2014.
If we combine Central Bank gold and silver sales over the same time period, we find a distinct change:
From 2003 to 2008, Central Banks sold 91.5 Moz of gold and 368 Moz of silver into the market. What is interesting to note here, is that the majority of gold sales came from Western Central Banks, while all the silver sales came from Eastern Central Banks. In a round-about way, the Western Central banks were supporting the gold price, while the Eastern Central Banks were supporting the silver price.
Of course, some investors would call this “manipulation hogwash”, but I can assure you… without Central Bank dumping of gold and silver on the market, the global fiat monetary system would have likely disintegrated years ago.
Now, let’s look at the gold and silver bars on the right hand side of the chart. After the collapse of the U.S. Investment Banking System and Housing Market, Central Bank gold sales dried up and silver sales declined significantly. From 2009-2014, Central Banks only sold 1.1 Moz of gold and 86.2 Moz of silver.
However, this is only part of the picture. While Net Government Silver sales continued until 2013, Central Banks actually starting buying gold in a big way in 2011. If we look the chart below, we can see the big change in Central Bank net gold purchases starting in 2010:
In 2009, net Central Bank gold sales were only 34 metric tons (mt), compared to 235 mt in 2008. As you scroll to the left of the chart, Central Bank gold sales reached a high of 663 mt (21.3 Moz) in 2005.
NOTE: Net Central Bank gold purchases shown in red are negative, because these figures represent sales into the market, while the gold-colored bars represent net purchases.
That being said, Central Banks dumped a total of 2,846 mt (91.5 Moz) of gold onto the market from 2003 to 2008, and consumed a net 2,301 mt (75.3 Moz) from 2009 to 2014. Here we can see a distinct change in net Central Bank gold purchases after the near meltdown of the U.S. and Global Financial System in 2008.
I believe the Central Banks (especially the in the West) have run out of gold and silver to dump on the market. Thus, the END GAME for Central Bank precious metal rigging has arrived… it’s just a matter of time.
The huge volatility we are now experiencing in the oil and broader stock markets indicates BIG TROUBLE AHEAD. While some investors think it will take many decades for the Fiat Monetary System to unravel, I believe it’s just a matter of years…. maybe less.
If we see a serious collapse of the broader stock markets this fall, investors will likely ramp up their precious metals purchases in a big way. This will make the present shortage in the retail silver market even worse, thus causing it to spill over into the retail gold market.
10-25%+ seems to be the norm and anywhere from two – six weeks delay for delivery. We have talked about the dichotomy between silver being panic “sold” and “shortages” occurring simultaneously. In a free market, this is an impossibility.
What I’d like to do today is get you to think forward or around the corner. If premiums exist today in what has been a declining market, what will happen in a rising market?
Now, what would happen to premiums if the same supply demand dynamics were applied, but rather than the price declining …it was rising? In a rising market, buyers will pay a premium out of fear! This fear will arise not only because other assets are crashing around them but because owners of fiat don’t want to be stuck with something worthless. The other side of the coin, the supply side, will also be a source of fear. “Fear” of metal going “no offer” (which it will) and having no exit door at all!
We will very soon see a new currency regimes and even new currencies to replace old and tired ones. Any new currency MUST have the confidence of the public in order to be accepted. In my mind, the litmus test as to whether a new currency is accepted is whether or not holders of gold or silver will sell part of their hoard for paper currency.
1 Chinese yuan vs USA dollar/yuan remains constant, this time at 6.3549/Shanghai bourse: closed and Hang Sang: red
Surprisingly, last week, officially, China added another 19 tonnes of gold to its official reserves now totaling 1677.
2 Nikkei down 390.23 or 2.15.%
3. Europe stocks all in the red /USA dollar index down to 95.26/Euro up to 1.1139
3b Japan 10 year bond yield: falls to .386% !!!!(Japan buying 100% of bond issuance)/Japanese yen vs usa cross now at 120.06
3c Nikkei now below 18,000
3d USA/Yen rate now well below the important 120 barrier this morning
3e WTI: 46.51 and Brent: 50.50
3f Gold down /Yen up
3gJapan is to buy the equivalent of 108 billion uSA dollars worth of bond per month or $1.3 trillion. Japan’s GDP equals 5 trillion usa.
Japan to buy 100% of all new Japanese debt and by 2018 they will have 25% of all Japanese debt. Fifty percent of Japanese budget financed with debt.
3h Oil down for WTI and down for Brent this morning
3i European bond buying continues to push yields lower on all fronts in the EMU. German 10 yr bund falls to .704 per cent. German bunds in negative yields from 4 years out
Greece sees its 2 year rate falls to 11.63%/Greek stocks this morning up by 0.04%: still expect continual bank runs on Greek banks /
3j Greek 10 year bond yield falls to : 9.20%
3k Gold at $1124.40 /silver $14.71 (8 am est)
3l USA vs Russian rouble; (Russian rouble down 1 1/8 in roubles/dollar) 67.58,
3m oil into the 46 dollar handle for WTI and 50 handle for Brent/Saudi Arabia increases production to drive out competition.
3n Higher foreign deposits out of China sees huge risk of outflows and a currency depreciation (already upon us). This can spell financial disaster for the rest of the world/China forced to do QE!! as it lowers its yuan value to the dollar.
30 SNB (Swiss National Bank) still intervening again in the markets driving down the SF. It is not working: USA/SF this morning .9735 as the Swiss Franc is still rising against most currencies. Euro vs SF is 1.0845 well above the floor set by the Swiss Finance Minister. Thomas Jordan, chief of the Swiss National Bank continues to purchase euros trying to lower value of the Swiss Franc.
3p Britain’s serious fraud squad investigating the Bank of England/
3r the 4 year German bund now enters in negative territory with the 10 year moving closer to negativity to +.706%
3s The ELA lowers to 89.1 billion euros, a reduction of .6 billion euros for Greece. The bank withdrawals were causing massive hardship to the Greek bank. the Greek referendum voted overwhelming “NO”. Greece votes again and agrees to more austerity even though 79% of the populace are against.
4. USA 10 year treasury bond at 2.13% early this morning. Thirty year rate below 3% at 2.91% / yield curve flatten/foreshadowing recession.
5. Details Ransquawk, Bloomberg, Deutsche bank/Jim Reid.
(courtesy Jim Reid/Bloomberg/Deutsche bank/zero hedge)
Futures Slide More Than 1%, At Day Lows Ahead Of “Rate Hike Make Or Break” Payrolls
Moments ago, US equity futures tumbled to their lowest level in the overnight session, down 22 points or 1.1% to 1924, following both Europe (Eurostoxx 600 -1.8%, giving up more than half of yesterday’s gains, led by the banking sector) and Japan (Nikkei -2.2%), and pretty much across the board as DM bonds are bid, EM assets are all weaker, oil and commodities are lower in what is shaping up to be another EM driven “risk off” day. Only this time one can’t blame the usual scapegoat China whose market is shut for the long weekend.
As Bloomberg’s Richard Breslow points out, “yesterday, China being closed was a source of calm for the markets. This morning their being closed is seen as a lack of liquidity with traders looking elsewhere for hedges.” He adds that “Draghi’s dovish comments from yesterday are being rediscussed as not hurrah for QE, but geez things must be really bad out there.” And while the biggest risk event of the day will the nonfarm payroll print in just two hours, leading to much sought after clarity from the Fed as any number 190,000 or below cements the case of a rate hike delay, it was yesterday’s G-20 statement language that “monetary policy tightening is more likely in some advanced economies” that precipitated a mini flash crash in the E-mini shortly thereafter and has led to the unwind of the Yen carry trade, pushing both the USDJPY under 119 and the ES to its low of the day.
Asia stocks traded lower despite the mostly positive close on Wall Street as the dovish ECB inspired gains were pared on position squaring ahead of today’s key NFP release. Nikkei 225 (-2.15%) led the region lower as a cautious tone at the open saw JPY strengthen and pressure exporters, while ASX 200 (-0.1%) was weighed by weakness in energy and financials. The Hang Seng (-0.45%) traded negative on its return from Victory Day,after Hong Kong PMI (44.4 vs Prey. 48.2) printed its lowest reading since Apr’09 and new orders from China narrowed the most since 2008. JGBs traded higher as the demand for safer assets increased on the back of the cautious tone in the region, while the BoJ also entered the market to buy JPY 450b1n government bonds further stoking demand for 10yr JGBs.
Cautious sentiment dominated the price action in Europe as market participants booked profits following yesterday’s ECB inspired surge in stocks and also positioned for the release of the crucial US monthly jobs report. As per the recent trend, the downside was led by energy names, while the 50DMA and 200DMA levels of the German benchmark DAX index formed the so-called death cross pattern.
Bunds benefited from the flight to quality trade, with shorter-dated peripheral bond yield spreads continue to outperfor m10s equivalent, with the bid tone said to be supported by domestic accounts, especially Italian and Spanish based. The release of less than impressive retail PMIs, together with much weaker than expected German factory orders data which printed biggest fall since January further buoyed the bid tone in fixed income products.
In FX, safe haven related flows saw JPY gain across the board, with USD/JPY fell to its lowest level since 25th August after the pair took out stops on the break of 119.00 level and also the 50% retracement level of the 24th to 31st August move. Consequent USD weakness ensured that EUR/USD traded higher, in spite of the dovish rhetoric by the President of the ECB yesterday. Elsewhere, commodity sensitive currencies remained under pressure amid lower energy and base metal prices.
In the crude space, both WTI and Brent crude futures traded lower, weighed on the cautious sentiment which dominated the price action ahead of the eagerly awaited US monthly jobs report. Of note, despite the recent choppy price action, the CBOE Crude oil ETF volatility index has come off its highs over the past several sessions, but nevertheless remains elevated and trades at March levels.
Today’s main event is of course the payrolls report, while we’ll also get the associated employment indicators including the unemployment rate, average hourly earnings reading and labour force participation rate. As usual Fedspeak will also be worth keeping an eye on today ahead of the long weekend in the US (markets closed on Monday for Labour Day) with Lacker due to speak shortly before the data on a talk entitled ‘the case against further delay’. The G20 meeting of finance ministers also starts today in Turkey so it’ll worth seeing if anything interesting of note comes out of that.
- DAX -2%, Nikkei 225 -2.2%
- German 10Yr yield down 4bps at 0.68%
- Brent futures down 0.8% at $50.28/bbl
- Euro spot +0.2% at 1.1141
- V2X up 14% at 34.1
- S&P 500 futures down 1.1% at 1925
Bulletin Headline Summary from RanSquawk and Bloomberg
- Cautious sentiment dominated the price action in Europe as market participants booked profits following yesterday’s ECB inspired surge and also positioned for the NFP release
- 50DMA and 200DMA levels of the German benchmark DAX index formed the so-called death cross pattern
- Looking ahead, highlights include US Nonfarm Payrolls, US Unemployment Rate and Fed’s Lacker making a case against further rate hike delays
- Treasuries gain as stocks decline before report forecast to show U.S. added 217k jobs in August while unemployment rate fell to 5.2% from 5.3%.
- Deputy PBOC governor Yi Gang, said China’s economy is solid despite the stock market selloff and that the yuan will be stable; signaled China won’t get dragged into tit-for-tat currency valuations
- UBS lowered its target for Hong Kong’s benchmark stock gauge by 25%, saying its worst-case scenario for the city is coming true as the economy weakens and tourism arrivals decline
- Far from weakening the Chinese military, the troop cuts announced by President Xi Jinping will help counter U.S. advantages and improve the country’s ability to project force further from its shores
- Prime Minister David Cameron yielded to pressure over the migration crisis engulfing Europe and said Britain will take in “thousands more” refugees from Syria
- Vice President Joe Biden opened up for the first time publicly about his painful deliberations over whether to run for president so soon after his son Beau’s death to brain cancer, saying the key question is “whether my family and I have the emotional energy to run”
- Sovereign 10Y bond yields lower. Asian and European stocks fall, U.S. equity-index futures decline. Crude oil, gold and copper decline
US Event Calendar
- 8:10am: Fed’s Lacker speaks in Richmond, Va., speech titled “the case against further delay“
- 8:30am: Change in Non-farm Payrolls, Aug., est. 217k (prior 215k)
- Change in Private Payrolls, Aug., est. 204k (prior 210k)
- Change in Mfg Payrolls, Aug., est. 5k (prior 15k)
- Unemployment Rate, Aug., est. 5.2% (prior 5.3%)
- Average Hourly Earnings m/m, Aug., est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, Aug., est. 2.1% (prior 2.1%)
- Average Weekly Hours All Employees, Aug., est. 34.5 (prior 34.6)
- Underemployment Rate, Aug. (prior 10.4%)
- Change in Household Employment, Aug. (prior 101k)
- Labor Force Participation Rate, Aug., est. 62.7% (prior 62.6%)
- G-20 finance ministers, central bankers meet in Ankara
DB’s Jim Reid concludes the overnight recap
As we discussed in our ‘Back to School’ credit strategy note earlier this week we think the global financial system is so fragile and the global economy so lethargic and asset prices generally so high (with exceptions) that it near forces central banks into a continuation of easy monetary conditions. So while our inclinations are to be bearish we are not due to what is still extraordinary global central bank liquidity and the promise of more to come. For now the ECB have laid the groundwork for such an occurrence.
More on the ECB later but next stop payrolls. As we noted yesterday, DB’s Joe Lavorgna has been highlighting that August tends to be a seasonally weak month for payrolls reports. Joe highlights in particular that the August reading has missed consensus expectations in 21 out of the last 27 years. The last four August payrolls reports have come in below consensus, averaging a 55k miss, while the data is even more compelling the further you go back in time. Since 1988 the average forecasting error has been -61k in the month of August while the median forecast error sits at -42k. Joe also highlights that even in relatively strong years for hiring there are typically pockets of payrolls weakness. Taking the three strongest years for hiring in the last four decades, in 1977 the US economy generated 4m jobs, yet there were three months when payrolls were very disappointing: June (135k), August (92k) and October (119k). The same happened in 1978 when despite generating 4.3m jobs, payrolls dipped well below trend in April (175k), August (113k) and September (-58k) while in 1984, when 3.9m jobs were added, August was again one of the three months of relative softness. So Joe’s forecast is for 170k while the market is sitting at 217k.
We head into today’s print with a September hike probability currently priced at 30%, down slightly from 32% this time yesterday. Meanwhile, it’s been a weak session across Asian equity markets this morning although with not a lot in the way of newsflow. The Nikkei (-2.65%), Kospi (-1.41%) and Hang Seng (-0.60%) have all seen declines while the ASX (+0.29%) is a touch higher. Treasury yields have fallen a couple of basis points, while S&P 500 futures are indicating a soft start, down around half a percent. Oil has softened too, down around a percent while credit indices in Asia are largely unchanged.
Staying in Asia briefly, our China Chief Economist Zhiwei Zhang published an interesting note overnight evaluating the risk of capital outflows in China. Zhiwei’s view is that he thinks the problem of capital outflows is manageable. He highlights that a common misconception in the market is that a decline of foreign reserves is equivalent to capital outflows. He notes however that what happened from July 2014 to July 2015 is that, while foreign currency reserves, managed by the SAFE, dropped by some $350bn, the PBoC’s net foreign assets only declined $82bn, which was more than offset by a rise of private foreign assets held in domestic banks ($188bn). As a result, the net foreign asset position of the entire banking system actually rose in this period. Zhiwei estimates the size of PBoC intervention in August to be between $100bn and $150bn, but only a fraction have turned into capital outflows. This is different from the balance of payment crises which happened in other emerging markets with open capital accounts, where capital flight led to a downward spiral. Ultimately the real challenge the PBoC faces is how to exit the current arrangement and what new ER regime it should follow. More details on Zhiwei’s piece is in the link at the bottom of today’s note.
Back to the ECB, the staff growth and inflation forecasts were revised down, a little more than our economists expected with the Council seeing downside risks. Draghi repeatedly mentioned EM which was a signal that they’re concerned and as DB’s Mark Wall suggested, the rhetoric on the willingness to respond was dialled up to “willingness, readiness and capacity to act”. Supporting this was the decision to raise the issue limit on individual securities purchases to 33% from 25%. So they have given themselves room to act although there was no discussion on the immediate use of this facility so its use would require fresh info. Nevertheless this should create a mini ECB put on financial assets if turmoil returns.
The dovish stance saw reasonable downward pressure on European rates yesterday. 10y Bund yields fell nearly 6bps (-5.8bps) to 0.722% while the moves were more exaggerated in the peripherals with the likes of Portugal and Italy falling 11bps and 7bps respectively. The Euro tumbled and eventually finished the session down 0.93% at $1.112 while risk assets benefited from a decent bid. The Stoxx 600 closed up 2.37% while there were +2% moves for bourses in Germany, France and Italy too. Credit markets also had a decent day with Crossover eventually finishing 10bps tighter while the comments also helped spark a brief 4% surge in the Oil complex, before WTI and Brent settled down but still up 1.08% and 0.36% respectively.
These moves were in contrast to what felt like another nervous session across the pond. The S&P 500 got off to a decent ECB-boosted start, reaching an intraday high of 1.3% although that marked the high in optimism as the market then proceeded to sell-off once markets in Europe closed, eventually settling +0.12% at the closing bell with anxiety levels clearly on the rise ahead of today’s big data release. The Dow (+0.14%) traded in similar fashion but it was a weak day in the tech space with the Nasdaq (-0.35%) down and dipping back into negative territory for the year in the process.
Yesterday’s dataflow in the US contributed to the better tone early in the session. Much of the focus was on the August ISM non-manufacturing reading which, while declining 1.3pts from July came in nearly a point ahead of expectations at 59.0 (vs. 58.2 expected). The important employment subcomponent declined to 56 last month, from 59.6 but more importantly still sits at the high end of its post-recession range. Initial jobless claims rose 12k last week to 282k (vs. 275k expected) while there was some improvement in the final services PMI reading for August, revised up 0.9pts to 56.1 which helped keep the monthly composite reading unchanged at 55.7. Meanwhile the July trade balance showed a slightly smaller than expected deficit for the month, shrinking over 7% to $41.9bn (vs. $42.2bn expected) and the smallest gap now since February. That print, along with the non-manufacturing ISM and vehicle sales data from a couple days ago saw the Atlanta Fed upgrade their Q3 GDP forecast 0.2pp to 1.5%.
Just staying on the data briefly, Europe saw some positive numbers too yesterday. Of most significance was the final composite Euro area PMI reading for August, revised up 0.2pts to 54.3 and to a new cyclical high and a reading which our colleagues in Europe believe supports their 0.5% qoq GDP growth forecast for Q3. With the exception of France, regionally the data was supportive also. Germany saw the composite reading revised up 1pt to 55.0 thanks to a strong services print. Spain was nudged up 0.5pts to 58.8 while a 2.6pt revision upwards in Italy’s services reading saw its composite print hit a new cyclical high of 55.0. France was the clear disappointment however with the composite down to 50.2 after downward revisions of over 1pt in both sectors.
Before we turn over to the day ahead, DB’s George Saravelos published his latest report on Greece yesterday, reviewing the two major developments we saw in August – the conclusion of the 3rd ESM program and the precipitation of a new general election on September 20th. George believes that the ingredients are in place for a stable political outcome after the general election, irrespective of which of the two major parties comes first (Syriza or New Democracy). Beyond that, George expects it to be political rather than financial risk that will continue to drive Greek developments going forward. The economy is set to suffer under the recent imposition of capital controls and large upfront fiscal tightening, but the worse could well be behind us by the turn of the year. Greece’s willingness to constructively, rather than confrontationally, engage with creditors will ultimately determine whether Eurozone membership can be sustained. In turn, this will depend on strong popular support towards the euro persisting which has so far survived unscathed despite the recent crisis. Ultimately, the ingredients may be in place to generate a gradually improving outlook in coming months. Key dates for our diary in the meantime will be the September 12th Eurogroup meeting where the prior actions required to unlock the second sub-tranche of the first loan installment will be discussed. This is followed two days later by a TV debate between party leaders Tsipras and Meimarakis which will likely have a large influence on public opinion.
Onto the day ahead now. It’s relatively quiet on the data front in Europe this morning with just German factory orders and French consumer confidence prints due. The main event is of course this afternoon in the US with the aforementioned payrolls report, while we’ll also get the associated employment indicators including the unemployment rate, average hourly earnings reading and labour force participation rate. As usual Fedspeak will also be worth keeping an eye on today ahead of the long weekend in the US (markets closed on Monday for Labour Day) with Lacker due to speak shortly before the data on a talk entitled ‘the case against further delay’. The G20 meeting of finance ministers also starts today in Turkey so it’ll worth seeing if anything interesting of note comes out of that.
Late last night, the Japanese economic minister opened his mouth that monetary tightening was likely in some advanced countries which no doubt meant the USA. This caused the USA/Yen to sink causing the ramp spiraling southbound on all bourses in Asia, Europe and futures in NY.
(late last night, zero hedge)
US Equity Futures Mini-Flash-Crash As Japanese Econ Minister Opens Mouth
Just as the machines had learned the “Buy when Japan opens” signal, Japanese leaders unleash their usual stream of utter tripe and break the bid. Tonight’s chosen member was Japanese Economy Minister Amari who said“it is important for markets to act calmly, not move in a volatile manner,” adding “stock markets are not reflecting fundamentals,” reflecting on the fact that G-20 ministers had discussed China and “monetary tightening was likely in some advanced countries.”This sparked a plunge in USDJPY and an instant 100-point plunge in Dow futures.
US equity futures mini-flash-crash
Led by USDJPY…
It appears the admission that an advanced nation was likely to tighten combined with his calls for calm were seen as increasing the odds of a rate hike being imminent for The Fed.
It looks like The BoJ will have to get back to work tonight, since China is still on holiday. As it appears Kuroda likes this level (the red dashed line)…
Then early this morning the IMF has just confirmed what zero hedge and all of us has been telling you: that the ECB, the Central Bank and also the Fed are running out of bonds to monetize
an extremely important read for this weekend!!
(courtesy IMF/ECB Nowotny,zero hedge)
The IMF Just Confirmed The Nightmare Scenario For Central Banks Is Now In Play
The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program“hasn’t been as successful as we’d hoped.“
Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”
So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail“, was correct. Namely this:
… the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.
… while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.
(Actually, we said all of the above first all the way back in 2012, but that’s irrelevant.)
So aside from the ECB officially admitting that it has become supply*constrained even with security prices at near all time highs, why is this so critical?
Readers will recall that just yesterday we explained why “Suddenly The Bank Of Japan Has An Unexpected Problem On Its Hands” in which we quoted BofA a rates strategist who said that “now that GPIF’s selling has finished, the focus will be on who else is going to sell.Unless Japan Post Bank sells JGBs, the BOJ won’t be able to continue its monetary stimulus operations.“
We also said this:
“in 6-9 months, following the next major market swoon when everyone is demanding more action from the BOJ, “suddenly” pundits will have discovered the biggest glitch in the ongoing QE monetization regime, namely that the BOJ simply can not continue its current QE program, let along boost QE as many are increasingly demanding, unless it finds willing sellers, and having already bought everything the single biggest holder of JGBs, the GPIF, had to sell, the BOJ will next shakedown the Post Bank, whose sales of JPY45 trillion in JGBs are critical to keep Japan’s QQE going.
The sale of that amount, however, by the second largest holder of JGBs, will only last the BOJ for the next 3 months. What next? Which other pension fund will have the massive holdings required to keep the BOJ’s going not only in 2016 but also 2017 and onward. The answer: less and less.
Once again to be accurate, the first time we warned about the biggest nightmare on deck for the BOJ (and ECB, and Fed, and every other monetizing central bank) was back in October 2014, when we cautioned that the biggest rish was a lack of monetizable supply.
We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.”
This was our summary:
The BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existant and getting worse by the day. All that would take for a massive VaR shock scenario to play out in Japan is one exogenous JGBevent for the market to realize just how little actual natural buyers and sellers exist.
That said, our conclusion, which was not to “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business” may have been a tad premature.
The reason: overnight the IMF released a working paperwritten by Serkan Arslanalp and Dennis Botman (which was originally authored in August), which confirmed everything we said yesterday… and then some.
Here is Bloomberg’s summary of the paper:
The Bank of Japan may need to reduce the pace of its bond purchases in a few years due to a shortage of sellers, said economists at the International Monetary Fund.
There is likely to be a “minimum” level of demand for Japanese government bonds from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management requirements, said IMF economists Serkan Arslanalp and Dennis Botman.
Here are the excerpts from the paper:
We construct a realistic re balancing scenario, which suggests that the BoJ may need to taper its JGB purchases in 2017 or 2018, given collateral needs of banks, asset-liability management constraints of insurers, and announced asset allocation targets of major pension funds.
… there is likely to be a “minimum” level of demand for JGBs from banks, pension funds, and insurance companies due to collateral needs, asset allocation targets, and asset-liability management (ALM) requirements. As such, the sustainability of the BoJ’s current pace of JGB purchases may become an issue.
Back to Bloomberg:
While Governor Haruhiko Kuroda said in May that he expects no obstacles in buying government bonds, the IMF analysts join Nomura Securities Co. and BNP Paribas SA in questioning the sustainability of the unprecedented debt purchases.
Who in turn merely joined Zero Hedge who warned about precisely this in October of last year.
Back to the IMF paper, which notes that in Japan, where there is a limited securitization market, the only “high quality collateral” assets are JGBs, and as a result of the large scale JGB purchases by the JGB, “a supply-demand imbalance can emerge, which could limit the central bank’s ability to achieve its monetary base targets. Such limits may already be reflected in exceptionally low (and sometimes negative) yields on JGBs, amid a large negative term premium, and signs of reduced JGB market liquidity.”
To the extent markets anticipate limits, the rise in inflation expectations could be contained, which may mitigate incentives for portfolio rebalancing and create a self-fulfilling cycle that undermines the BoJ’s objectives.
For those surprised by the IMF’s stark warning and curious how it is possible that the BOJ could have put itself in such a position, here is the explanation:
So far, the BoJ’s share of the government bond market is similar to those of the Federal Reserve and still below the Bank of England (BOE) at the height of their QE programs. Indeed, the BoE held close to 40 percent of the conventional gilt market at one point without causing significant market impairment. Japan is not there yet, as the BoJ held about a quarter of the market at end-2014. But, at the current pace, it will hold about 40 percent of the market by end-2016 and close to 60 percent by end-2018. In other words, beyond 2016, the BoJ’s dominant position in the government bond market will be unprecedented among major advanced economies.
As we expanded yesterday, the biggest issue for the BOJ is not that it has problems buying paper, but that there are simply not enough sellers: “under QQE1, only around 5 percent of BoJ’s net JGB purchases from the market came from institutional investors. In contrast, under QQE2, close to 40 percent of net purchases have come from institutional investors between October 2014 and March 2015.”
This is where things get back for the BOJ, because now that the BOJ is buying everything official institutions have to sell, the countdown has begun:
given the pace of BoJ purchases under QQE2 and projected debt issuance by the government (based on April 2015 IMF WEO projections of the fiscal deficit), we estimate that Japanese investors could shed some ¥220 trillion of JGBs until end-2018 (Table 2, Figure 4). In particular, Japanese insurance companies and pension funds could reduce their government bond holdings by ¥44 trillion, while banks could sell another ¥176 trillion by end-2018, which would bring their JGB holdings down to 5 percent of total assets. At that point, the BoJ may have to taper its JGB purchases.
Then there are the liquidity issues:
As the BoJ ascends to being a dominant player in the JGB market, liquidity is likely to be affected, implying that economic surprises may trigger larger volatility in JGB yields with potential financial stability implications. As noted in IMF (2012), demand-supply imbalances in safe assets could lead to deteriorating collateral quality in funding markets, more short-term volatility jumps, herding, and cliff effects. In an environment of persistent low interest rates and heightened financial market uncertainty, these imbalances can raise the frequency of volatility spikes and potentially lead to large swings in asset prices.
This, too, is precisely what we warned yesterday would be the outcome: “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market –especially since liquidity in the Japanese government market is now non-existant and getting worse by the day.”
The IMF paper conveniently provides some useful trackers to observe just how bad JGB liquidity is in real-time.
The IMF is quick to note that the BOJ does have a way out: it can simply shift its monetization to longer-dated paper, expand collateral availability using tthe BOJ’s Securited Lending Facility (which basically is a circular check kiting scheme, where the BOJ lends banks the securities it will then repurchase from them), or simply shift from bonds to other assets: “the authorities could expand the purchase of private assets. At the moment, Japan has a relatively limited corporate bond market (text chart). Hence, this would require jumpstarting the securitization market for mortgages and bank loans to small and medium-sized enterprises which could generate more private assets for BoJ purchases.”
But the biggest risk is not what else the BOJ could monetize – surely the Japanese government can always create “monetizable” kitchen sinks… but what happens when the regime shifts from the current buying phase to its inverse:
As this limit approaches and once the BoJ starts to exit, the market could move from a situation of shortage to one with excess supply. The term premium could jump depending on whether the BoJ shrinks its balance sheet and on the fiscal deficit over the medium term.
When considering that by 2018 the BOJ market will have become the world’s most illiquid (as the BOJ will hold 60% or more of all issues), the IMF’s final warning is that “such a change in market conditions could trigger the potential for abrupt jumps in yields.”
At that moment the BOJ will finally lose control. In other words, the long-overdue Kyle Bass scenario will finally take place in about 2-3 years, tops.
But ignoring the endgame for Japan, and recall that BofA triangulated just this when it said that “the BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation“, what’s worse for Abe is that the countdown until his program loses all credibility has begun.
What happens then? As BNP wrote in an August 28-dated report, “Once foreign investors lose faith in Abenomics, foreign outflows are likely to trigger a Japanese equities meltdown similar to the one observed during 2007-09.”
And from there, the contagion will spread to the entire world, whose central banks incidentally, will be faced with precisely the same question: who will be responsible for the next round of monetization and desperately kicking the can one more time.
But before we get to the QE endgame, we first need to get the interim point: the one where first the markets and then the media realizes that the BOJ – the one central banks whose bank monetization is keeping the world’s asset levels afloat now that the ECB has admitted it is having “problems” finding sellers – will have no choice but to taper, with all the associated downstream effects on domestic and global asset prices.
It’s all downhill from there, and not just for Japan but all other “safe collateral” monetizing central banks, which explains the real reason the Fed is in a rush to hike: so it can at least engage in some more QE when every other central bank fails.
But there’s no rush: remember to give the market and the media the usual 6-9 month head start to grasp the significance of all of the above.
This sounds ominous: many traders are dumping Japanese stocks in the fastest pace in history. This is good for gold because of the huge carry trade must now be unwound: the trade was long NIKKEI/short gold.
(courtesy zero hedge)
Losing Faith? Traders Dump Japanese Stocks At Fastest Pace In History
The narrative of the omnipotent central banker continues to be questioned with China’s inability to save its own market the latest incarnation of investors losing faith. Nowhere has the religious zealotry been more fervent than in trading Japanese stocks where Abe and Kuroda have broken every independent rule in their manipulation of wealth-giving stocks. However – it appears their time is up, as Bloomberg reports,foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s themost for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.
Global investors are pulling money out of Japan’s equity market at the fastest pace since at least 2004, according to Mizuho Securities Co. As Bloomberg details,
Foreigners last week sold a net 1.85 trillion yen ($15.4 billion) of Japanese stocks and equity index futures, the biggest combined outflow since Mizuho began tracking the data more than a decade ago, said Yutaka Miura, a Tokyo-based senior technical analyst at the brokerage. Investors are fleeing amid concern about China’s economic outlook and the prospect of higher interest rates in the U.S., he said.
“This is a result of investors dumping global risk assets,” said Miura. “Japanese stocks have performed well since the start of the year, so similar to what’s happening in Europe, we’re seeing people take profits.”
Foreigners dumped 1.43 trillion yen of Japanese equities in the three weeks through Aug. 28, Tokyo Stock Exchange data updated Thursday show. That’s the most for any three-week span on record, overtaking the period when Bear Stearns Cos. collapsed in 2008.
Net stock sales totaled 707 billion yen last week, and investors also reduced positions in index futures by 1.14 trillion yen, exchange data show. Cumulative flows for 2015 are still positive, with foreigners buying a net 1.1 trillion yen of equities through last week.
As one local broker noted,
“The sell-off started in China,” Clarke said. “Investors couldn’t sell there in the end so selling spread to Asia, and Japan especially as it has a greater liquidity. This eventually spread to Europe and the U.S.”
Time for some moar QQE Mr. Kuroda? Oh wait – you can’t!!
We have been warning you on the dangers of a collapse in Brazil. It is getting worse over there by the hour:
(courtesy zero hedge)
FX Traders Fear “Worst Case Scenario” For Brazil As FinMin Cancels Travel Plans, Rousseff Meets With Lula
It’s not that we want to pick on Brazil, it’s just that simply put, it’s one of the most important emerging markets in the world, which means that when depressed demand from China, plunging commodity prices, a shock devaluation from the PBoC, and the generally lackluster pace of global trade conspire to trigger an emerging market meltdown, Brazil is very likely to end up at the center of it all and sure enough, that’s exactly what’s happened.
Late last week, we noted that Brazil officially entered a recession in Q2, a quarter which also ushered in the worst stagflation in a decade and saw unemployment rise to five-year highs. Then on Monday, the government officially threw in the towel on running a primary surplus (striking a major blow to market confidence in the process) and then yesterday, we got a look at industrial production in July which missed wildly, coming in at -1.5% m/m versus consensus of -0.01%. Meanwhile, exports cratered 24%.
We could go on. And bear in mind that the budget issue is complicated by the fact that Rousseff’s political woes are making budget cuts next to impossible to pass. As Italo Lombardi, senior LatAm economist at StanChart told Bloomberg earlier this week, the admission that the country would likely miss its primary surplus target underscores the trouble “Finance Minister Joaquim Levy faces in winning congressional approval for austerity measures and pushes Brazil’s credit rating closer to junk status.” “Politics are making Levy’s life very difficult,” Lombardi added.
So difficult in fact, that he may now resign and that, according to at least one trader, would be the worst scenario possible. Here’s Bloomberg with more:
Brazil’s real declined for a fifth straight day and fell to a new 12-year low as speculation grew that Finance Minister Joaquim Levy is closer to leaving his post amid budget turmoil.
A gauge of the rout’s momentum rose to a five-month high as a Valor Pro newswire columnist, citing unidentified people at presidential palace, reported that Levy canceled a trip to the Group of 20 meeting in Turkey and planned to talk with President Dilma Rousseff later Thursday. In a setback for Brazil, the Treasury scrapped an auction of local fixed-rated government bonds for the first time in 19 months as yields at a six-year high made borrowing expensive.
“Seeing Levy leave would be worse than Rousseff stepping down or even her impeachment,” Guilherme Esquelbek, a currency trader at Correparti Corretora de Cambio, said from Curitiba, Brazil. “His departure is the worst scenario we can have right now.”
Meanwhile, Copom is stuck between a rock and a hard place – that is, they can’t hike to support the currency because the economy is in such terrible shape. Here’s Goldman on Wednesday’s MPC decision to hold Selic at 14.25%:
One could argue that given the drifting currency (approximately 20% since June) it would even demand additional rate hikes if the monetary authority’s objective is still to, with reasonable confidence, drive inflation to the 4.50% target by end-2016. However, given the rapidly deteriorating real activity picture and heightened political/institutional noise and uncertainty, near-term rate hikes are unlikely.
And in the wake of last week’s GDP data and Monday’s confirmation of the budget blues, Barclays is out with a bit of decisively negative commentary both on the outlook for the economy and for the fiscal situation. Here’s more:
We now forecast a 3.2% fall of real GDP in Brazil in 2015, to be followed by a 1.5% contraction the next year. The downside surprise in Q2 and the deeper recession in the second half of this year also imply a negative contribution to next year’s growth. Household consumption should continue contributing negatively to headline growth, together with fixed asset investment.
The disappointment with fiscal execution, coupled with the lack of capacity of the government to negotiate structural changes in how expenditures grow, leads us to expect a fiscal primary deficit for this year and next of 0.3% and 0.5% of GDP, respectively. For 2015, the fiscal measures approved in Congress were reduced meaningfully from the original proposal and are contributing with only 0.53% of GDP to the fiscal balance. Even including those, we forecast total real fiscal revenues to fall 3.2%, as the growth slowdown is having the biggest negative contribution on this year’s result.
And the inevitable result (as we’ve been saying for months):
The implication is a downgrade in less than one year. We believe the rating agencies will take off the investment grade rating in H1 16, starting likely in April by S&P, given the increased pace of deterioration of the macroeconomic juncture and the disappointment relatively to the agencies’ forecasts. Moody’s could follow suit in the second half of the year, if it becomes clear that the country will fail to achieve real GDP growth and the primary surplus as percentage of GDP near 2%, as the agency expects for 2017. At this point, it is very hard to foresee any meaningful change in the political and/or economic scenario that could avoid such an outcome.
Finally, in what is always the surest sign that a market-moving rumor is probably true, we got the official government denial this afternoon:
- LEVY SAYS HAS NO PLANS TO LEAVE BRAZIL GOVT: EL PAIS
Underscoring how serious the situation truly is, the headlines are still coming in with Bloomberg reporting that former President Luiz Inacio Lula da Silva “will travel to Brasilia tonight to meet with President Dilma Rousseff” for a one-on-one where the two will discuss “higher pressure on Finance Minister Joaquim Levy, 2016 budget proposal and possible restoration of CPMF tax.”
Clearly, this is bad news. All sarcasm and jokes aside, it looks as though Brazil may be about to step off the ledge here. You now have a President with an approval rating of just 8% convening an emergency meeting with the former President, a finance minister on the verge of pulling a Varoufakis, a plunging currency, a hamstrung central bank, and a nightmarish fiscal situation.
So… who wants tickets to next summer’s Olympic games in Rio?
Meanwhile In Submerging Markets: An FX Bloodbath
Things were already bad enough for emerging markets going into August. Persistently low commodity prices, slumping demand from China, depressed global trade, and a “diminutive” septuagenarian waving around a loaded rate hike pistol in the Eccles Building had served to put an enormous amount of pressure on the world’s emerging economies.
And then, the unthinkable happened.
No longer able to watch from the sidelines as the export-driven economy continued to buckle from the pain of the dollar peg, China devalued the yuan. What happened next was nothing short of a bloodbath. The carnage is documented below.
First note that just moments after the PBoC’s yuan move we said the following:
Well sure enough, with the exception of the kwacha, the Belarusian ruble, and the tenge (which went to a free float overnight late last month), that has proven to be demonstrably correct as you can see from the following overview of EM FX performance since China’s deval:
And here’s the big picture which also shows that EM FX has fallen 16 of the last 18 weeks with this week being the worst stretch since March:
Now just imagine what this will look like if the Fed pulls the trigger…
Is a Global Debt Deleveraging At Our Doorstep?
The blogosphere is rife with talk of the “death of the US Dollar.”
The US Dollar will eventually die, as all fiat currencies do. But the fact remains that everyone on the planet has been borrowing in US Dollars for decades, or leveraging up using Dollars and that process needs to unwind.
When you borrow in US Dollars you are effectively shorting the US Dollar. So when leverage decreases through defaults or restructuring, the number of US Dollars outstanding diminishes.
And this strengthens the US Dollar.
With that in mind, it looks as though we are in the early stages of a massive, multi-year Dollar deleveraging cycle. Indeed, the greenback is now breaking out against EVERY major world currency.
Here’s the US Dollar/ Japanese Yen:
Here’s the US Dollar/ Euro:
Even the Swiss’s decision to break the peg to the Euro hasn’t stopped the US Dollar from breaking out of a long-term downtrend relative to the Franc:
The fact that we are getting major breakouts of multi-year if not multi-decade patterns against every major world currency indicates that this US Dollar bull market is the REAL DEAL, not just an anomaly.
With that in mind, I continue to believe the US Dollar is in the beginning of a multi-year bull market. And this will result in various crises along the way.
Globally there is over $9 trillion borrowed in US Dollars and invested in other assets/ projects. This global carry trade is now blowing up and will continue to do so as Central Banks turn on one another.
This will bring about a wave of deleveraging that will see the amount of US Dollars in the system shrink. This in turn will drive the US Dollar higher.
Indeed, consider that the US Dollar actually MATCHED the performance of stocks for the year of 2014.
And it is crushing stocks in 2015 as well.
Any entity or investor who is using aggressive leverage in US Dollars will be at risk of imploding. Globally that $9 trillion in US Dollar carry trades is equal in size to the economies of Germany and Japan combined.
Indeed, few investors remember that the US Dollar rallied hard in 2008 as a precursor to the meltdown. Is today’s US Dollar rally a similar warning?
Smart investors are preparing now.
Lira Plunges To Record Lows As Turkish Minister Addresses G20
On Thursday evening we noted – with more than a little amusement – that Brazil’s embattled finance minister had cancelled an appearance at a G20 summit in Turkey in order to address his future in President Dilma Rousseff’s government amid a plunging BRL and a horrendous fiscal situation.
Why is that amusing? Because Turkey isn’t doing so well itself either politically or economically, and when it comes to plunging currencies well, Ankara is doing its absolute best to make things worse. Here’s what we said yesterday:
Last month, Turkey’s central bank had a chance to give the plunging lira some respite by preempting the Fed and hiking rates.
Only they didn’t.
And not only did they not hike, they made it clear that tightening would only occur once the Fed tightened and then made matters immeasurably worse by proceeding to stumble through a “roadmap” of how they planned to deal with DM policy normalization. That, combined with political turmoil, an escalating civil war (and yes, that’s what it is), and pressure on EM in general has led directly to further weakness for TRY.
Don’t look now, but the lira just plunged to a (new) record low:
Put simply: if we don’t see aggressive emergency hikes sometime soon, this debacle is going get a whole lot uglier and that means more pass through inflation like we saw in August which in turn will do absolutely nothing to calm nervous traders let alone a nervous populace.
And the punchline (from just minutes ago):
- TURKEY DEPUTY PM CEVDET YILMAZ SPEAKS AT G20 EVENT: BHT
Why Capital Is Fleeing China: The Crushing Costs Of Systemic Corruption
What China will be left with a poisoned land stripped of talent and capital.
Corruption isn’t just bribes and influence-peddling: it’s protecting the privileges of the few at the expense of the many. Rampant pollution is corruption writ large: the profits of the polluters are being protected at the expense of the millions being poisoned.
This is why capital and talent are fleeing China: systemic corruption has poisoned the nation and raised the cost of doing business.External costs such as environmental damage must be paid eventually, one way or the other.
Either the cost is paid in rising chronic illnesses, shorter lifespans and declining productivity, or profits and tax revenues must be siphoned off to clean up the damage and the sources of environmental degradation.
In large-scale industrial economies such as China and the U.S., that cost is measured not in billions of dollars but in hundreds of billions of dollars over a long period of time.
I have often noted that one key reason why the U.S. economy stagnated in the 1970s was the enormous external costs of runaway industrialization were finally paid in reduced profits and higher taxes.
China’s manufacturing base simply isn’t profitable enough to pay for the remedial clean-up and pollution controls needed to make China livable. That means labor and all the other sectors will have to pay the costs via higher taxes.
Pollution and environmental damage is driving away human capital, i.e. talent. This loss of talent is difficult to quantify, but it’s not just foreigners who have worked in China for years who are pulling up stakes to escape pollution and repression–talented young Chinese are finding jobs elsewhere for the same reasons.
The game-changer is automation, i.e. robots and software eating the world. To understand the impact on China, let’s start with unit labor costs, i.e. the cost of labor needed to produce each unit of output.
If it takes one worker an hour to assemble 10 light fixtures, the unit labor cost of each fixture is 1/10th of an hour’s total compensation costs, i.e. wages and overhead. (Total compensation costs include all overhead such as vacation, healthcare, pensions, social security taxes on labor paid by the employer, etc.)
If an automated machine can produce 1,000 of the same units in an hour, and the only labor is the machine’s one operator, the the unit labor cost of each fixture is 1/1,000th of an hour’s total compensation costs.
When labor’s contribution to production costs drop to near-zero, there’s no labor arbitrage left to make China a low-cost producer. Frequent contributor Mark G. explains:
“Doing business in China has its own set of local costs. In the past, these costs were outweighed by the greater profit potential of dirt-cheap Chinese labor. But once unit labor costs fall to near-zero as factories are automated, the remaining cost inputs for any manufacturer become a proportionally much larger part of the price.
Environmental regulatory arbitrage is the sole exception. But even this advantage must fade as the Chinese consumer middle class acquires influence. Very few Chinese of any class will have a direct profit stake in automated factories. Any pollution emitted by automated factories becomes a direct cost and a form of tax that those living nearby must bear. Therefore I anticipate that even this current advantage of effectively no environmental regulation will soon dwindle as Chinese tolerance for pollution fades.”
Environmental clean-up costs have been avoided due to corruption. Filters are taken off at night, when the smoke is less visible. If local residents complain too loudly, local squads of goons attack them.
The Chinese state exists to enforce the privileges enjoyed by the few at the expense of the many. Paying pollution-remediation costs slash profits–indeed, in many cases, these external costs completely wipe out profits.
Dissenters and anyone daring to question the corruption must be suppressed by whatever means are available, and the central and local governments in China have been liberally deploying every tool of repression.
This systemic repression is the direct consequence and cost of corruption. So by all means, poison the nation and its non-privileged citizens to benefit the few at the top of the heap, and arrest, beat up or silence critics and dissenters.
What China will be left with a poisoned land stripped of talent and capital. That’s the ultimate cost of systemic corruption.
Flashpoint: White House Confirms Russian Presence In Syria, Warns It Is “Destabilizing”
wo days ago we reported something which we had anticipated for a long time but nonetheless did not expect to take shape so swiftly: namely, that with Assad’s regime close to collapse and fighting a war on three different fronts (one of which is directly supported by US air and “advisor” forces), Putin would have no choice but to finally intervene in the most anticipated showdown in recent history as “Russian fighter pilots are expected to begin arriving in Syria in the coming days, and will fly their Russian air force fighter jets and attack helicopters against ISIS and rebel-aligned targets within the failing state.”
This was indirectly confirmed the very next day when an al-Nusra linked Twitter account posted pictures of a Russian drone and a Su-34 fighter jet – the kind which is not flown by the Syrian air force – flying over the Nusra-controlled western idlib province.
Another twitter account said to have captured Russian soldiers in Zabadani “while fighting for Assad”
Also, one day after our report, the Telegraph reportedthat “Syrian state TV reportedly broadcasts footage of Russian soldiers and armoured vehicle fighting alongside pro-Assad troops.” According to the article, “the video footage claimed to show troops and a Russian armoured vehicle fighting Syrian rebels alongside President Bashar al-Assad’s troops in Latakia. It is reportedly possible to hear Russian being spoken by the troops in the footage.”
It added that “a Russian naval vessel was photographed heading south through the Bosphorus strait carrying large amounts of military equipment, according to social media and a shipping blog” while “an unnamed activist with the Syrian rebel group the Free Syrian Army told The Times: “The Russians have been there a long time.”
“There are more Russian officials who came to Slunfeh in recent weeks. We don’t know how many but I can assure you there has been Russian reinforcement.” “
Then earlier today we got the closest thing to a confirmation from the White House itself which confirmed that “it was closely monitoring reports that Russia is carrying out military operations in Syria, warning such actions, if confirmed, would be “destabilising and counter-productive.”
Obama spokesman Joshn Earnest essentially confirmed Russia was already operating in Syria when he said that “we are aware of reports that Russia may have deployed military personnel and aircraft to Syria, and we are monitoring those reports quite closely.”
“Any military support to the Assad regime for any purpose, whether it’s in the form of military personnel, aircraft supplies, weapons, or funding, is both destabilising and counterproductive.”
And another confirmation: “a US official confirmed that “Russia has asked for clearances for military flight to Syria,” but added “we don’t know what their goals are.”
“Evidence has been inconclusive so far as to what this activity is.”
Other reports have suggested Russia has targeted Islamic State group militants, who have attacked forces loyal to Russian-backed Syrian leader Bashar al-Assad.
Both the White House and the Pentagon refused to say whether they had intelligence suggesting the reports were accurate.
Of course, what is left unsaid is that since Russia is there under the humanitarian pretext of fighting the evil ISIS, the same pretext that the US, Turkey, and the Saudis are all also there for, when in reality everyone is fighting for land rights to the most important gas pipeline in decades, the US is limited in its diplomatic recoil.
Indeed as we sarcastically said last week: “See: the red herring that is ISIS can be used just as effectively for defensive purposes as for offensive ones. And since the US can’t possibly admit the whole situation is one made up farce, it is quite possible that the world will witness its first regional war when everyone is fighting a dummy, proxy enemy which doesn’t really exist, when in reality everyone is fighting everyone else!”
* * *
Which now effectively ends the second “foreplay” phase of the Syrian proxy war (the first one took place in the summer of 2013 when in a repeat situation, Russia was supporting Assad only the escalations took place in the naval theater with both Russian and US cruisers within kilometers of each other off the Syrian coast), which means the violent escalation phase is next. It also means that Assad was within days of losing control fighting a multi-front war with enemies supported by the US, Turkey and Saudi Arabia, and Putin had no choice but to intervene or else risk losing Gazprom’s influence over Europe to the infamous Qatari gas pipeline which is what this whole 3 years war is all about.
Finally, it means that the European refugee crisis, which is a direct consequence of the ISIS-facilitated destabilization of the Syrian state (as a reminder, ISIS is a US creation meant to depose of the Syrian president as leaked Pentagon documents have definitively revealed) is about to get much worse as 2013’s fabricated “chemical gas” YouTube clip will be this years “Refugee crisis.” It will be, and already has been, blamed on Syria’s president Assad in order to drum up media support for what is now an inevitable western intervention in Syria.
The problem, however, has emerged: Russia is already on the ground, and will hardly bend over to any invading force.
Finally, while we have no way of knowing how the upcoming armed conflict will progress, now may be a safe time to take profits on that oil short we recommended back in October, as the geopolitical chess game just shifted dramatically, and with most hedge funds aggressively short, any realization that the middle east is suddenly a far more violent powderkeg – one which may promptly include the Saudis in any confrontation – could result in an epic short squeeze
And then this:
(courtesy zero hedge)
Chinese Warships Came Within 12 Miles Of U.S. Coast
On Wednesday we noted, with some alarm, that just as Xi Jinping was busy putting China’s military might on display for the entire world to observe via a massive parade (a parade which, incidentally, provided China’s weary masses with some much needed mental relief after weeks of hand-wringing over stock market meltdowns and deadly chemical explosions), the Chinese navy was spotted off the coast of Alaska. “It’s difficult to tell [what they’re doing] exactly, but it indicates some interest in the Arctic region,” a Pentagon official told WSJ, adding that, “it’s different.”
To that, we said the following: “Different” indeed, as in “unprecedented”, and while we won’t endeavor to jump to conclusions, we would note that the PLA hasn’t exactly been shy when it comes to challenging the US from a maritime perspective of late and of course, the US has had its ships and carriers to the east and south of China for decades, so it would appear that Xi is intent on giving Washington a taste of its own medicine.
Today, we get a bit more detail on the “incident” and as it turns out, the ships were a little closer than you might have thought. In fact, as WSJ reports, they came within 12 nautical miles of the U.S. coast. Here’s more:
Chinese navy ships off the coast of Alaska in recent days weren’t just operating in the area for the first time: They also came within 12 nautical miles of the U.S. coast, making a rare foray into U.S. territorial waters, according to the Pentagon.
Pentagon officials said for the first time late Thursday that the five Chinese navy ships had passed through U.S. territorial waters as they transited the Aleutian Islands, but said they had complied with international law.
Analysts saw the passage as significant as Beijing has long objected to U.S. Navy vessels transiting its territorial waters or operating in international waters just outside.
The five Chinese ships “transited expeditiously and continuously through the Aleutian Island chain in a manner consistent with international law,” a Pentagon spokesman said. Pentagon officials also confirmed that the vessels came within 12 nautical miles of the U.S. coast.
U.S. officials believe China is building a “blue-water” navy capable of operating far from its shores, while also developing missiles and other capabilities designed to prevent the U.S. Navy from intervening in a conflict in Asia.
Many of those capabilities, including a new antiship ballistic missile, were put on display for the first time on Thursday in a military parade in Beijing to mark the surrender of Japanese forces at the end of World War II.
There seem to be several key takeaways here. First, this comes just a few weeks ahead of Xi Jinping’s first official visit to the US. That visit, as detailed on Thursday evening, may already be clouded by expectations that Washington will announce sanctions as early as next week in connection with a series of cyber attacks that allegedly emanated from China. Thus China’s maritime forays could serve to make the trip even more tense than it already would have been.
Second, China’s operations in the Aleutians need to be looked at in the context of its recent activity in the South China Sea, where Beijing has constructed some 3,000 acres of sovereign territory atop reefs in the Spratlys. What seems clear here is that the PLA is intent on projecting its ability and willingness to unilaterally do as it pleases even if that means ruffling the feathers of US allies and even the US itself along the way. Additionally, as we mentioned on Thursday, the US has operated in and around China’s territorial waters for years, so there’s a “what’s good for the goose…” element at play here as well. Amusingly, one military expert turned this on its head when he told the Journal that now, “as a matter of fairness and equity”, the US will be able to point to the Chinese navy’s operations near Alaska as a justification for sailing near China’s islands in the Spratlys: “these operations are a big step forward for U.S. interests in that Beijing now has no basis to object to similar passage through China’s territorial sea by the U.S., for instance in vicinity of China’s islands in the South China Sea.”
Finally, it’s worth mentioning that the South China Sea dispute and now the traversal of US territorial waters near Alaska hardly mark the only two notable examples of the Chinese navy expanding the scope of its operations this year. Recall that during the height of the Houthis’ seige on Aden, the PLA navy inexplicably showed up to evacuate civilians. Here’s a look at the scope of China’s expanded naval activities:
Finally, lest anyone should think that suddenly China will be prepared to accept the excuse that because the US “allowed” the Chinese navy to pass by Alaska, Beijing will suddenly take an “it’s only fair” approach to US ships in Chinese waters, we’ll close with the following passage, also from the WSJ piece excerpted above.
Still, experts said it was doubtful that China would suddenly stop objecting to U.S. naval ships passing through its territorial waters or conducting surveillance in nearby international waters.
The refugee problem in Europe is getting pretty bad as thousands of poor souls leave war torn Arab countries seeking sanctuary. Many seek Germany as this nation has the best source for new jobs. The problem of course is the fact that Germany does not have a port of entry, which is why Greece, Italy and Spain are receiving in inordinate amount of refugees. Just look at what Czech cops did as the hauled off these poor souls and wrote numbers on their arms in ink:
This is becoming a huge crisis and I will follow it for you!
(courtesy Michaela Whitton/AntiMedia.org)
Czech Cops Haul Refugees Off Trains To Germany, Writes Numbers On Their Arms In Ink
For most of us, the image of a serial number on a forearm conjures up indelible images of 1940s Germany, but it seems this is not the case for the Czech police, who adopted the controversial practice earlier this week.
As the immigration debate intensifies throughout Europe, police in the Southern Czech region of Moravia resorted to the method in an attempt to stem the tide of people fleeing war by heading to the E.U.
According to The Independent, during the early hours of Tuesday morning, over 200 people were arrested as their trains arrived from Austria and Hungary.The refugees were removed from the trains heading to Germany, detained, and flagged with identification numbers written on their arms with marker pens. Photographs in the Czech media showed police officers writing registration numbers on the arms of women and children among chaotic scenes of razor wire and makeshift camps.
“What never stops amazing me are people who look at the Holocaust and think that it only holds lessons for Germans & Jews,” European Media Director of Human Rights Watch Andrew Stroehlein said on Twitter.
Seemingly oblivious to the shocking inhumanity of the measures, whoever had the idea to introduce the unbelievable techniques thankfully decided to use marker pen and not needles to punch serial numbers into the skin. Governor of Southern Moravia Michael Hasek told local media the authorities “…were preparing for what would occur if the migrants increased.”
According to Czech media, after arrest, refugees are placed in secure institutions and believe it or not, are then required to pay for the privilege.Following a backlash of international criticism, the Czech Republic has since announced that it no longer plans to detain Syrian refugees trying to reach Germany, making it the latest country to abandon European asylum rules in the face of the global crisis.
In keeping with the 1940s theme, distressing scenes erupted in Hungary on Thursday as desperate refugees climbed aboard what they assumed was the first western Europe-bound train for days. Assuming the train was taking them to the Austrian border, panic among the refugees broke out when it stopped at the Hungarian town of Bicske instead.
As the train pulled into the town, which hosts a major refugee camp, the platforms were lined with waiting police in riot gear. After reaching yet another dead end in their journey, families refused to leave the train they had boarded in search of freedom — that in fact was taking them to a detention camp. One desperate refugee threw himself and his family onto the train tracks in an attempt to prevent being hauled off to a camp.
Oil related stories:
First it was Saudi Arabia who went to the bond market to borrow due to fiscal imbalances. Today it was Qatar:
Fallout From Petrodollar Demise Continues As Qatar Borrows $4 Billion Amid Crude Slump
Early last month in “Cash-Strapped Saudi Arabia Hopes To Continue War Against Shale With Fed’s Blessing,” we noted the irony inherent in the fact that Saudi Arabia, whose effort to bankrupt the US shale space has blown a giant hole in the country’s fiscal account, was set to tap the debt market in an effort to offset a painful petrodollar reserve burn.
“Saudi Arabia is returning to the bond market with a plan to raise $27bn by the end of the year, in the starkest sign yet of the strain lower oil prices are putting on the finances of the world’s largest oil exporter,” FT reportedat the time.
The reason this is so ironic is that at various times, we’ve characterized persistently low crude prices as essentially a battle between the Fed and the Saudis. Many struggling US producers would likely have been out of business months ago were it not for the fact that ZIRP has kept capital markets wide open, allowing otherwise insolvent drillers to stay afloat. Obviously, that works at cross purposes with Riyadh’s efforts to “preserve market share”, and so ultimately, the Saudis are betting their FX reserves can outlast ZIRP.
There are other factors at play here that weigh on Saudi Arabia’s financial situation including two proxy wars and the defense of the riyal peg which is why turning to the bond market is an attractive option especially considering that capital markets are so favorable thanks to – and here’s the irony – the very same Fed policies that are keeping US shale producers in business.
But Saudi Arabia’s “war” with the US shale space isn’t unfolding in a vacuum and now Qatar is looking to borrow to alleviate the financial strain. Here’s more from Bloomberg:
Qatar issued 15 billion riyals ($4.1 billion) of bonds on 1 September as the country takes advantage of low borrowing costs to replenish funds eroded by the decline in oil prices.
The sale, intended to boost the local capital market, was four times oversubscribed, central bank Governor Abdullah Bin Saoud Al Thani told reporters in Doha, without commenting on the bond’s duration or pricing.
Qatar follows Saudi Arabia in raising money from local banks as the slump in oil prices buffets the finances of the Middle East’s largest oil and gas exporters. Saudi Arabia said it tapped local markets in June and August and has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007. Qatar needs an oil price of $59.1 dollars a barrel to balance its budget, according to the IMF, and on 29 August said its trade surplus fell 56 in July. Crude dropped below $45 a barrel on 2 September.
“The policy of the central bank is to manage liquidity,” Al Thani said. “Interest rates are low in Qatar now so we decided it was the right time to issue these bonds and sukuk.”
Meanwhile, liquidity is tightening across the region, prompting banks to borrow in order to accommodate a slow down in deposit growth. Bloomberg has more:
First Gulf Bank PJSC, the United Arab Emirates’ third-biggest bank by assets, is seeking to raise about $1 billion from a syndicated loan to boost lending as liquidity in the economy tightens, two bankers familiar with the deal said.
The Abu Dhabi-based lender is paying less than 1 percentage point over the London interbank offered rate for the three-year facility, said the people, asking not to be identified because the information is not yet public.
Banks in the six-nation Gulf Cooperation Council, which includes the U.A.E. and Qatar, are turning to the loan market to raise funds in addition to selling bonds as a drop in crude prices threatens economic growth in the oil-producing region. Qatar National Bank SAQ, the country’s biggest lender, borrowed $3 billion via a syndicated loan in March and Abu Dhabi-based Union National Bank PJSC is planning a $750 million 3-year facility, three people familiar with the matter said last month.
Bank liquidity in the U.A.E., the second-biggest Arab economy, is tightening as an increase in lending outpaces deposit growth. The loans-to-deposits ratio of the U.A.E.’s 49 banks climbed to 100.2 percent in June from 95 percent a year ago, rising above 100 for the first time since September 2013.
Of course the punchline to it all is that the fall of the petrodollar has effectively brought an end to emerging market FX reserve accumulation and as the drawdown of those assets tightens global market liquidity and puts upward pressure on UST yields, the Fed will effectively be forced to delay its first rate hike or else will be compelled to immediately reverse itself once the ill-effects of tightening into a tightening become clear. That, in turn, means that the longer the Saudis keep oil prices suppressed and the longer the epic EM FX reserve drawn down continues, the longer the Fed will cling to ZIRP and thus the longer insolvent US drillers will keep drilling and around we go in a vicious deflationary, self-defeating loop.
Crude Jumps After US Oil Rig Count Collapses By Most In 4 Months
After 6 straight weeks of rig count increases, last week saw a 13 rig drop – the most since May. This leave the rig count at its lowest since July 24th. WTI Crude jumped 60c on the news and is holding gains…
- *U.S. OIL RIG COUNT DOWN 13 TO 662, BAKER HUGHES SAYS
- *OIL RIGS IN EAGLE FORD FELL BY FIVE TO 78: BAKER HUGHES
- *OIL RIGS IN PERMIAN BASIN FELL BY TWO TO 249: BAKER HUGHES
- *OIL RIGS IN WILLISTON FELL BY ONE TO 72: BAKER HUGHES
The oil rig count is the lowest since July 24th.
Euro/USA 1.1139 up .0016
USA/JAPAN YEN 119.11 down 1.001
GBP/USA 1.5227 down .0030
USA/CAN 1.3233 up .0044
Early this Monday morning in Europe, the Euro rose by 16 basis points, trading now just above the 1.11 level rising to 1.1139; Europe is still reacting to deflation, announcements of massive stimulation, a proxy middle east war, and the ramifications of a default at the Austrian Hypo bank, an imminent default of Greece and the Ukraine, rising peripheral bond yields, and flash crashes. Last night the Chinese yuan remained constant due to the holiday. The rate at closing last night: 6.3549
In Japan Abe went all in with Abenomics with another round of QE purchasing 80 trillion yen from 70 trillion on Oct 31. The yen now trades in a northbound trajectory as settled up again in Japan up by 101 basis points and trading now well below the 120 level to 119.11 yen to the dollar.
The pound was down this morning by 30 basis points as it now trades well below the 1.53 level at 1.5227.
The Canadian dollar reversed course by falling 44 basis points to 1.3233 to the dollar. (Harper called an election for Oct 19)
We are seeing that the 3 major global carry trades are being unwound. The BIGGY is the first one;
1. the total dollar global short is 9 trillion USA and as such we are now witnessing a sea of red blood on the streets as derivatives blow up with the massive rise in the rise in the dollar against all paper currencies and especially with the fall of the yuan carry trade. The emerging market which house close to 50% of the 9 trillion dollar short is feeling the massive pain as their debt is quite unmanageable. Today, the yen carry traders blew up.
2, the Nikkei average vs gold carry trade (blowing up)
3. Short Swiss franc/long assets (European housing/Nikkei etc. This has partly blown up (see Hypo bank failure).(blew up)
These massive carry trades are terribly offside as they are being unwound. It is causing global deflation ( we are at debt saturation already) as the world reacts to lack of demand and a scarcity of debt collateral. Bourses around the globe are reacting in kind to these events as well as the potential for a GREXIT>
The NIKKEI: this Friday morning: down by 390.23 or 2.15%
Trading from Europe and Asia:
1. Europe stocks all in the red/
2/ Asian bourses mostly in the red … Chinese bourses: Hang Sang red (massive bubble forming) ,Shanghai closed (massive bubble ready to burst), Australia in the green: /Nikkei (Japan)red/India’s Sensex in the red/
Gold very early morning trading: $1124.00
Early Friday morning USA 10 year bond yield: 2.13% !!! down 5 in basis points from Wednesday night and it is trading well below resistance at 2.27-2.32%. The 30 yr bond yield falls to 2.91 down 3 basis points.
USA dollar index early Friday morning: 95.26 down 15 cents from Thursday’s close. (Resistance will be at a DXY of 100)
USA/Chinese Yuan: 6.3549 par/holiday
Dow Drops To 17-Month Lows As Hope-Filled Dead-Cat-Bounce Dies
The last 2 weeks in markets…
And to all those who took Cramer’s advice to buy the dips…
Some big moves this week…
- Dow Industrials lowest weekly close since April 2014
- Dow Transports lowest weekly close since May 2014
- S&P 500 lowest weekly close since Oct 2014’s Bullard lows
- Nikkei dumped over 7% this week – worst week since April 2014
- Utilities collapsed 5.1% this week – worst week since March 2009
- Financials lowest weekly close since Oct 2014’s Bullard lows
- Biotechs lowest weekly close since Feb 2015
- Investment Grade Corporate Bond Spreads worst since June 2013
- Treasury Curve (2s30s) flattened 6bps today– biggest drop in 2 weeks.
- JPY strengthened 2.4% on week against the USD – strongest week since August 2013 (up 4.5% in 3 weeks) – major carry unwind!
- AUD plunged 3.5% on week against the USD– worst week since January 2015 and worst 4-weeks since Oct 2014 – China proxy
So before we start, Japan was really ugly…
And some context for the US equity index drops…
With everything red year-to-date… (and since the end of QE3, only Nasdaq is clinging to the green)
A quiet Friday before Labor Day weekend provided no juice for momo ignition and apart from a brief algo-driven pop on payrolls, stocks were a one-way-street lower…until the late-day VIX-smash ramp which closed ugly…
And Futures show an ugly night turned even uglier…
On the week, everything is red…
Dow Futures give us some context for the last 2 week’s moves. Bounce dies at Fib61.8% retracement, breaks through 50% and makes lower high as today tested post Black-Monday lows…
FANG is FUBAR… (post FOMC Minutes)
Financials continues to get hammered (as investors rushed to the safety of Homebuilders this week!?!) – but the panic-buying in the last hour saved it from being a lot worse…
Utilities had their worst week since March 2009..
But financials have further to fall to catch up with counterparty risk…
Just as we saw lasty Friday, VIX was smashed lower in the last hour… which makes perfect sense given Monday is a holiday and China reopens after 3 days of being closed during extreme moves in EM FX and global equity markets…
After some VIX complex shenanigans midweek, SPY continues to coverge down to XIV (though the latter is also being squeezed to lows).
Since the FOMC Minutes, gold and the long bond are modest losers and stocks big losers…
Investment Grade Credit spreads rose 4bps this week, ending with the widest weekly close since June 2013
This is why it matters!! Bye Bye Buybacks
Thank to today’s plunge, Treasury yields ended the week lower after China closed… Note that 2Y is unch today, 10Y -3.5bps, 30Y -4.5bps
with a dramatic 6bps 2s30s curve flattening on the day (post-payrolls)
The US Dollar ended the week unchanged against the majors… but that hid the stunning moves in JPY (USDJPY dropped 2.4% on the week – its worst since Auguist 2013) and AUD (-3.6% – biggest weekly drop in 8 months, worst 4-week drop in a year)…
Commodities on the week were a mixed bag with crude up on the week and copper notably lower overnight to negative. Gold & Silver modestly lower… The 8-10ET period remains insanely volatile…
Crude had a wild week as Monday and Tuesday’s idiocy and noite today’s pump’n’dump after rig counts unexpectedly declined…
And finally before everyone points out how crazy the bond yields are relative to stocks etc… and the ‘economy’ – perhaps it was stocks that were wrong all along!!
Bonus Chart” “Just one wafer thin 25bps rate hike”
“Good-Enough” Jobs Data Sparks Stock Slump As September Rate Hike Odds Jump
Update – Equity market weakness is accelerating…
The dollar, TSY yields, and Gold have roundtripped close to unch as stocks dump. Crude is back below $46…
* * *
September rate hike probability jumped up to 34% (and December 60%) following the ‘headline’ positive payrolls print. The market is reacting very hawkishly to the data with USD surging, bonds and stocks selling off and commodities leaking lower.
Markets are not happy…
As rate hike odds are rising…Now 34%
Fed’s Lacker Says “Strong Case For Rate Hike… August Jobs Data Won’t Change Decision”
With just 20 minutes to go until the latest most important jobs report ever in the history of man, Richmond Fed Chief Lacker just explained why “the case for raising rates is still strong”…
- LACKER: BOTH MANDATE CONDITIONS ‘APPEAR TO HAVE BEEN MET’
- LACKER: EXCEPTIONALLY LOW RATES NO LONGER WARRANTED BY JOB MKT
- *LACKER: AUG. JOBS REPORT UNLIKELY TO `MATERIALLY ALTER’ PICTURE
But perhaps most crucially, Lacker explains “recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy,”removing the one last leg for permabulls to rely on (that is if you velieve The Fed is not Dow-Data-Dependent).
While “there is always a chance that this morning’s report is unexpectedly weak,”Lacker said, refering to the Labor Department’s release of non-farm payrolls at 8:30 a.m. ET, but “it’s quite unlikely that a one-month blip would materially alter the labor market picture or, for that matter, the monetary policy outlook.”
- Economic data suggest that an increase in the Fed’s target interest rate from near zero is warranted sooner rather than later.
- With nominal short-term interest rates close to zero and inflation of at least one percent, real interest rates have been negative for the better part of the past six years. But with rising growth in personal consumption and income over the past couple of years, negative real rates are unlikely to remain appropriate.
- The unemployment rate has declined nearly to pre-recession levels, and research suggests that there is little if any excessive slack in the labor market. Consistent with the Fed’s forward guidance, many labor market indicators support the case for an increase in interest rates.
- Inflation has been below the Fed’s 2 percent target since early 2012, but has been running slightly above target over the past half year. Because inflation is a lagging indicator, maintaining low interest rates poses serious risks.
- Recent financial market volatility is unlikely to affect economic fundamentals in the United States and thus has limited implications for monetary policy.
And now the official jobs report number:
August Payrolls Miss, Rise Only 173K, Even As Prior Revised Higher; Hourly Earnings Rise More Than Expected
The “most important and anticipated payrolls number ever”, or at least since the last payroll number, is out and it is a doozy at only 173K, it is a huge miss to the 217K expected (and almost in line with LaVorgna’s forecast). However, the curious twist is that the July and June NFPs were both revised higher to 245K, making the net revision up 44K. The unemployment rate dropped to just 5.1%, below the 5.2% expected, and well below July’s 5.3%.
And while the headline NFP would be enough to assure no September rate hike, it was the average hourly earnings which jumped 0.3%, above the 0.2% consensus, and above July’s 0.2% that may be the indication that September is still on the table after all.
Bottom line: something for everyone in this report.
However, if you look under the covers, one discovers that 94 million Americans are now not in the labour force, as a huge 261,000 dropped out!!
Record 94 Million Americans Not In The Labor Force; Participation Rate Lowest Since 1977
While the kneejerk headling scanning algos are focusing on the seasonally-adjusted headline monthly NFP increase which came in a worse than expected 173K, the presidential candidates – especially the GOP – are far more focused on another data point: the labor force participation rate, and the number of Americans not in the labor force. Here, they will have some serious ammo, because according to the BLS, the main reason why the unemployment rate tumbled to the lowest since April 2008 is because another 261,000 Americans dropped out of the labor force, as a result pushing the total number of US potential workers who are not in the labor force, to a record 94 million, an increase of 1.8 million in the past year, and a whopping 14.9 million since the start of the second great depression in December 2007 while only 4 million new jobs have been created.
And since there are still those confused why wages so stubbornly refuse to rise, here is our favorite labor-related chart, showing the annual increase in average hourly wages superimposed next to the US civilian employment-to-population ratio, which remains solidly below 60%, and has barely risen since the great financial crisis.
The big news early that the bankers were relying on was the rising wage component. However it was the smaller supervisory section that gained the dollar rises, not the masses:
(courtesy zero hedge/BLS)
Not So Fast With Those “Rising Wages”
Perhaps the biggest catalyst why Fed Funds rate increased following today’s payrolls miss is not so much the prior monthly payroll revisions but that after stagnating for months, August average hourly wages rose by 0.3%, the biggest sequential increase since January. The reason why pundits are focused on this number is because Yellen has repeatedly noted that with the unemployment having become utterly meaningless as a result of the 94 million Americans not in the labor force, the only indicator of labor slack is wages, and whether they are finally – after 5 years of waiting – rising.
Well, for the headline-scanning algos who saw the 0.3% number, they were although a Y/Y chart reveals a very different picture:
That said, a quick dig through the data reveals that as we first reported almost half a year ago, there are two vastly different pictures emerging when looking at the two key segment of the US labor force: the supervisors, managers and other workers in position of power, and everyone else.
First, this is how wages for the supervisory workers looked like: nothing but blue skies here, and rising at 3.7%, this was in line with the biggest wage gains in the past decade.
And if this was indicative of the overall work force, the Fed could indeed claim mission accomplished and hike not 0.25% but 2.5%.
There is a problem: supervisory workers only make up 17.5% of the US work force. As such, their wage gains are anything but indicative of the vast 140 or so million US workers.
What about the wages for the remaining 82.5% of US workers: the non-supervisory one. Here is the answer.
This means that on an inflation adjusted basis, 82% of the US population can’t even keep up with inflation!
So before anyone decides that the Fed is one and done in September based on the “strong” August average hourly wages, if the Fed is looking at the real chart that matters, that of non-supervisory workers, it will be zero and nothing for a long, long time.
Waiters and bartenders continue to grow in numbers. However this time manufacturing workers dropped in numbers, something that has not happened in 2 years:
(courtesy zero hedge)
New Record In Waiters And Bartenders Masks First Drop In Manufacturing Workers In Over 2 Years
In August, the reality of the oil crunch finally caught up with the BLS, when not only did the number of Mining and Logging employees decline again by 10,000 workers to 823K, the lowest since October 2011, an 8-month stretch of consecutive declines last seen during the previous recession driven by the ongoing weakness in the oil patch and the US shale drilling sector…
… but far more importantly for those tracking the US manufacturing recession, for the first time in over two years, the US manufacturing sector also lost workers, as 17,000 mfg lost their jobs. As shown in the chart below, this is the first time US manufacturing jobs have declined since July 2013, and the sudden drop means that only 28,000 manufacturing jobs have been added so far in 2015.
Considering the flurry of subprime-debt driven activity in US auto manufacturing, this was a very unexpected outcome, and those concerned that the US is about to enter, or already finds itself in, a manufacturing recession this will be the most important number in the months to come.
But don’t worry: while US manufacturing may have peaked, US waiters and bartender are more than making up for it. In August, the US service economy grew by another 26,100 waiters and bartenders, bring the total to a record 11.1 million, thanks to 207,100 “food service and drinking places” jobs added in 2015: nearly 7 times more than manufacturing workers added over this period.
Putting this all together, since the start of the Second Great Depression, the US economy has lost 1.4 million manufacturing workers, but has more than made up for this with the addition ff 1.5 million waiters and bartenders.
And there, in one chart, is your minimum-wage recovery.
And now with the last word on the jobs report, as always is Dave Kranzler of IRD
(courtesy Dave Kranzler/IRD)
Non-farm payroll report comes out and Spoos [SPX futures] go down 32 handles. Gold starts off up $4, now down $6. This is totally rigged. I’m going to Vegas, at least the tables are more level then these markets and I get free booze and some really hot chicks. – reader comment after employment report hit the tape
Despite the rhetoric coming from the Richmond Fed’s Lacker, there will be no interest rate hikes in September. It’s not about the fictitious and indisputably managed and manipulated non-farm payroll report, it’s about the catastrophic degree of leverage in the banking system.
All along, despite the disingenuous pretenses of helping “main street,” the Fed’s money printing has been targeted specifically at keeping the big banks from collapsing and to enable them the continue sucking wealth out of the U.S. economic system. Secondarily, it’s enabled the U.S. Treasury to continue issuing debt obligations that will never be repaid.
There will be no interest rate hike in September, or in 2015 for that matter.
In order to support this intended monetary policy, the Fed has to discourage investors from converting fiat paper money into real money – gold and silver – by creating shock and awe terror in the paper precious metals markets (hey, it worked with 9/11 and we got the Patriot Act, Detainee Bill, Homeland Security Act and an unfettered NSA).
Here’s what this anti-gold terrorism looks like in the paper gold trading market – click to enlarge – the time-scale on the x-axis is MST: